##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended: December 31, 2003



OR



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
                     to



Commission file number: 0-21428



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OCCUPATIONAL HEALTH + REHABILITATION INC

(Exact name of registrant as
specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 13-3464527                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                  |  |           
|------------------------------------------------- |  | ----------
|175 Derby Street, Suite 36 Hingham, Massachusetts |  | 02043     
|(Address of principal executive offices)          |  | (Zip Code)



(781) 741-5175

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | Not Applicable                           



Securities
registered pursuant to Section 12(g) of the Act:



Common
Stock, $0.001 par value

(Title of Class)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈.



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ̈.



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)    YES ̈NO  x.



The aggregate market value of
the voting Common Stock held by non-affiliates of the registrant on June 30, 2003 was $2,165,858 based on the closing price of $1.25 per share. The number of shares outstanding of the registrants Common Stock as of March 1, 2004 was 3,088,111.



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##### Table of Contents

OCCUPATIONAL HEALTH + REHABILITATION INC



Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2003



Table of Contents



|                                                                            |  |                                                                                                              |  |     
|--------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                            |  |                                                                                                              |  | Page
|                                                                            |  | PART I                                                                                                       |  |     
|                                                                            |  |                                                                                                             
|Item 1.                                                                     |  | Business                                                                                                     |  | 1   
|                                                                            |  |                                                                                                             
|Item 2.                                                                     |  | Properties                                                                                                   |  | 14  
|                                                                            |  |                                                                                                             
|Item 3.                                                                     |  | Legal Proceedings                                                                                            |  | 14  
|                                                                            |  |                                                                                                             
|Item 4.                                                                     |  | Submission of Matters to a Vote of Security Holders                                                          |  | 14  
|                                                                            |  |                                                                                                             
|                                                                            |  | PART II                                                                                                      |  |     
|                                                                            |  |                                                                                                             
|Item 5.                                                                     |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 15  
|                                                                            |  |                                                                                                             
|Item 6.                                                                     |  | Selected Financial Data                                                                                      |  | 17  
|                                                                            |  |                                                                                                             
|Item 7.                                                                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 18  
|                                                                            |  |                                                                                                             
|Item 7A.                                                                    |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 29  
|                                                                            |  |                                                                                                             
|Item 8.                                                                     |  | Financial Statements and Supplementary Data                                                                  |  | 30  
|                                                                            |  |                                                                                                             
|Item 9.                                                                     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 30  
|                                                                            |  |                                                                                                             
|Item 9A.                                                                    |  | Controls and Procedures                                                                                      |  | 30  
|                                                                            |  |                                                                                                             
|                                                                            |  | PART III                                                                                                     |  |     
|                                                                            |  |                                                                                                             
|Item 10.                                                                    |  | Directors and Executive Officers of the Registrant                                                           |  | 31  
|                                                                            |  |                                                                                                             
|Item 11.                                                                    |  | Executive Compensation                                                                                       |  | 36  
|                                                                            |  |                                                                                                             
|Item 12.                                                                    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 39  
|                                                                            |  |                                                                                                             
|Item 13.                                                                    |  | Certain Relationships and Related Transactions                                                               |  | 42  
|                                                                            |  |                                                                                                             
|Item 14.                                                                    |  | Principal Accountant Fees and Services                                                                       |  | 42  
|                                                                            |  |                                                                                                             
|                                                                            |  | PART IV                                                                                                      |  |     
|                                                                            |  |                                                                                                             
|Item 15.                                                                    |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                             |  | 43  
|                                                                            | 
|Index to Consolidated Financial Statements and Financial Statement Schedule |  | 45                                                                                                          
|                                                                            | 
|Signatures                                                                  |  | 68                                                                                                          
|                                                                            | 
|Exhibit Index                                                               |  | 69                                                                                                          



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##### Table of Contents

PART I



ITEM 1. BUSINESS



General



Occupational Health + Rehabilitation Inc (the Company), a
leading occupational healthcare provider, specializes in the prevention, treatment, and management of work-related injuries and illnesses, as well as regulatory compliance services. As of March 1, 2004, the Company operates thirty-six occupational
health centers serving over 15,000 employer clients in ten states and also delivers workplace health services at employer locations throughout the United States. The Companys mission is to provide high quality medical care and extraordinary
service, thereby improving the health status of employees, reducing workers compensation costs, and assisting employers in their compliance with state and federal regulations governing workplace health and safety. The Company believes it is
the leading provider of occupational health services in most of its established markets as a result of its commitment to these core values and competencies.



The Company has developed a system of clinical and operating protocols as well as proprietary information systems to track the resulting patient outcomes
(the OH+R System), all focused on reducing the cost of work-related injuries. The OH+R System includes a full array of proven protocols designed to reduce the frequency and severity of work-related injuries, to return injured employees
to full duty in the shortest possible time, and to assure regulatory compliance. Many of these services may also be delivered on-site at the workplace. Prevention and compliance services include pre-placement examinations, medical surveillance
services, fitness for duty and return to work evaluations, drug and alcohol testing, physical examinations, and work-site safety programs.



The Companys treatment approach for work-related injuries and illnesses is based on documented, proprietary clinical protocols which combine
state-of-the-art medical, rehabilitation, and care coordination services in an integrated system of care focused on addressing the needs of employers, employees, and payers. Under this approach, employees receive high quality care, maintain a
positive attitude, and have a greatly reduced probability of developing chronic problems or being re-injured. Utilizing the OH+R System, which is being continually refined, occupational medicine physicians and other clinical staff have consistently
generated substantial documented savings as compared to national averages for both lost work days and medical costs associated with work-related injuries and illnesses.



In recent years, the Company has expanded its operations beyond its base in New England into selected major metropolitan
markets elsewhere in the United States. In selecting new markets, the Company looks for many factors, including a favorable regulatory environment, attractive reimbursement levels, fragmented competition and a good industrial base. The
Companys strategic plan is to expand its network of service delivery sites throughout the United States, principally through joint ventures and other contractual agreements with hospitals and by development of its workplace health programs.
The Company currently has twelve health system affiliations in place.



The Company maintains its principal executive offices at 175 Derby Street, Suite 36, Hingham, Massachusetts 02043-4058, and its telephone number is (781) 741-5175.



Industry Overview



Work-related injuries and illnesses are a large source of lost productivity and costs for businesses in the United States. In a report issued in October
2002, The National Institute for Occupational Safety and Health estimated the cost to business each year of job related injuries to be $171 billion. Liberty Mutuals 2002 Safety Index, based on 1999 data, estimated the total annual cost,
inclusive of lost productivity, overtime, and the cost of replacement workers, to be between $120 billion and $240 billion, of which $40 billion related to the direct cost of workplace injuries, namely payments to injured workers and their medical
care providers. The Company



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estimates that the primary occupational healthcare market (Primary Occupational Healthcare) represents $10 billion of the total outlays, of which
$6 billion relates to initial treatment of injuries and $4 billion to injury healthcare services, such as prevention and compliance services. Although Primary Occupational Healthcare accounts for only a small portion of these total expenditures, the
Company believes it is a critical determinant of other costs. Functioning as the gatekeeper, the occupational medicine physician greatly influences both down stream medical costs and when an injured employee returns to work, thereby
controlling lost work days.



The increase in workers
compensation costs nationally in recent years, after a short period of relative stability, has resulted in employers taking a more active role in preventing and managing workplace injuries. This typically includes the establishment of safety
committees, an emphasis on ergonomics in the workplace, drug testing, and other efforts to reduce the number of injuries, and the establishment of preferred provider relationships to ensure prompt and appropriate treatment of work-related injuries
when they do occur. Employer demand for comprehensive and sophisticated healthcare services to support these programs has been a key factor in the development of the occupational healthcare industry.



The occupational healthcare market is highly fragmented, consisting primarily
of individual or small-group practices and hospital-based programs. Increasing capital requirements, the need for more sophisticated management of both information systems and direct sales and marketing, and changes in the competitive environment,
including the formation of larger integrated networks such as the Companys, have all created increased interest in affiliating with larger, professionally managed organizations. As a result of these factors, the Company believes there is an
opportunity to consolidate hospital programs and private practices.



Strategy



The Companys mission is to
reduce the cost of work-related injuries and illnesses and other healthcare costs for employers and payers and to improve the health status of employees through high-quality care and extraordinary service. The Companys strategic objectives are
to develop a comprehensive national network of occupational healthcare delivery sites and to expand its workplace health services to become a leading occupational health provider in selected regional markets.



The Company intends to build its network of delivery sites through:



| |  | Joint ventures and other contractual arrangements with health systems designed to augment existing occupational health programs and to create networks of occupational health service
delivery sites throughout the health system and its affiliates.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Acquisitions of existing occupational medicine, physical therapy and other related service practices.
| | - | -----------------------------------------------------------------------------------------------------



| |  | Start-up of Company-owned centers in strategic locations.
| | - | ---------------------------------------------------------



Subsequent to an acquisition, joint venture or other contractual relationship, new centers are converted to the Companys practice model through
implementation of the OH+R System. New services are added as required to provide the Companys comprehensive offering. These additional services may be provided by contracting with affiliates of the newly partnered health system or with local
practitioners. Workplace health services are often delivered at employer locations within the service area of a center and are a natural extension of center operations. The Companys direct sales efforts and word-of-mouth recommendations from
satisfied clients are the source of workplace health opportunities not proximate to a center.



The Companys operating strategy is based upon:



| |  | Integration of ServicesPrevention and compliance services provide important baseline information to clinicians, as well as knowledge of the work site,
which makes the treatment of subsequent injuries more effective. Close management and coordination of all aspects of an injured workers care are essential to ensuring the earliest possible return to work. Management and coordination are
difficult, if
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | not impossible, when clinicians are not working within an integrated system. Such a system significantly reduces the number of communications required for a
given case and eases the coordination effort, while enhancing the quality of care and patient convenience.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Quality Care and Extraordinary ServiceFor a number of reasons, injured workers often receive less than optimal care. A lack of quality care is costly to both the
injured/ill worker and the employer. The worker faces longer recovery time and the employer bears the burden of unnecessary lost work-days, including indemnity, lost production and staff replacement costs. The Company is committed to providing
extraordinary serviceto patients, to employers and to third parties. From proactive communications with all parties to custom services addressing an employers specific needs, the Company is dedicated to delivering a level of service that
is expected from companies noted for extraordinary service, but atypical for healthcare providers.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Outcome Tracking and ReportingThe OH+R System is focused on achieving successful outcomes and cost-effectively returning injured workers to the job as quickly as
possible while minimizing the risk of re-injury. Since the inception of its first center, the Company has tracked outcome statistics. The Company believes these extensive outcome statistics demonstrate its ability to return injured workers to the
job faster and for costs substantially lower than the national averages and, typically, those of other local occupational health providers.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Low Cost ProviderThe Company believes that future success in virtually any segment of healthcare services will require delivery of quality care at the lowest possible
price. The Company believes it is a low cost provider, and it is continuously working to further reduce the cost of providing care by streamlining patient processing procedures thereby increasing the productivity of clinicians. The Company routinely
refines and revises the OH+R System to increase efficiency and effectiveness.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Provider RelationsThe Company believes there is intense competition for occupational health providers who are interested in community-based practice. Consequently, it
has implemented strategies to attract, recruit, and retain high quality providers who share the Companys goals and culture. These strategies include proactive efforts to involve providers in the development of clinical protocols and policies
through regular provider meetings and electronic communication, provider involvement in the operation of each center, and varieties of practice to suit individual providers interests. The Company uses physician assistants and nurse
practitioners as integral parts of the clinical team.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Best Practices EthicCore to the Companys operating strategy is the belief that best practices in all aspects of occupational healthcare
(clinical protocols and procedures, operations protocols, sales systems, service ethics, outcomes measurement, information systems, new site integration, and training and orientation systems) can be continuously improved. The Company constantly
pursues enhancement of best practices in all aspects of its business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Services



The
Companys services address the diverse healthcare needs and challenges faced by employers in the workplace. Specializing in the prevention, treatment and management of work-related injuries and illnesses, the Company is able to meet the needs
of single site, regional multi-site or national employers and payers in the regions it serves. The Companys services are delivered in a variety of venues including the Companys full service centers, in the workplace, and through
contractual arrangements with providers or hospitals affiliated with its health system partners.



The Company, in conjunction with its health system partners, provides an integrated system of care. The Companys full service centers provide
primary occupational health services while its health system partners offer after-hours care, specialist services, and diagnostic testing. The integrated system provides a seamless continuum of services to employees and employers. The Companys
occupational health centers are typically staffed with multi-disciplinary teams, including physicians, physician assistants, nurse practitioners, and physical and occupational therapists, as well as a manager, a client relations director, a care
coordinator, and support personnel.



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In support of both center operations and workplace health initiatives, the Company also provides an
after-hours program to coordinate treatment of second and third shift injuries through local emergency departments. This program ensures that the injured employee receives immediate medical attention and continuing treatment in the Companys
organized system of care. The Company also offers 24-hour nurse triage in selected markets.



The Companys Medical Policy Board is the focal point for maintaining and enhancing the Companys reputation for clinical excellence. The Medical Policy Board is comprised of physicians and other provider
representatives employed by the Company who are established, recognized leaders in occupational healthcare. The Medical Policy Board oversees the establishment of best practice standards, the development of clinical protocols and quality
assurance programs, and the recruitment, training, and monitoring of clinical personnel.



Specific services provided by the Company include:



Prevention/Compliance



A safe work environment is a critical factor impacting costs associated with work-related injuries and illnesses. To optimize workplace safety and productivity, the Company offers a full array of services designed to prevent injuries and to
meet regulatory compliance requirements. The expertise and experience of the Companys occupational health specialists differentiate the Companys prevention and compliance services. Through treating work-related injuries, the
Companys clinicians gain significant insights into employers safety issues, thereby improving the efficacy of prevention programs. The Companys expertise in health and safety regulatory matters provides employers with a critical
resource to assist them in addressing increasingly complex federal and state regulations.



Specific prevention and compliance services include:



| |  | Physical Examinations
| | - | ---------------------



| |  | Preplacement
| | - | ------------



| |  | Executive
| | - | ---------



| |  | Department of Transportation (DOT)
| | - | ----------------------------------



| |  | Annual
| | - | ------



| |  | Medical Monitoring/Surveillance
| | - | -------------------------------



| |  | Screenings
| | - | ----------



| |  | Drug and Alcohol Testing
| | - | ------------------------



| |  | Substance Abuse Program Development and Management
| | - | --------------------------------------------------



| |  | Hazardous Substances Screening/Testing
| | - | --------------------------------------



| |  | Pulmonary Function Tests
| | - | ------------------------



| |  | Audiograms
| | - | ----------



| |  | Job Specific Work Skills Screens
| | - | --------------------------------



| |  | Safety Programs
| | - | ---------------



| |  | Ergonomics Consultations
| | - | ------------------------



| |  | Health Promotion
| | - | ----------------



| |  | Immunizations
| | - | -------------



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Treatment/Management



Where an injured worker receives initial treatment for a work-related injury or illness is critical to the eventual outcome
of the case. The initial provider is the medical gatekeeper and single most important player in controlling case costs. When the Company acts as the gatekeeper, whether in a Company center, in the workplace, or through its network providers, it
controls the cost of treatment provided as well as the costs of specialist and ancillary services by ensuring that referrals are appropriate and required. The Companys prevention/compliance efforts support an in-depth understanding of the
workplace and the workforce, facilitating optimal treatment plans and early return to work. Lost work-days are minimized when care is controlled and effectively coordinated.



The Companys treatment protocols, which have been demonstrated to be effective through outcome studies documenting
reduced medical costs and fewer lost work days, are based on a sports medicine philosophy of early intervention and aggressive treatment to maximize a patients recovery while minimizing the ultimate costs associated with the case.



As part of the Companys injury treatment services, the
multi-disciplinary clinical team controls and coordinates all aspects of an injured workers care. This includes referrals to specialists within a network of physicians who understand workers compensation and the special requirements of
treating work-related injuries. In a typical Company full service center or a network of its contract providers, medical and rehabilitation team members work within an integrated system of formal, defined protocols. This approach facilitates
superior, ongoing communication among clinician team members regarding the most appropriate treatment plan, thus eliminating time lost from delays in dealing with several unrelated providers.



Another element to successfully managing work-related injuries is continuous
communication to all the key players, including the employer, employee, and third-party payers. With expectations and treatment plans clearly communicated to all involved, the Companys commitment to goal-oriented, cost-effective,
quality care is evident.



When an individual has not been
treated within the Companys system of care, specialty evaluations may be used to bring a case to closure and/or to create return to work programs for both work-related and non-work-related cases. The Companys occupational medicine
physicians and therapists bring a unique set of skills and experiences to these evaluations, including in-depth understanding of the workplace and of the laws and regulations governing work assignments. Referrals for these services typically come
from employers, insurers, or lawyers.



Treatment/management
services include:



| |  | Work-related Injury Treatment
| | - | -----------------------------



| |  | Physical and Occupational Therapy
| | - | ---------------------------------



| |  | Specialist Referrals
| | - | --------------------



| |  | Care Coordination
| | - | -----------------



| |  | Specialty Evaluations
| | - | ---------------------



| |  | Independent Medical Examinations
| | - | --------------------------------



| |  | Disability Examinations
| | - | -----------------------



| |  | Fitness-for-Duty and Return-to-Work Examinations
| | - | ------------------------------------------------



Workplace Health



The workplace is often the most effective place for the Company to deliver its services for work-related injuries/illnesses as well as to reduce other
employee healthcare costs. Furthermore, many employers recognize



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the value of medical personnel managing integrated disability management programs that cover both work-related and non-work-related injuries and illnesses.
The Company is a leader in workplace health services. It has assembled a fully integrated continuum of workplace health services that systematically address workplace safety and aim to minimize absenteeism of employees who have work-related and
non-work-related injuries and illnesses. Employers may choose to have all or some of these services delivered at the workplace through staffing contracts or in conjunction with the Companys center resources. The Companys physical and
occupational therapists provide job-specific, individualized treatment at the workplace, utilizing real work as the rehabilitation medium. The Company helps employees remain on the job while they receive therapy. Disability days decrease and
return-to-work rates increase using this model of rehabilitative care.



Consulting/Advisory Services



Based on its
depth of occupational medicine expertise, the Company provides a variety of consulting/advisory services for clients as follows:



| |  | Healthcare Policy Development
| | - | -----------------------------



| |  | Regulatory Compliance
| | - | ---------------------



| |  | Americans with Disabilities Act (ADA) Compliance
| | - | ------------------------------------------------



| |  | Environmental Medicine
| | - | ----------------------



| |  | Medical Review Officer (MRO)
| | - | ----------------------------



Outcomes Measurement and Tracking



The Company has significant experience with data management and outcomes tracking and has created a sophisticated reporting tool that enables employers and third-party payers to track all costs and utilization of
services received within the Companys network of care. In addition, the system measures the Companys return-to-work performance by measuring lost and modified work days per case. The Company believes that its multi-disciplinary clinical
teams have consistently outperformed others by returning injured employees to work more quickly and at lower cost, while maintaining high patient satisfaction. The Company also believes its ability and willingness to measure and be accountable for
its performance to employers and third-party payers significantly differentiates it from its competitors.



Sales and Marketing



The Company markets through a direct sales force primarily to employers, but also to insurers and third-party administrators. The latter parties strongly influence (and in many instances direct) an injured workers choice of provider,
while employers select providers for prevention and compliance services.



Through a sales planning and forecasting process, the Company analyzes markets and allocates and consistently monitors resources to ensure maximum results. Client Relations Directors (CRDs), typically
located at each Company center, are responsible for client retention and new client prospecting activities. The personal sales efforts of each CRD are supported by direct mail, selective advertising, and public relations programs focused on
reinforcing the Companys position as a leader in occupational health. The successful establishment of partnership relationships with clients is a key ingredient to the Companys success. During the sales process, the CRD routinely engages
the expertise of the local provider team to enhance these efforts.



Agreements with Medical Providers



In most
cases, medical and other professional services at the Companys centers are provided through professional corporations (collectively, the Medical Providers) that enter into management agreements with the Company or with its
affiliated joint ventures which then subcontract with the Company. The Company provides a



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wide array of business services under these management and submanagement agreements, such as the provision of trained personnel, practice and facilities
management, real estate services, billing and collection, accounting, tax and financial management, human resource management, risk management, insurance, sales, marketing, and information-based services such as process management and outcome
analysis. The Company provides services under these management agreements as an independent contractor, and the medical personnel at the centers, under the direction of the Medical Providers, provide all medical services and retain sole
responsibility for all medical decisions. The management agreements grant the Medical Providers a non-exclusive license to use the Companys service mark Occupational Health + Rehabilitation Inc. These agreements typically have
automatically renewing terms and specific termination rights. Management fees payable to the Company vary depending upon the particular circumstances and applicable legal requirements. These fees may include an assignment of certain accounts
receivable, an allocation of a portion of net revenue, or a flat fee for each service provided by the Company.



Expansion Plan



The
Companys objective is to develop regional occupational healthcare systems in selected areas of the United States with full-service occupational health centers, workplace health sites, and a variety of network providers, typically affiliated
with the Companys health system partners. Forming ventures, alliances and other contractual relationships with hospitals, health systems, and providers in markets in which it operates is a key strategy for the Company. The Companys
management team, comprised primarily of seasoned healthcare executives, is experienced in corporate development as well as the integration and operation of the resulting acquisitions, ventures and alliances. In addition, the OH+R System, with its
documented protocols covering all aspects of occupational health services delivery, facilitates effective assimilation of new operations. The Company believes that occupational health providers, like all other segments of the healthcare industry,
have been subjected to the pressure of managed care and other cost containment efforts from employers and payers. These pressures and the expected continuance of regulatory complexities in the workers compensation and health and safety systems
have caused a growing need, in the Companys opinion, for physicians and hospitals with occupational health programs to seek affiliations with larger, professionally managed organizations, such as the Company, that specialize in occupational
healthcare. However, because of the many factors involved in building such a network, there can be no assurance that the Company will be successful in meeting its expansion goals.



Health System Joint Ventures, Affiliations, and Network Service Agreements



The Companys intended principal method of expansion is by entering
into joint ventures, affiliations, service agreements, or other contractual arrangements with health systems to develop and operate comprehensive occupational health programs based upon networks of delivery sites, including full-service centers,
satellite locations and/or contract providers. There are about 3,200 hospital-owned occupational health programs in the United States. Approximately half of these programs are affiliated with one of the 270 multi-hospital health systems that offer
occupational health services while the rest are operated by non-health system affiliated hospitals.



Most hospital occupational health programs have developed by default. Employers and injured employees have naturally looked to the local hospital for
treatment of work-related injuries. In addition, as Occupational Safety and Health Administration (OSHA) and other safety and health regulations came into existence, hospitals again were the logical, and often only, place for employers
to turn for service. The majority of the occupational health services offered by hospitals are delivered by functional departments where occupational health is a small percentage of the services rendered. Management of care, employer communications
and, ultimately, successful outcomes are extremely difficult to accomplish. Because of their relatively small size in the context of the total hospital system, occupational health departments generally receive insufficient management attention,
operate at a loss, and require constant funding. Consequently, many health systems are looking to acknowledged experts in the field, such as the Company, for effective outsourcing of their hospital-based occupational health programs.



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By affiliating or contracting with the Company, health systems benefit from:



| |  | The Companys expertise in profitably delivering high quality care and extraordinary service at the center level
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | Minimization of capital requirements
| | - | ------------------------------------



| |  | The OH+R Systema proven clinical and operating system
| | - | ------------------------------------------------------



| |  | Retention of occupational health, and the resultant downstream services, as a service affiliated with the hospital, while transferring the operational responsibilities to an
organization totally focused on successful operation of occupational health programs
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increased ability to recruit qualified providers and integrate them into an established network
| | - | -----------------------------------------------------------------------------------------------



| |  | The clinical expertise of the Companys Medical Policy Board which helps ensure that the health systems patients are receiving best practice care
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Companys entrepreneurial work environment that provides incentives for performance
| | - | ---------------------------------------------------------------------------------------



| |  | The Companys expertise in sales and marketing to increase market share, occupational health revenues, and referrals for other health system services
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Access to the Companys regional network of multi-location clients
| | - | ------------------------------------------------------------------



| |  | Enhanced relationships with employers, many of whom are becoming directly involved in contracting with health systems to provide healthcare for their employees
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



Health system relationships allow the Company to
leverage the name and position of the institution within a community to expedite building market share. Moreover, as healthcare reform continues, many hospitals and health systems are re-thinking their scope of activities. As a result, health
systems are concentrating more of their effort and capital on core services and are more open to outsourcing important yet ancillary services such as occupational health. It is strategically important for the Company to have links to these systems
in order to be well positioned to become the occupational health provider for a system.



Under these health system affiliations, the Company typically provides all necessary personnel and assumes management responsibility for the day-to-day operation of the occupational health entity. In return for such
services, the Company will receive fees customarily including a component based upon the net revenue attained by the entity and its operating profit performance, as well as reimbursement of all of the Companys personnel costs and other
expenses incurred. Moreover, in a typical joint venture, the Company will own 51% or more of the occupational health entity with the health system owning the remainder. The Company is continuously exploring potential health system affiliations but
there can be no assurance that it will be successful in these efforts.



Acquisitions, Strategic Alliances, and Selective Start-ups



By acquiring private practices that perform occupational medicine, physical therapy, or related services, the Company can enter a new geographical area or consolidate its position within an existing market. Therapy
practices receive referrals of injured workers from local specialty physicians, which can complement the Companys direct marketing to employers. Alternatively, occupational medicine practices, including medical consulting practices focused on
occupational and environmental health issues, have established relationships with employers to whom the Company may provide its more comprehensive services.



In November 2001, OHR-SSM, LLC, a joint venture of the Company, purchased an occupational medicine business in St. Louis, Missouri for $77,000, and
recognized goodwill of $57,000. The acquired revenue stream was incorporated into the Companys existing Missouri centers.



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In January 2002, the Company entered into an affiliation with a hospital system in New Jersey to operate
its employee health and occupational health programs. In February 2002, the Company purchased two occupational health clinics located in New Jersey and transferred the hospital systems occupational health programs to these centers. The
combined purchase price of these entities was $610,000, of which $70,000 was in cash and the balance in the form of a subordinated note payable in varying installments through February 2005. The Company recognized goodwill of $621,000 on these
transactions. Effective July 1, 2002, the Company assumed the 40% ownership interest of its joint venture partner in its Rochester, NY center, and recognized $193,000 in goodwill on the transaction.



Effective January 31, 2003, the Company terminated its long-term management
contract with Eastern Rehabilitation Network (ERN), an affiliate of Hartford Hospital, Hartford, Connecticut, in exchange for transfer of title to the Company of ERNs four occupational health centers in Connecticut which the
Company had previously managed for ERN. In addition, ERN agreed to terminate its network provider agreement with Hartford Medical Group (HMG), also an affiliate of Hartford Hospital, under which the Company had managed seven occupational
health centers owned by HMG. The Company agreed to pay ERN $25,000 for its share of the networks assets. There will be a final settlement between the parties after the Company has collected all amounts owed to, and paid all amounts owed by,
the network as of the termination date. It is estimated that settlement will occur in June 2004.



In 2002, the Company recognized revenue of $2,286,000 for the seven occupational health centers owned by HMG which it no longer manages. Because a
significant portion of the revenue was paid to third party providers for services rendered to the Companys patients, the loss of revenue did not have a material impact on its operating profit.



On April 1, 2003, the Company purchased an occupational health practice in
Murfreesboro, TN and consolidated the operations into its existing center. The Company recognized $493,000 in goodwill and other intangible assets on the transaction.



Effective April 30, 2003, the Company terminated its long-term management contract with a hospital system in Nashville, TN
and concurrently purchased five centers which it had previously managed for a total consideration of $1,700,000, payable in cash of $300,000 at closing, and $400,000, $500,000, and $500,000 on October 1, 2003, 2004, and 2005, respectively. In
connection with the purchase, the seller forgave the loan payable balance of $1,200,000 (before discount) due under the long-term management contract. Accordingly, the Company offset against the purchase price the net deferred credit previously
recorded on the management contract which amounted to $550,000. This deferred credit represented the net difference between payments made by the hospital system for working capital deficiencies and the discounted value of the non-interest bearing
loan payable to the hospital system. The net of the aforementioned items resulted in the recognition of $98,000 in fixed assets and $35,000 in goodwill and other intangible assets and had no impact on the Companys statement of operations.



The Company will also consider establishing start-up centers
when appropriate. This approach is most suitable for geographic areas proximate to existing Company centers or where a significant source of patients can be assured through arrangements with large employers and third-party administrators. Often,
start-ups can be developed in concert with a local provider, enabling the Company to minimize its investments, particularly during the early growth phase of the site. The Company will continue to explore opportunities such as these throughout its
marketplace when conditions warrant such an approach. However, there can be no assurance the Company will be successful in these efforts.



1999 Restructuring Plan



During the fourth quarter of 1999, the Company initiated measures designed to enhance its overall financial strength and success. These measures
principally included the closure of Company centers that were either outside of the Companys core occupational health focus or were not capable of achieving significant



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profitability due to specific market factors. In December 1999, the Companys South Boston, Massachusetts occupational health and sports medicine center
was closed and during the first quarter of 2000 its Wellesley Hills, Massachusetts occupational health and sports conditioning center and its Essex Junction, Vermont primary care location were closed. The restructuring plan also included the
streamlining of certain other remaining operations and the elimination or combining of various positions within the Company. The plan resulted in restructuring and other charges of $2,262,000. At December 31, 2003, the Company had no further
obligations under the restructuring plan, having made its final lease payment in connection with one of its closed centers in October 2003.



Competition



Most organizations providing care for work-related injuries and illnesses in the eastern part of the United States are local providers or hospitals. The
fundamental difference between the Company and these providers is the Companys focused expertise in combining multiple disciplines to address the needs of a single market segmentwork-related injuries and illnesses, and prevention and
compliance services. Other providers are generally organized to provide services, such as physical therapy, to a wide variety of market segments with differing needs, regardless of the source of the injury or type of patient.



Most of the Companys competitors are local operations and typically
provide only some of the services required to successfully resolve work-related injuries and illnesses, and reduce employers costs. Hospitals typically provide most of the required services but not as part of a tightly integrated, formal care
system. Injured workers tend to be a small segment of the patients seen by the individual hospital departments involved, and department personnel tend not to have any particular training or expertise in work-related injuries and illnesses.



Concentra, Inc. is the nations largest company providing
occupational healthcare followed by U.S. HealthWorks, Inc. which in 2000 acquired the occupational health centers operated by HEALTHSOUTH Corporation, a large national provider of rehabilitation services which also offered occupational health
services in certain locations. The Company is in direct competition with these companies in approximately half the markets in which it operates. While the Company believes it can compete effectively with these companies on the basis of quality and
service, there can be no assurance that these competitors will not establish similar services to those offered by the Company in all its markets. These companies are larger than the Company and have greater financial resources.



Laws and Regulations



General



As a participant in the healthcare industry, the Companys operations and relationships are subject to extensive and increasing regulation by a
number of governmental entities at the federal, state, and local levels. The Company is also subject to laws and regulations relating to business corporations in general. The Company believes that its operations are in material compliance with
applicable laws. Nevertheless, many aspects of the Companys business operations, especially those related to the special nature of the Companys relationship with the Medical Providers, have not been the subject of state or federal
regulatory interpretation, and there can be no assurance that a review of the Companys or the Medical Providers business by courts or regulatory authorities will not result in a determination that could adversely affect the operations of
the Company or the Medical Providers or that the healthcare regulatory environment will not change so as to restrict the Companys or the Medical Providers existing operations or their expansion.



Workers Compensation Legislation



Each state in which the Company operates has workers compensation
programs requiring employers to cover medical expenses, lost wages, and other costs resulting from work-related injuries, illnesses, and disabilities. Medical costs are paid to healthcare providers through the employers purchase of insurance
from private workers compensation carriers, participation in a state fund, or by self-insurance. Changes in workers compensation laws or regulations may create a greater or lesser demand for some or all of the Companys



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services, require the Company to develop new or modified services or ways of doing business to meet the needs of the marketplace and compete effectively, or
modify the fees that the Company may charge for its services.



Many states are considering or have enacted legislation reforming their workers compensation laws. These reforms generally give employers greater control over who will provide medical care to their employees and where those services
will be provided, and attempt to contain medical costs associated with workers compensation claims. Some states have implemented procedure-specific fee schedules that set maximum reimbursement levels for healthcare services. The federal
government and certain states provide for a reasonableness review of medical costs paid or reimbursed by workers compensation.



When not governed by a fee schedule, the Company adjusts its charges to the usual and customary levels authorized by the payer.



Corporate Practice of Medicine and Other Laws



Most states limit the practice of medicine to licensed individuals or
professional organizations which are themselves comprised of licensed individuals and prohibit physicians and other licensed individuals from splitting professional fees with non-licensed persons. Many states also limit the scope of business
relationships between business entities such as the Company and licensed professionals and professional corporations, particularly with respect to non-physicians exercising control over physicians engaged in the practice of medicine. Many states
require regulatory approval, including certificates of need, before establishing certain types of healthcare facilities, offering certain services or making expenditures in excess of statutory thresholds for healthcare equipment, facilities or
programs.



Laws and regulations relating to the corporate
practice of medicine, the sharing of professional fees, certificates of need, and similar issues vary widely from state to state, are often vague, and are seldom interpreted by courts or regulatory agencies in a manner that provides guidance with
respect to business operations such as those of the Company. Although the Company attempts to structure all of its operations so that they comply with the relevant state statutes and believes that its operations and planned activities do not violate
any applicable medical practice, fee-splitting, certificates of need, or similar laws, there can be no assurance that (i) courts or governmental officials with the power to interpret or enforce these laws and regulations will not assert that the
Company or certain transactions in which it is involved are in violation of such laws and regulations, and (ii) future interpretations of such laws and regulations will not require structural and organizational modifications of the Companys
business. In addition, the laws and regulations of some states could restrict expansion of the Companys operations into those states.



Federal regulations aimed at standardizing the format in which certain types of healthcare information is exchanged electronically and establishing
standards for the security and privacy of protected healthcare information have been issued pursuant to the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Further
regulations under HIPAA, as well as modifications to and interpretations of existing regulations, are expected. Compliance with these regulations became effective beginning April 14, 2003 and at various dates thereafter for Covered Entities (as
defined). Based principally upon the composition of its business on that date, most notably the elimination of its urgent care services in March 2003, and because it does not engage in Covered Transactions (as defined) through electronic means, the
Company has determined that it does not currently fall directly under the purview of HIPAA. However, the Company recognizes that a number of the standards established by HIPAA represent best practices for its own business and it intends
to phase in those procedures over time in addition to maintaining its compliance with state privacy laws applicable to its business. The Company may also be expected to comply with some limited HIPAA standards under future contracts with healthcare
providers and insurers. Moreover, there can be no assurance that the Company will not be required at some future time to comply fully with HIPAA in which event the Company may be called upon to devote substantial management effort and expenditures
to achieving such compliance.



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Fraud and Abuse Laws



A federal law (the Anti-Kickback Statute) prohibits any offer, payment, solicitation, or receipt of any form of
remuneration to induce, or in return for, the referral of Medicare or other governmental health program patients or patient care opportunities, or in return for the purchase, lease or order of, or arranging for, items or services that are covered by
Medicare or other governmental health programs. Violations of the statute can result in the imposition of substantial civil and criminal penalties. In addition, certain anti-referral provisions (the Stark Amendments) prohibit a physician
with a financial interest in an entity from referring a patient to that entity for the provision of certain designated health services, some of which are provided by the Medical Providers that engage the Companys
management services.



Most states have statutes, regulations or
professional codes that restrict a physician from accepting various kinds of remuneration in exchange for making referrals, some of which are similar to the Anti-Kickback Statute and are applicable to non-governmental programs. Several states are
considering legislation that would prohibit referrals by a physician for certain types of healthcare services to an entity in which the physician has a specified financial interest.



All of the foregoing laws are subject to modification and interpretation, have not often been interpreted by appropriate
authorities in a manner directly relevant to the Companys business, and are enforced by authorities vested with broad discretion. The Company has attempted to structure all of its operations so that they comply with applicable federal and
state anti-kickback and anti-referral prohibitions. The Company also monitors developments in this area. If these laws are interpreted in a manner contrary to the Companys interpretation, or are reinterpreted or amended, or if new legislation
is enacted with respect to healthcare fraud and abuse or similar issues, the Company will seek to restructure any affected operations so as to maintain compliance with applicable law. No assurance, however, can be given that such restructuring will
be possible, or, if possible, will not adversely affect the Companys business.



Antitrust Laws



Federal, and many state, laws prohibit anti-competitive conduct, including price fixing, improper exercise of monopoly power, concerted refusals to deal, and division of markets. Violations of the Sherman Act, the primary federal antitrust
statute, are felonies punishable by significant fines. While the Company believes that it is in compliance with relevant antitrust laws, no assurance can be given that the Companys business practices will be interpreted by federal and state
enforcement agencies to comply with such laws, and any violation of such laws could have a material adverse effect on the Company and its business.



Uncertainties Related to Changing Healthcare Environment



Over the last several years, the healthcare industry has experienced change. Although managed care has yet to become a major factor in occupational
healthcare, the Company anticipates that managed care programs, including capitation plans, may play an increasing role in the delivery of occupational healthcare services. Further, competition in the occupational healthcare industry may shift from
individual practitioners to specialized provider groups such as those managed by the Company, insurance companies, health maintenance organizations and other significant providers of managed care products. To facilitate the Companys managed
care strategy, the Company is offering risk-sharing products for the workers compensation industry that will be marketed to employers, insurers and managed care organizations. However, no assurance can be given that the Company will prosper in
the changing healthcare environment or that the Companys strategy to develop managed care programs will succeed in meeting employers and workers occupational healthcare needs.



Other changes in the healthcare environment may result from an Internal
Revenue Service ruling and recent cases related to whole-hospital joint ventures with tax-exempt organizations. The Company currently does not believe that this specific ruling will be extended to joint ventures concerning ancillary services such as



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occupational health for tax-exempt hospitals; however, if so extended, the Companys structure for joint ventures with tax-exempt hospitals may differ
from the Companys typical model so as not to jeopardize the tax-exempt status of these hospitals.



Environmental



The Company and the Medical Providers are subject to various federal, state, and local statutes and ordinances regulating the disposal of infectious
waste. If any environmental regulatory agency finds the Companys facilities to be in violation of waste laws, penalties and fines may be imposed for each day of violation, and the affected facility could be forced to cease operations. The
Company believes that its waste handling and discharge practices are in material compliance with the applicable law; however, any future claims or changes in environmental laws could have an adverse effect on the Company and its business.



Use of Provider Networks



The Companys provision of comprehensive healthcare management and cost
containment services depends in part on its ability to contract with or create networks of healthcare providers which share its objectives. For some of its clients, the Company offers injured workers access to networks of providers who are selected
by the Company or its joint venture partners for quality of care and willingness to follow the OH+R System. Laws regulating the operation of managed care provider networks have been adopted by a number of states. These laws may apply to managed care
provider networks having contracts with the Company or to provider networks that the Company may develop or acquire. To the extent these regulations apply to the Company, the Company may be subject to additional licensing requirements, financial
oversight and procedural standards for beneficiaries and providers.



Background



The Company was incorporated in
Delaware in 1988. On June 6, 1996, Occupational Health + Rehabilitation Inc (OH+R) merged with and into (the Merger) Telor Opthalmic Pharmaceuticals, Inc. (Telor). Pursuant to the terms of the Merger, Telor was
the surviving corporation. Concurrent with the Merger, Telors name was changed to Occupational Health + Rehabilitation Inc, and the business of the surviving corporation was changed to the business of OH+R. The Merger was accounted for as a
reverse acquisition whereby OH+R was deemed to have acquired Telor for financial reporting purposes.



Economic Conditions



The Companys success is influenced by a number of economic factors, principally employment levels and the rate of change thereof, and the general
level of business activity. Adverse changes in these economic conditions may negatively affect the Companys growth and profitability.



Seasonality



The Company is subject to the seasonal fluctuations that impact the various employers and their employees it serves. Historically, the Company has noticed
these impacts in portions of the first and fourth quarters. Traditionally, revenues are lower during these periods since patient visits decrease due to the occurrence of plant closings, vacations, holidays, a reduction in new employee hires, and
inclement weather. These activities also cause a decrease in drug and alcohol tests, medical monitoring services, and pre-employment examinations. Similar fluctuations occur during the summer months, but typically to a lesser degree than during the
first and fourth quarters. The Company attempts to ameliorate the impact of these fluctuations through adjusting staff levels.



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Employees



As of March 1, 2004, the Company employed 524 individuals on a full and part-time basis. The total clinical professionals contracted or associated with
the Company as of March 1, 2004 were 260, including physicians, physician assistants, nurse practitioners, nurses, medical assistants, physical and occupational therapists, and assistant physical and occupational therapists. None of the
Companys employees are covered by collective bargaining agreements. The Company has not experienced any work stoppages and considers its relations with its employees to be good.



Important Factors Regarding Forward-Looking Statements



Statements contained in this Annual Report on Form 10-K, including in Managements Discussion and Analysis of Financial
Condition and Results of Operations, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act, which statements are intended to be subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on managements current expectations and are subject to many risks and uncertainties which could cause actual
results to differ materially from such statements. Such statements include statements regarding the Companys objective to develop a network of regional occupational healthcare systems providing integrated services through multi-disciplinary
teams. In addition, when used in this report, the words anticipate, plan, believe, estimate, expect, and similar expressions as they relate to the Company or its management are intended to
identify forward-looking statements. Among the risks and uncertainties that will affect the Companys actual results are locating and identifying suitable partnership candidates; the ability to consummate operating agreements on favorable
terms; the success of such ventures, if completed; the costs and delays inherent in managing growth; the ability to attract and retain qualified professionals and other employees to expand and complement the Companys services; the availability
of sufficient financing; the attractiveness of the Companys capital stock to finance its ventures; strategies pursued by competitors; the restrictions imposed by government regulation; changes in the industry resulting from changes in
workers compensation laws and regulations and in the healthcare environment generally; and other risks described in this Annual Report on Form 10-K and the Companys other filings with the Securities and Exchange Commission. The
forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise.



ITEM 2. PROPERTIES



The Company
rents approximately 7,000 square feet of office space for its corporate offices in Hingham, Massachusetts.



The Companys centers range in size from 750 square feet to approximately 15,000 square feet and generally have lease terms of between three years
and six years with varying renewal or extension rights. A typical center ranges in size from approximately 4,000 to 10,000 square feet and has four to eight rooms used for examination and trauma, a laboratory, an x-ray room, and ancillary areas for
reception, drug testing collection, rehabilitation, client education, and administration. Most centers are open from nine to ten hours per day for five days per week.



The Company believes that its facilities are adequate for its reasonably foreseeable needs.



ITEM 3. LEGAL PROCEEDINGS



The
Company is not a party to any material legal proceedings and is not aware of any threatened litigation that could have a material adverse effect upon its business, operating results, or financial condition.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



The Companys Common Stock is traded on the OTC Bulletin Board. The
Company trades under the symbol OHRI. The following table sets forth the high and low bid quotations for the Companys Common Stock as reported by the OTC Bulletin Board during the periods shown below.



|                                 |  |      |       |     |   |      
|-------------------------------- |  | ---- | ----- | --- | - | -----
|                                 |  | High |       | Low
|Quarter ended March 31, 2002     |  | $    | 3.050 |     | $ | 1.950
|Quarter ended June 30, 2002      |  |      | 3.000 |     |   | 1.650
|Quarter ended September 30, 2002 |  |      | 2.050 |     |   | 1.200
|Quarter ended December 31, 2002  |  |      | 1.650 |     |   | 0.950
|Quarter ended March 31, 2003     |  |      | 1.600 |     |   | 1.300
|Quarter ended June 30, 2003      |  |      | 1.850 |     |   | 0.730
|Quarter ended September 30, 2003 |  |      | 1.350 |     |   | 1.225
|Quarter ended December 31, 2003  |  |      | 1.900 |     |   | 1.250



The foregoing
represent inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. As of March 1, 2004, the Companys Common Stock was held by 72 stockholders of record and approximately 500
beneficial stockholders whose shares were held in street name.



The Company has never paid any cash dividends on its Common Stock. The Company currently intends to retain earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable
future. The payment of future dividends will be at the discretion of the board of directors of the Company and will depend, among other things, upon the Companys earnings, capital requirements, and financial condition. The Company is subject
to a covenant with one of its lenders that prohibits the payment of dividends.



The transfer agent and registrar for the Companys Common Stock is American Stock Transfer & Trust Company.



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Securities Authorized for Issuance Under Equity Compensation Plans



The following table sets forth certain information with respect to
compensation plans (including individual compensation arrangements) under which the Companys equity securities are authorized for issuance, as of December 31, 2003.



EQUITY COMPENSATION PLAN INFORMATION



|                                                           |  |                                                                                            |  |                                                                             |      |                                                                                                                                            |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------ | -------
|Plan Category                                              |  | Number of Securities To Be Issued Upon Exercise of OutstandingOptions, Warrants and Rights |  | Weighted-average Exercise Price of Outstanding Options, Warrants and Rights |      | Number of SecuritiesRemaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
|                                                           |  | (a)                                                                                        |  | (b)                                                                         |      | (c)                                                                                                                                       
|Equity compensation plans approved by security holders (1) |  | 1,228,576                                                                                  |  | $                                                                           | 2.08 |                                                                                                                                            | 147,761
|Equity compensation plans not approved by security holders |  |                                                                                           |  |                                                                             |     |                                                                                                                                            |       
|                                                           |  |                                                                                            |  |                                                                             |      |                                                                                                                                            |        
|Total                                                      |  | 1,228,576                                                                                  |  | $                                                                           | 2.08 |                                                                                                                                            | 147,761

---

|(1) | Includes the Companys 1993, 1996, and 1998 Stock Plans. The 1998 Stock Plan, as approved by the Companys stockholders, reserved 150,000 shares of the Companys
Common Stock for the granting of non-qualified stock options, incentive stock options, and stock appreciation rights. The Companys board of directors has subsequently approved, without stockholder approval, the reservation of an additional
770,000 shares of the Companys Common Stock under the 1998 Stock Plan for the granting of non-qualified stock options and stock appreciation rights.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Each of the Companys Stock Plans expires ten years from inception, after which no new options may be granted from them. Since the expiration of the 1993 Stock Plan in February
2003, options to purchase 49,028 shares under the 1993 Stock Plan have been forfeited by former employees and are no longer available for re-issuance.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 24, 2003, the Company paid a cash amount of $2,699,740 and issued 1,608,247 shares of its Common Stock, and
promissory notes in the aggregate principal amount of $2,699,740 to repurchase 1,416,667 shares of its Series A Convertible Preferred Stock, from certain venture capital funds and other accredited investors (the Sellers) in reliance upon
the exemption from the registration requirements of the Securities Act under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.



In claiming the exemption under Section 4(2) and Rule 506, the Company relied in part on the following facts: (1) each of
the Sellers represented that such Seller (a) had the requisite knowledge and experience in financial and business matters to evaluate the merits and risk of an investment in the Company; (b) was able to bear the economic risk of an investment in the
Company; (c) had access to or was furnished with the kinds of information that registration under the Securities Act would have provided; (d) acquired the shares for the Sellers own account in a transaction not involving any general
solicitation or general advertising, and not with a view to the distribution thereof; and (e) is an accredited investor as defined in Rule 502 of Regulation D; and (2) a restrictive legend was placed on each certificate or other
instrument evidencing the shares and notes.



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ITEM 6. SELECTED FINANCIAL DATA



The consolidated statement of operations data set forth below with respect to the years ended December 31, 2003, 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003 and 2002 are derived from, and are qualified by
reference to, the audited consolidated financial statements included elsewhere in this report and should be read in conjunction with those financial statements and notes thereto. The consolidated statement of operations data for the years ended
December 31, 2000 and 1999 and the consolidated balance sheet data at December 31, 2001, 2000, and 1999 are derived from financial statements not included herein. Historical results should not be taken as necessarily indicative of the results that
may be expected for any future period.



|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|---------------------------------------------------------------------- |  | ----------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                       |  | Years ended December 31,                        |          
|                                                                       |  | 2003                                            |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                                                       |  | (In thousands, except share and per share data) |          
|Consolidated Statement of Operations Data:                             |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Revenue                                                                |  | $                                               | 53,538    |   |      | $ | 56,949    |      |  | $ | 57,017    |   |  | $    | 43,683    |   |  | $ | 32,148    |  
|Expenses:                                                              |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Operating                                                              |  |                                                 | 46,309    |   |      |   | 49,803    |      |  |   | 48,476    |   |  |      | 36,376    |   |  |   | 26,924    |  
|General and administrative                                             |  |                                                 | 4,697     |   |      |   | 4,883     |      |  |   | 5,096     |   |  |      | 4,824     |   |  |   | 3,708     |  
|Depreciation and amortization                                          |  |                                                 | 1,405     |   |      |   | 1,012     |      |  |   | 1,265     |   |  |      | 1,134     |   |  |   | 1,062     |  
|Restructuring                                                          |  |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   | 2,262     |  
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                                                       |  |                                                 | 52,411    |   |      |   | 55,698    |      |  |   | 54,837    |   |  |      | 42,334    |   |  |   | 33,956    |  
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income (loss) from operations                                          |  |                                                 | 1,127     |   |      |   | 1,251     |      |  |   | 2,180     |   |  |      | 1,349     |   |  |   | (1,808    | )
|                                                                       |  |                                                 |           |   |     
|Nonoperating income (losses):                                          |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income                                                        |  |                                                 | 8         |   |      |   | 26        |      |  |   | 45        |   |  |      | 36        |   |  |   | 51        |  
|Interest expense                                                       |  |                                                 | (650      | ) |      |   | (423      | )    |  |   | (507      | ) |  |      | (535      | ) |  |   | (244      | )
|Minority interest and contractual settlements, net                     |  |                                                 | (815      | ) |      |   | (496      | )    |  |   | (329      | ) |  |      | 105       |   |  |   | (590      | )
|Recovery (write-off) of note receivable                                |  |                                                 |          |   |      |   |          |      |  |   |          |   |  |      | 248       |   |  |   | (292      | )
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|(Loss) income before income taxes                                      |  |                                                 | (330      | ) |      |   | 358       |      |  |   | 1,389     |   |  |      | 1,203     |   |  |   | (2,883    | )
|Tax (benefit) provision                                                |  |                                                 | (99       | ) |      |   | 215       |      |  |   | (2,695    | ) |  |      | 34        |   |  |   |          |  
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net (loss) income                                                      |  | $                                               | (231      | ) |      | $ | 143       |      |  | $ | 4,084     |   |  | $    | 1,169     |   |  | $ | (2,883    | )
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net (loss) income available to common shareholders - basic             |  | $                                               | (377      | ) |      | $ | (537      | )    |  | $ | 3,390     |   |  | $    | 473       |   |  | $ | (3,011    | )
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Weighted average common shares outstanding - basic                     |  |                                                 | 2,726,806 |   |      |   | 1,479,864 |      |  |   | 1,479,591 |   |  |      | 1,479,510 |   |  |   | 1,479,450 |  
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net (loss) income per common share                                     |  | $                                               | (0.14     | ) |      | $ | (0.36     | )    |  | $ | 2.29      |   |  | $    | 0.32      |   |  | $ | (2.04     | )
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net (loss) income available to common shareholders - assuming dilution |  | $                                               | (377      | ) |      | $ | (537      | )    |  | $ | 3,402     |   |  | $    | 485       |   |  | $ | (3,011    | )
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Weighted average common shares outstanding - assuming dilution         |  |                                                 | 2,726,806 |   |      |   | 1,479,864 |      |  |   | 3,161,331 |   |  |      | 2,935,745 |   |  |   | 1,479,450 |  
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net (loss) income per commonshare - assuming dilution                  |  | $                                               | (0.14     | ) |      | $ | (0.36     | )    |  | $ | 1.08      |   |  | $    | 0.17      |   |  | $ | (2.04     | )
|                                                                       |  |                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  



|                                       |  |                |        |   |      |   |        |  |      |        |  |      |        |   |  |   |        |  
|-------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ |  | ---- | ------ |  | ---- | ------ | - |  | - | ------ | -
|                                       |  | December 31,   |       
|                                       |  | 2003           |        |   | 2002 |   | 2001   |  | 2000 |        |  | 1999 |       
|                                       |  | (In thousands) |       
|Consolidated Balance Sheet Data:       |  |                |        |   |      |   |        |  |      |        |  |      |        |   |  |   |        |  
|Working capital                        |  | $              | (3,132 | ) |      | $ | 4,049  |  | $    | 4,453  |  | $    | 1,935  |   |  | $ | 2,803  |  
|Total assets                           |  |                | 24,099 |   |      |   | 24,397 |  |      | 24,198 |  |      | 22,148 |   |  |   | 17,160 |  
|Long-term debt, less current portion   |  |                | 1,705  |   |      |   | 1,982  |  |      | 1,229  |  |      | 1,614  |   |  |   | 2,906  |  
|Redeemable convertible preferred stock |  |                |       |   |      |   | 10,653 |  |      | 9,973  |  |      | 9,279  |   |  |   | 8,583  |  
|Stockholders equity (deficit)         |  |                | 5,814  |   |      |   | 896    |  |      | 1,433  |  |      | (1,957 | ) |  |   | (2,430 | )



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QUARTERLY RESULTS (UNAUDITED)



Set forth below is certain summary information with respect to the Companys operations for the last eight fiscal
quarters.



|                                                       |  |                                       |        |   |             |   |        |             |  |   |             |   |  |   |       
|------------------------------------------------------ |  | ------------------------------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ------
|                                                       |  | 2003                                 
|                                                       |  | 1st Quarter                           |        |   | 2nd Quarter |   |        | 3rd Quarter |  |   | 4th Quarter
|                                                       |  | (In thousands, except per share data)
|Revenue                                                |  | $                                     | 13,472 |   |             | $ | 13,150 |             |  | $ | 13,430      |   |  | $ | 13,486
|Income from operations                                 |  |                                       | 440    |   |             |   | 137    |             |  |   | 31          |   |  |   | 519   
|Net income (loss)                                      |  |                                       | 68     |   |             |   | (100   | )           |  |   | (242        | ) |  |   | 43    
|Net (loss) income per common share - basic and diluted |  | $                                     | (0.05  | ) |             | $ | (0.03  | )           |  | $ | (0.08       | ) |  | $ | 0.02  



|                                              |  |                                       |        |   |             |   |        |             |  |   |             |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ------ | -
|                                              |  | 2002                                  |       
|                                              |  | 1st Quarter                           |        |   | 2nd Quarter |   |        | 3rd Quarter |  |   | 4th Quarter |  
|                                              |  | (In thousands, except per share data) |       
|Revenue                                       |  | $                                     | 13,708 |   |             | $ | 14,381 |             |  | $ | 14,770      |   |  | $ | 14,090 |  
|Income from operations                        |  |                                       | 193    |   |             |   | 316    |             |  |   | 540         |   |  |   | 202    |  
|Net income (loss)                             |  |                                       | 5      |   |             |   | 85     |             |  |   | 100         |   |  |   | (47    | )
|Net loss per common share - basic and diluted |  | $                                     | (0.11  | ) |             | $ | (0.06  | )           |  | $ | (0.05       | ) |  | $ | (0.14  | )



The Companys
quarterly results of operations are not necessarily indicative of results for any future period.



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview



The Company is a leading provider of occupational healthcare services to employers and their employees specializing in the prevention, treatment, and
management of work related injuries and illnesses. The Company develops and operates multidisciplinary outpatient healthcare centers and contracts with other healthcare providers to develop integrated occupational healthcare delivery systems. The
Company typically operates the centers under management and submanagement agreements with professional corporations that practice exclusively through such centers. Additionally, the Company has entered into joint ventures and long-term management
agreements with health systems to provide management and related services to the centers and networks of providers established by the joint ventures.



The Companys operations have been funded primarily through venture capital investments, the Merger, and lines of credit. The Companys growth
has resulted predominantly from the formation of joint ventures, long-term management agreements, acquisitions, and development of businesses principally engaged in occupational healthcare.



The Company derives its revenue from three principal sources: treatment of
work-related injuries, including the provision of rehabilitation services necessary to speed the patients post-injury recovery, injury prevention and regulatory compliance services such as pre-placement physical examinations and drug and
alcohol tests, and workplace health services where the Company provides on-site delivery of its services for work-related injuries, generally to regional locations of major corporations. Medical treatment of injuries and the associated
rehabilitation services account for nearly two-thirds of the Companys revenue, prevention and compliance services about 25%, and workplace health about 10%. The Company operates 36 centers, 27 of which are in the northeast of the United
States, five in Tennessee, and four in Missouri. It manages workplace health contracts not only at sites close to its centers but also in many other areas of the country.



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The level of economic activity in the regions of the country in which the Companys centers are
located impacts its profitability. Certain classifications of employment have higher injury rates than other classifications. For instance, manufacturing, transportation, healthcare delivery, and construction tend to have high injury rates and
therefore high utilization of the types of services offered by the Company. Consequently, changes in the employment levels in these market sectors impact the volume of business available to the Company. The Company also provides more services when
employment levels rise. The stronger the employment market, the greater the demand for pre-placement examinations and drug and alcohol tests. Higher levels of economic activity also result in more work-related injuries requiring treatment. In the
past three years, when employment levels have been soft and economic growth modest, the Company has focused on increasing its market share in a still very fragmented industry through aggressive marketing, offering high levels of service to its
clients, and maintaining a tight control on its costs.



In many
states in which the Company operates, the prices it charges for its injury treatment of work-related injuries are determined by state specific fee schedules established by state agencies pursuant to the workers compensation programs in that
state. Such fee schedules are reviewed by the regulatory bodies from time to time, but changes in the rates tend to lag the increase in the cost of delivering medical services. Moreover, reimbursement rates vary widely from state to state. In those
states not governed by a fee schedule, the Company charges the usual and customary rates which are based on the average fees paid by workers compensation insurers and accepted by healthcare providers. The Company uses the services of third
party consultants to assist it in keeping abreast of the frequently complex and often changing workers compensation fee schedules and the appropriate usual and customary fees.



Accounts receivable is the Companys largest single asset on the balance sheet. The Company closely monitors its days
sales outstanding, a measure computed by dividing its average revenue per day into its current accounts receivable balance. By reducing its days sales outstanding, the Company can increase its cash inflow and use the additional funds to pay down its
short-term debt or for general corporate purposes. Over the past three years, the Company has reduced its days sales outstanding by 12 days from 72 in 2001 to 60 in 2003.



The Companys major focus is building its revenue base. Once a center has covered its fixed costs, which account on
average for approximately 53% of its revenue and consist primarily of employee-related expenses and rent and occupancy charges, each additional dollar of revenue generates a high variable profit margin. A new injury visit, for example, generates
about $600 in net revenue through follow up visits and referrals to rehabilitation treatment.



The discussion and analysis of the financial condition and results of operations of the Company are based on the Companys consolidated financial statements, included elsewhere within this report, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of
commitments and contingencies. The Company relies on historical experience and on various other assumptions that it believes to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from these estimates.



Critical Accounting Policies



Revenue Recognition



Revenue is recorded at
estimated net amounts to be received from third-party payers, employers, and others for services rendered. The Company operates in certain states that regulate the amounts which the Company can charge for its services associated with work-related
injuries and illnesses.



Provision for Doubtful Accounts



Accounts receivable consist primarily of amounts due from
third-party payers (principally, managed care companies and commercial insurance companies), employers, and others, including private individuals.



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Estimated provisions for doubtful accounts are recorded to the extent that it is probable that a portion or all of a particular account receivable will not
be collected. The Company estimates the provision for doubtful accounts based on various factors including payer type, historical collection patterns, and the age of the receivable. Changes in estimates for particular accounts receivable are
recorded in the period in which the change occurs.



Professional Liability Coverage



The Company
maintains entity professional liability insurance coverage on a claims-made basis in all states in which it has operating centers. The Company also maintains shared professional liability insurance coverage in the name of its employed physicians on
a claims-made basis. At December 31, 2003, the Company recorded an actuarially determined liability equal to the estimated required reserves for future payments for claims that have been reported and claims that have occurred but have not been
reported. The Company intends to renew its existing policies and is not aware of any reason it will not be able to do so. Nor is it aware of any claims that may result in a loss in excess of amounts covered by its existing insurance.



Impairment of Property and Equipment, Goodwill, and Intangible Assets



The Company reviews the carrying value of its property
and equipment, goodwill, and intangible assets on a quarterly basis. The Companys review is undertaken to determine if current facts and circumstances suggest that the assets have been impaired or that the life of the asset needs to be
changed. As part of its review, the Company considers various factors including local market developments, changes in the regulatory environment, historical financial performance, recent operating results, and projected future cash flows. Any
impairment would be recognized in operating results if a diminution in value considered to be other than temporary were to occur. During the years ended December 31, 2003 and 2002, the Company did not recognize any adjustments to the carrying value
of its property and equipment, goodwill, and intangible assets.



Reserves for Employee Health Benefits



The
Company retains a significant amount of self-insurance risk for its employee health benefits. The Company maintains stop-loss insurance which limits the Companys liability for health insurance payments on both an individual and total group
basis. At the end of each quarter, the Company records an accrued expense for estimated health benefit claims incurred but not reported at the end of such period. The Company estimates this accrual based on various factors including historical
experience, industry trends, and recent claims history. This accrual is by necessity based on estimates and is subject to ongoing revision as conditions change and as new data present themselves. Adjustments to estimated liabilities are recorded in
the accounting period in which the change in estimate occurs.



New
Accounting Pronouncements



In December 2002, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of SFAS No. 123, Accounting
for Stock Based Compensation. SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS 123. SFAS 148 does not change the provisions of SFAS 123 that permit entities to
continue to apply the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.



SFAS 148 is intended to encourage the adoption of the accounting provisions of SFAS 123. Under the provisions of SFAS 148, companies that choose to adopt
the accounting provisions of SFAS 123 will be permitted to select from three transition methods:



(a) Prospective method. Apply the recognition provisions to all employee compensation awards granted, modified, or settled after the
beginning of the fiscal year in which the recognition provisions are first applied. The prospective method, however, may no longer be applied for adoptions of the accounting provisions of SFAS 123 for periods beginning after December 15, 2003.



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(b) Modified prospective method. Recognize stock-based employee compensation cost from
the beginning of the fiscal year in which the recognition provisions are first applied as if the fair value based accounting method had been used to account for all employee awards granted, modified, or settled in fiscal years beginning after
December 15, 2004.



(c) Retroactive
restatement method. Restate all periods presented to reflect stock-based employee compensation cost under the fair value based accounting method for all employee awards granted, modified, or settled in fiscal years beginning after December 15, 2004.



The Company has a stock option program. SFAS 123 encourages
entities to recognize as expense over the vesting period the fair market value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of APB 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock grants as if the fair-value method defined in SFAS 123 had been applied.



The Company has elected to follow APB 25, and SFAS 148 has no impact on the Companys financial statements. Consequently, no compensation cost
related to the stock option program is reflected in net income since all options under this program had an exercise price equal to the market value of the underlying common stock on the date of grant.



In January 2003, the FASB issued FASB Interpretation (FIN) No.
46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The primary objective of FIN 46 is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means
other than voting rights; such entities are known as variable-interest entities. The adoption of FIN 46 during 2003 did not have a material impact on the Companys financial statements.



In April 2003, the FASB issued SFAS No. 149 which amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities,and establishes accounting and reporting standards for derivative instruments
including derivatives embedded in other contracts (collectively referred to as derivatives) and for hedging activities. Adoption of SFAS 149 did not have a material impact on the Companys financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 clarifies the accounting for certain financial instruments with characteristics of debt that, under previous guidance, issuers could account for as equity. SFAS 150 requires
that those instruments be classified as liabilities in statements of financial position. SFAS 150 became effective for financial instruments entered into or modified after May 31, 2003, and otherwise became effective July 1, 2003. Adoption of SFAS
150 did not have a material impact on the Companys financial statements.



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The following table sets forth, for the periods indicated, the relative percentages which certain items
in the Companys consolidated statements of operations bear to revenue. The following information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. Historical results
and percentage relationships are not necessarily indicative of the results that may be expected for any future period.



|                                                   |  |                          |    |  |       |   |  |       |  
|-------------------------------------------------- |  | ------------------------ | -- |  | ----- | - |  | ----- | -
|                                                   |  | Years Ended December 31, |   
|                                                   |  | 2003                     |    |  | 2002  |   |  | 2001  |  
|Revenue                                            |  | 100.0                    | %  |  | 100.0 | % |  | 100.0 | %
|Operating expenses                                 |  | (86.5                    | )  |  | (87.5 | ) |  | (85.0 | )
|General and administrative expenses                |  | (8.8                     | )  |  | (8.6  | ) |  | (8.9  | )
|Depreciation and amortization expense              |  | (2.6                     | )  |  | (1.8  | ) |  | (2.2  | )
|Interest income                                    |  | 0.0                      |    |  | 0.0   |   |  | 0.1   |  
|Interest expense                                   |  | (1.2                     | )  |  | (0.7  | ) |  | (0.9  | )
|Minority interest and contractual settlements, net |  | (1.5                     | )  |  | (0.9  | ) |  | (0.6  | )
|Tax benefit (provision)                            |  | 0.2                      |    |  | (0.3  | ) |  | 4.7   |  
|                                                   |  |                          |    |  |       |   |  |       |  
|Net (loss) income                                  |  | (0.4                     | )% |  | 0.2   | % |  | 7.2   | %
|                                                   |  |                          |    |  |       |   |  |       |  



RESULTS OF
OPERATIONS(dollar amounts in thousands)



Years Ended
December 31, 2003 and 2002



Revenue



Total net revenue in 2003 decreased by $3,411, or 6.0%, to $53,538 from
$56,949 in 2002. The decrease in revenue is attributable primarily to measures implemented by management to eliminate unprofitable operations or lines of business, partially offset by increases in revenue at centers open for more than one year.
Revenue decreased by $6,002 as compared to 2002 due to actions taken by the Company in early 2003 to eliminate unprofitable or low margin businesses. The termination of management contracts in Connecticut in January 2003 resulted in the elimination
of $2,423 of revenue compared to 2002, and the reorganization of the Companys operations in Tennessee, including the closure of two centers and the cessation of urgent care services, reduced revenue by an additional $3,579.



Revenue at centers in operation for comparable periods in both years
increased by $2,453, or 4.9%, primarily due to a growth in revenue per visit as a result of price increases. Same center new injury initial visits were down 1.5% for the year but were ahead of last year during the second half of 2003, reflecting
both the capture of market share by the Company and the positive effects of a slowly recovering economy. Prevention services in 2003 were flat. Additional revenue of $138 in 2003 was primarily attributable to a new center start-up late in the year.



Operating, General and Administrative Expenses



Operating expenses decreased $3,494, or 7.0%, to $46,309
in 2003 from $49,803 in 2002. The decrease was primarily due to the reduction in the number of centers under management, principally in Connecticut where a majority of the costs related to payments to third party providers for services rendered to
the Companys patients, and the elimination of urgent care services in Tennessee after March 31, 2003. These cost reductions were partially offset by consulting fees tied to the increase in revenue resulting from implementation of recommended
improvements to the Companys billing practices, increases in professional and general liability insurance premiums, and costs relating to an upgrade to the Companys practice management system. As a percentage of revenue, operating
expenses decreased to 86.5% in 2003 from 87.5% in 2002.



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General and administrative expenses decreased $186, or 3.8%, to $4,697 in 2003 from $4,883 in 2002, with
a decrease in corporate employee-related costs being partially offset by an increase in regional management expenses. As a percentage of revenue, general and administrative expenses increased to 8.8% in 2003 from 8.6% in 2002.



Depreciation and Amortization



Depreciation and amortization expense increased 38.9% to $1,405 in 2003 from
$1,012 in 2002. Depreciation expense increased to $1,336 in 2003 from $961 in 2002, primarily due to continued investment in information services-related equipment. Amortization expense increased to $69 in 2003 from $51 in 2002, primarily due to the
amortization of non-compete agreements with sellers of businesses acquired by the Company in 2003. As a percentage of revenue, depreciation and amortization expense increased to 2.6% in 2003 from 1.8% in 2002.



Interest Expense



Interest expense increased to $650 in 2003 from $423 in 2002. The increase
was attributable to the Companys repurchase of its preferred stock in March 2003 in connection with which it increased its borrowings under its line of credit by $2,805 in order to pay $2,700 in cash to its preferred stockholders as well as
the legal costs associated with the transaction, and issued $2,700 of 8% subordinated promissory notes. As a percentage of total revenue, interest expense increased to 1.2% in 2003 from 0.7% in 2002.



Minority Interest and Contractual Settlements



Minority interest represents the share of (profits) and losses of joint
venture investors with the Company. In 2003, the minority interest in pre-tax profits of subsidiaries decreased to $(853) from $(891) in 2002, reflecting a reduction in the aggregate profits of the joint venture operations as compared to the prior
year. Contractual settlements represent payments to, or receipts from, the Companys partners under the Companys management contracts in respect of the partners share of operating (profits) or losses, respectively. In 2003, the
Company recorded receipt of $38 of funded operating losses and contractual settlements compared to $395 in 2002.



Tax (Benefit) Provision



There was a net tax benefit of $(99) in 2003 compared to a tax provision of $215 in 2002 because the Company reported a net loss for the year ended
December 31, 2003. The effective tax rate for 2003 was (30.2%). The tax provision for 2002 includes $52 relating to an adjustment to the previously provided deferred tax benefit, and to state income taxes. These charges resulted in an increase in
the Companys effective tax rate in 2002 to 60.1% from the normalized rate of 45.5%. If the Company were to continue to operate at a loss, it may at some future time determine that it will be unable to utilize its deferred tax assets, primarily
net operating loss carryforwards, before they expire. In such an event, it would record a valuation allowance equal to the carrying value of the deferred tax assets.



Years Ended December 31, 2002 and 2001



Revenue



Revenue in 2002 decreased by $68, or 0.1%, to $56,949 from $57,017 in 2001. A decrease in revenue of $1,948, or 3.4%, at centers in operation for
comparable periods in both years was offset by revenue of $2,245 generated by centers opened during 2002. Revenue in 2001 included $365 from non-core businesses which were closed during 2001. The decrease in same center revenue in 2002 was primarily
due to the general economic recession which had an especially negative effect on urgent care services. Revenue for urgent care services, which were offered only at the Companys centers in Tennessee, decreased by $1,038, or 22.1%, versus the
prior year. Because of the declining revenue, a high incidence of bad debts, and other economic reasons, the Company ceased offering urgent care services in Tennessee after March 31, 2003.



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Same center revenue in the Companys core business of occupational medicine decreased 1.8% in 2002
compared to 2001. Including centers open less than a year, revenue in the Companys core business increased $1,292, or 2.5%, with gains being recorded in all major categories other than prevention services. During periods of economic recession,
prevention services generally decline in line with the magnitude of the slow down in economic activity. Although there can be no assurance that this will occur in the future, such a decline has historically reversed as the level of economic activity
increases in the markets served by the Company.



Operating,
General and Administrative Expenses



Operating expenses
increased $1,327, or 2.7%, to $49,803 in 2002 from $48,476 in 2001. Same center operating expenses decreased $842 despite an increase of $444 in information services-related costs. To counter the downturn in its business as result of the weak
economy, the Company reduced expenses in all facets of its operations including employee costs where same center costs decreased about 4% despite significant increases in the cost of employee benefits. As a percentage of revenue, operating expenses
increased to 87.5% in 2002 from 85.0% in 2001, primarily due to expected early stage losses at centers acquired in 2002 and an increase in rehabilitation services provided by subcontractors.



General and administrative expenses decreased $213, or 4.2%, to $4,883 in
2002 from $5,096 in 2001, primarily due to the elimination of a number of management positions as part of the company-wide program to reduce expenses. Because of the payment of severance costs, the full benefit of these actions was not realized
until 2003. As a percentage of revenue, general and administrative expenses decreased to 8.6% in 2002 from 8.9% in 2001.



Depreciation and Amortization



Depreciation and amortization expense decreased 20.0% to $1,012 in 2002 from $1,265 in 2001. Depreciation expense increased to $961 in 2002 from $911 in
2001, primarily due to continued investment in information services equipment. Amortization expense decreased to $51 in 2002 from $354 in 2001 because the Company adopted SFAS 142 on January 1, 2002 and no longer amortizes its goodwill. As a
percentage of revenue, depreciation and amortization expense fell to 1.8% in 2002 from 2.2% in 2001.



Interest Expense



Interest expense decreased to $423 in 2002 from $507 in 2001. The decrease was due primarily to lower interest rates. As a percentage of total revenue,
interest expense decreased to 0.7% in 2002 from 0.9% in 2001.



Minority Interest and Contractual Settlements



Minority interest represents the share of (profits) and losses of joint venture investors with the Company. In 2002, the minority interest in pre-tax profits of subsidiaries increased to $(891) from $(699) in 2001, reflecting the greater
aggregate profits of the joint venture operations. Contractual settlements represent payments to, or receipts from, the Companys partners under the Companys management contracts in respect of the partners share of operating
(profits) or losses, respectively. In 2002, the Company recorded receipt of $395 of funded operating losses and contractual settlements compared to $370 in 2001.



Tax Provision (Benefit)



There was a tax provision of $215 in 2002 compared to a net tax benefit of $(2,695) in 2001. The tax provision for 2002 includes $52 relating to an
adjustment to the previously provided deferred tax benefit, and to state income taxes. These charges resulted in an increase in the Companys effective tax rate to 60.1% from the normalized rate of 45.5%. At December 31, 2001, the Company,
having determined that its operating results and forecasted future income supported an assertion that ultimate realization of its net deferred tax assets was more



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likely than not, fully released the valuation allowance which had in prior years offset such deferred tax assets, and recorded a deferred tax benefit of
$2,768. The Company also recorded tax expense of $73 in 2001, primarily relating to state income taxes.



Off Balance Sheet Arrangements



The Company does not currently have any off balance sheet arrangements.



Significant Accounting Contractual Obligations



The following summarizes the Companys contractual obligations at December 31, 2003, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.



|                              |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |      
|----------------------------- |  | ---------------------- | ------ | ---------------- | - | --------- |  | --------- | ----- | ---------------- | - | ----- |  | - | -----
|                              |  | Payments Due by Period
|                              |  | Total                  |        | Less Than 1 Year |   | 1-3 Years |  | 3-5 Years |       | More Than5 Years
|Contractual Obligations       |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |      
|Long-term debt obligations(1) |  | $                      | 9,313  |                  | $ | 8,462     |  | $         | 851   |                  | $ |      |  | $ |     
|Capital lease obligations     |  |                        | 1,636  |                  |   | 782       |  |           | 819   |                  |   | 34    |  |   | 1    
|Operating lease obligations   |  |                        | 14,106 |                  |   | 3,636     |  |           | 5,460 |                  |   | 3,457 |  |   | 1,553
|Purchase obligations          |  |                        |       |                  |   |          |  |           |      |                  |   |      |  |   |     
|Other long-term liabilities   |  |                        |       |                  |   |          |  |           |      |                  |   |      |  |   |     
|                              |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |      
|Total contractual obligations |  | $                      | 25,055 |                  | $ | 12,880    |  | $         | 7,130 |                  | $ | 3,491 |  | $ | 1,554
|                              |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |      

---

|(1) | As of December 31, 2003, the amount available under the lenders borrowing base formula was $6,260, of which $4,957 was drawn down. See Note 4 in the consolidated notes to the
financial statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Liquidity and Capital Resources



At December 31, 2003, the Company had negative working
capital of $3,132 compared to positive working capital of $4,049 in 2002 and $4,453 in 2001. Of the total decrease in working capital, $5,672 related to the repurchase by the Company of its Series A Convertible Preferred Stock (the Preferred
Stock). The Company increased its borrowings under its line of credit by $2,805 in order to pay $2,700 in cash to the preferred stockholders and $105 of legal costs associated with the transaction. It has also recognized as a current liability
$2,867 of notes payable, inclusive of accrued interest, issued to the preferred stockholders. The Companys principal sources of liquidity at December 31, 2003 consisted of (i) cash and cash equivalents aggregating $1,744 and (ii)
uncollateralized accounts receivable of $1,769.



Net
cash provided by operating activities in 2003 was $2,959 compared to $2,606 in 2002 and $3,957 in 2001. The increase of $353 in 2003 compared to 2002 was due to a positive net change in operating assets and liabilities of $759 which was partially
offset by a decrease in profitability of $406, after adjusting for non-cash charges. The decrease of $1,351 in net cash provided by operating activities in 2002 compared to 2001 was primarily due to a decrease in profitability, after adjusting for
non-cash charges.



Accounts receivable decreased to $8,771 in
2003 from $9,736 in 2002 and $11,211 in 2001. The reduction in accounts receivable in each of the last two years is attributable in part to the decrease in the Companys revenue over the period resulting from the reduction in the number of
centers under management and the elimination of urgent care services, and in part from the administrative efficiencies gained from centralizing the Companys billing procedures, a process which began in late 2001. Days sales outstanding at
December 31, 2003, 2002 and 2001 were 60, 62, and 72, respectively.



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Prepaid expenses and other assets decreased $28 in 2003 as compared to 2002. In 2002, prepaid and other
assets increased $390 from 2001, primarily due to the prepayment of one months estimated employee medical costs to the Companys new medical insurance administrator. Prepaid expenses and other assets decreased $535 in 2001 from 2000,
primarily due to final settlement in 2001 of amounts owed the Company by a hospital system partner responsible for funding first year working capital deficiencies and by a client under a managed care contract which expired in mid year.



Accounts payable and accrued expenses decreased $44 in 2003 to $5,906 from
$5,950 in 2002. Amounts due to third-party providers decreased $768, primarily due to the termination of a long-term management contract in Connecticut and conversion to on-site rehabilitation services upon the purchase of five centers in Tennessee.
Effective January 1, 2003, the Company reduced the amount of earned but unused vacation time an employee may carry over to the following year, resulting in a decrease of $242 in the accrued vacation liability. Accounts payable increased $348 due to
normal variances in the payment cycle. An increase of $293 in accrued professional fees related primarily to consulting fees tied to the increase in revenue resulting from implementation of recommended improvements to the Companys billing
practices. Accrued interest expense increased $180, primarily relating to the notes issued in connection with the repurchase of the Preferred Stock in March 2003. The professional liability accrual increased $163, primarily to recognize the
actuarially determined liability for future payments for claims that have been reported and claims that have occurred but have not been reported.



Accounts payable and accrued expenses decreased $806 in 2002 from $6,756 in 2001, primarily due to prompter settlement of both medical claims by the
Companys new employee medical insurance administrator and amounts due to certain third-party providers who provide medical services to the Companys patients, and to a smaller employee incentive pay liability.



Net cash used in investing activities was $1,160, $1,006, and $161 in 2003,
2002, and 2001, respectively. The Companys investing activities included fixed asset additions of $678, $891, and $993 in 2003, 2002, and 2001, respectively, primarily related to information services equipment.



In 2003, net cash used in investing activities included $482, primarily
relating to the purchase of an occupational health practice in Murfreesboro, Tennessee with an initial cash outlay of $150, and the purchase of five centers in Nashville, Tennessee previously managed by the Company with an initial cash outlay of
$300.



In 2002, net cash used in investing activities included
$115, primarily relating to the purchase of two occupational health centers in New Jersey. In 2001, investing activities included the purchase of a physician business with a cash outlay of $77 and payments of $211 relating to earnouts in connection
with previously acquired businesses.



In 2001 net cash used in
investing activities also included receipt by the Company of $872 under an agreement with a hospital system to manage its ambulatory care centers where the system provided working capital necessary to fund the working capital deficiencies (as
defined) during the first twelve months of operations.



Net
cash used by financing activities was $1,729, $1,533, and $3,632 in 2003, 2002, and 2001, respectively. In 2003, the Company increased its borrowings, after repayments, under its line of credit by $3,061, primarily in connection with the repurchase
of its Preferred Stock in March 2003. In 2002 and 2001, the Company paid down $198 and $2,153, net of advances, respectively, under its line of credit. The pay down in 2001 was primarily due to the strong operating performance that year and the net
receipt of $872 to fund the working capital deficiencies described in the preceding paragraph.



Under lease arrangements with certain leasing companies, the Company accumulates its fixed asset purchases until the value of those purchases reach a certain minimum amount before requesting a draw down from its lease
lines. In 2003, 2002 and 2001, cash proceeds of $139, $766 and $398, respectively, were received under its lease lines, primarily to fund information services equipment. The Company used funds of $1,181, $1,205, and $1,072 in 2003, 2002, and 2001,
respectively, for the payment of long-term debt and capital lease obligations.



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During the twelve months ended December 31, 2003, 2002, and 2001, the Company paid cash of $845, $886,
and $773, respectively, relating to distributions to its joint venture partners. Distributions of cash in joint ventures to the Company and its joint venture partners allow the Company access to its share of the cash accumulated by the joint
ventures which it can then utilize for general corporate purposes. The Company expects to continue to make future distributions when the cash balances in the joint ventures permit.



Capital Stock



In 2003, net cash used by financing activities included $2,805 in connection with the Companys repurchase on March 24, 2003 of all of its
outstanding Preferred Stock, namely 1,416,667 shares, for (i) $2,700 in cash at closing, (ii) subordinated promissory notes (the Notes) in the aggregate principal amount of $2,700, and (iii) 1,608,247 shares of the Companys
common stock. The Company incurred $105 of legal expenses in connection with this transaction. The Notes bear interest at 8% and are payable in three equal principal installments, together with interest accrued thereon, 12, 15, and 18 months after
the date of issuance. In the event a principal payment is not made when due, the interest rate on the past due principal and interest amount will increase to 15% until the default is cured. A default under the Notes permits the Note holders to
accelerate payment of all unpaid principal and interest. However, under the CapitalSource Credit Line, no amounts can be paid to the Note holders without the express approval of CapitalSource.



On March 24, 2004, the Company paid $450 of the $900 principal amount due on
its Notes together with accrued interest thereon of $36. Beginning March 24, 2004, the unpaid principal and interest is $2,286. The Company elected to enter into such default in order to conserve its cash resources for operating purposes. The
default under the Notes created a cross default under the CapitalSource Credit Line. Accordingly, the Company obtained a waiver from CapitalSource on March 30, 2004 which waives any similar cross default that will occur as a result of any additional
partial payment of the Notes by the Company through March 31, 2005. Also on March 30, 2004, the Note holders agreed to waive such default through March 31, 2005 and agreed not to pursue any remedies related to the failure to make a full installment
payment on the Notes. The Company anticipates making additional payments on the Notes in future months and expects to generate sufficient funds to repay the full principal amount of $2,700 by December 31, 2004. However, if cash is needed for
operations the Company will continue to defer payments on the Notes.



Until the repurchase by the Company of its Preferred Stock, holders of the Preferred Stock constituting a majority of the then outstanding shares of the Preferred Stock, by giving notice to the Company, could have required the Company to
redeem all of the outstanding shares of the Preferred Stock at $6.00 per share plus an amount equal to all dividends accrued or declared but unpaid thereon, payable in four equal annual installments. If the Company had not completed the repurchase
of the Preferred Stock on March 24, 2003, and the preferred stockholders had, instead, put their shares for redemption on that date, the Company would have been obligated to pay the preferred stockholders $2,700, $2,870, $3,040, and $3,210 on April
24, 2003, 2004, 2005, and 2006, respectively. Under the agreement to repurchase its Preferred Stock, the Company paid $2,700 in cash and is obligated to pay $2,970, including interest at 8%, in 2004.



On December 17, 2003, the Company retired 100,502 shares of common stock
being held as treasury stock, with the effect that such shares resumed the status of authorized but unissued shares of common stock of the Company.



Secured Credit Facility



On December 15, 2000, the Company entered into an agreement with DVI Business Credit Corporation (DVI), an asset-based lender, for a revolving
line of credit (the DVI Credit Line) of up to $7,250. The DVI Credit Line was collateralized by present and future assets of certain operations of the Company. The borrowing base consisted of a certain percentage of eligible accounts
receivable (as defined in the agreement). Under the terms of the agreement, the Company paid a commitment fee of 0.5% of the unused portion of the DVI Credit Line and certain additional fees. The interest rate under the Credit Line was the prime
rate plus 1%.



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Effective March 18, 2003, the financial covenants under the DVI Credit Line included a quarterly tangible
net worth requirement of $2,500 (defined as shareholders equity plus subordinated debt, and minority interests less intangible assets, goodwill, deferred tax assets, leasehold improvements, deposits and certain prepayments), a leverage
coverage ratio not greater than 5.00 to 1.00, and a fixed charge ratio not less than 1.25 to 1.00 as well as certain restrictions relating to the acquisition of new businesses without the prior approval of DVI. The Company was not in compliance with
one of its financial covenants for the three months ended June 2002, nor with certain of its covenants during the three months ended March 31 and June 30, 2003 and was granted waivers by DVI in each instance.



On August 21, 2003, shortly before filing for Chapter 11 bankruptcy
protection, DVI sold the Companys loan to a subsidiary of CapitalSource Inc. (CapitalSource), a publicly traded asset-based lender. As of September 30, 2003, the Company did not meet any of its three financial covenants and was
granted a waiver by CapitalSource.



On December 15,
2003, the Company entered into an agreement with CapitalSource for a new three-year revolving line of credit (the CapitalSource Credit Line) of up to $7,250. The CapitalSource Credit Line is collateralized by present and future
assets of certain operations of the Company. The borrowing base consists of a certain percentage of eligible accounts receivable (as defined in the agreement). Under the terms of the agreement, the Company pays a commitment fee of 0.6% of the unused
portion of the CapitalSource Credit Line and certain other fees. The interest rate under the CapitalSource Credit Line is the prime rate plus 1%, subject to a floor of 4% on the prime rate.



The financial covenants under the CapitalSource Credit Line consist of a
fixed charge ratio (defined as the ratio, for a defined period, of earnings before interest, taxes, depreciation, amortization, and other non-cash charges and non-recurring gains and losses to the sum of payments on long-term debt, exclusive of the
Notes, and capital leases, accrued interest and dividends, and capital expenditures and income taxes paid in cash) of not less than 1.20 to 1.00, tested monthly on a trailing six months basis, commencing January 2004, and minimum liquidity
(defined as the sum of unrestricted cash on hand, the Companys pro rata share of cash on hand in its joint ventures, and the unborrowed availability under the CapitalSource Credit Line) of $1,000. In 2003, the fixed charge ratio was set at not
less than 1.00 to 1.00 on a trailing four months basis through November 30, 2003 and a trailing five months basis through December 31, 2003. During the term of the agreement, the Company may enter into new capital lease obligations of up
to $1,000 and must obtain the prior approval of CapitalSource before acquiring any new business. The Company was in compliance with its financial covenants through December 31, 2003. As of and for the trailing five months ended December 31, 2003,
the Companys fixed charge ratio was 1.29 and its minimum liquidity $2,469.



The default under the Notes created a cross default under the CapitalSource Credit Line. Accordingly, the Company obtained a waiver from CapitalSource on March 30, 2004 which waives any similar cross default that will
occur as a result of any additional partial payment of the Notes by the Company through March 31, 2005. Also on March 30, 2004, the Note holders agreed to waive such default through March 31, 2005 and agreed not to pursue any remedies related to the
failure to make a full installment payment on the Notes.



Based
on its projections, the Company expects to be in compliance during 2004 with its covenants under the CapitalSource Credit Line, as amended by the waiver granted on March 30, 2004. However, there can be no assurance that the Company will meet its
projections and, if it does not, it may not be in compliance with its covenants in the future.



Lease Lines



In March
2001, the Company entered into an agreement for an equipment facility (the Lease Line) of $750 to provide secured financing. Borrowings under the facility are repayable over 42 months. The interest rate was based upon the 31 month
Treasury Note (T-Note) plus a spread and fluctuated with any change in the T-Note rate up until the time of payment commencement for each draw down.At December 31, 2003, the Company had utilized all of its Lease Line.



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In August 2002, the Company entered into an agreement for secured equipment lease financing in the
approximate amount of $1,600 with Somerset Capital Group, Ltd. (the Somerset Line). Borrowings under the facility are repayable over 36 months. The lease-rate factors were based upon the 36-month Treasury Note yield ten days prior to
payment commencement for each draw down. At the end of the lease term, the Company may purchase the equipment for its fair market value, renew the lease on a year-to-year basis at its then fair market value, or return the equipment with no further
obligation. The Company has utilized this lease line primarily to fund its equipment needs relating to the upgrade of its practice management system. At December 31, 2003, the Company had utilized all of its Somerset Line.



In December 2003, the Company entered into an agreement for secured equipment
lease financing of approximately $330 with GE Healthcare Financial Services, Inc. Borrowings under the facility are repayable over 60 months. The interest rate is to be set at 4.80 percentage points above the yield on 5 Year Interest Rate Swaps on
the payment commencement date for each draw down. At December 31, 2003, the 5 Year Interest Rate Swap was 3.61% and the Company had not drawn down on the lease line.



The Company expects that its principal use of funds in the foreseeable future will be for the repayment of the Notes, and
for acquisitions and the formation of joint ventures, working capital requirements, other debt repayments, and purchases of property and equipment. The Company believes that the funds available to it under the CapitalSource Credit Line together with
cash generated from operations and other sources of funds it anticipates will be available to it, will be adequate to meet these projected needs. However, the Company recognizes that the level of financial resources available to it is an important
competitive factor and it will consider additional financing sources as appropriate, including raising additional equity capital on an on-going basis as market factors and its needs suggest, since additional resources may be necessary to fund its
expansion efforts.



Inflation



The Company does not believe that inflation had a significant impact on its
results of operations during the last two years. Further, inflation is not expected to adversely affect the Company in the future unless it increases substantially and the Company is unable to pass through the increases in its billings.



Seasonality



The Company is subject to the seasonal fluctuations that impact the various employers and their employees it serves.
Historically, the Company has noticed these impacts in portions of the first and fourth quarters. Traditionally, revenues are lower during these periods since patient visits decrease due to the occurrence of plant closings, vacations, holidays, a
reduction in new employee hires, and inclement weather. These activities also cause a decrease in drug and alcohol tests, medical monitoring services, and pre-employment examinations. Similar fluctuations occur during the summer months, but
typically to a lesser degree than during the first and fourth quarters. The Company attempts to ameliorate the impact of these fluctuations through adjusting staff levels.



Professional Liability Insurance Risk



The Company maintains professional liability insurance coverage both on the Company as an entity and in the name of its employed physicians, as well as an
umbrella policy to supplement that coverage. In recent years, the Company, in line with the healthcare industry in general, has experienced significant increases in the cost of such insurance. For its policy year commencing March 1, 2003, the cost
to the Company for its professional liability and umbrella insurance approximately doubled to $669 from $343 in the prior policy year, despite the Company assuming more of the risk itself. The cost for the policy year commencing March 1, 2004, with
similar coverage to 2003, will be $772, a 15.4% increase over the prior policy year. Maintenance of an appropriate level of professional liability insurance coverage is critical to the Company in order to attract and retain competent clinical staff,
the core of its business. While the Company currently believes that it will continue to be able to purchase such insurance, there can be no assurance that the cost of doing so will not have a serious negative



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effect on its operating results since the price it can charge for many of its services is dependent upon fee schedules set by the states in which it operates
and changes in those schedules generally lag the increase in medical-related costs.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company has considered the provisions of Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company had no
holdings of derivative financial or commodity-based instruments or other market risk sensitive instruments entered into for trading purposes at December 31, 2003. As described in the following paragraph, the Company believes that it currently has no
material exposure to interest rate risks in its instruments entered into for other than trading purposes.



Interest rates



The Companys balance sheet includes a revolving credit facility and lease lines which are subject to interest rate risk. The revolving credit loan
is priced at a floating rate of interest while the interest rates on the lease lines are subject to market fluctuations until a draw down is effected. As a result, at any given time, a change in interest rates could result in either an increase or
decrease in the Companys interest expense. The Company performed a sensitivity analysis as of December 31, 2003 to assess the potential effect of a 100 basis point increase or decrease in interest rates and concluded that near-term changes in
interest rates should not materially affect the Companys consolidated financial position, results of operations, or cash flows.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The auditors reports, consolidated financial statements and financial statement schedule that are listed in the Index to the Consolidated Financial Statements and Financial Statement Schedule on page 45 hereof
are incorporated herein by reference.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



At the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures was conducted under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were adequate and designed to ensure
that information required to be disclosed by the Company in this report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



There were no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses in internal controls, subsequent to the evaluation described above.



Reference is made to the Certifications of the Chief Executive Officer and Chief Financial Officer about these and other matters that are filed as
exhibits to this report.



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PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



As of March 1, 2004, the executive officers and directors of the Company were:



|                               |  |     |  |                                                  
|------------------------------ |  | --- |  | -------------------------------------------------
|Name                           |  | Age |  | Position with the Company                        
|                               |  |    
|John C. Garbarino              |  | 51  |  | President, Chief Executive Officer and Director  
|                               |  |    
|Lynne M. Rosen                 |  | 42  |  | Chief Operating Officer                          
|                               |  |    
|H. Nicholas Kirby              |  | 55  |  | Senior Vice President, Sales and Development     
|                               |  |    
|Keith G. Frey                  |  | 64  |  | Chief Financial Officer and Secretary            
|                               |  |    
|William B. Patterson, MD, MPH. |  | 55  |  | Chief Medical Officer, Chair-Medical Policy Board
|                               |  |    
|Edward L. Cahill               |  | 50  |  | Director                                         
|                               |  |    
|Kevin J. Dougherty             |  | 57  |  | Director                                         
|                               |  |    
|Angus M. Duthie                |  | 64  |  | Director                                         
|                               |  |    
|Steven W. Garfinkle            |  | 46  |  | Director                                         
|                               |  |    
|Donald W. Hughes               |  | 53  |  | Director                                         
|                               |  |    
|Frank H. Leone                 |  | 59  |  | Director                                         



John C. Garbarino, a
founder of OH+R, was its President and Chief Executive Officer and a director since its formation in July 1992 and has been President, Chief Executive Officer and a director of the Company since the Merger. From February 1991 through June 1992, Mr.
Garbarino served as President and Chief Executive Officer of Occupational Orthopaedic Systems, Inc., a management company that operated Occupational Orthopaedic Center, Inc., a company which was the initial acquisition of OH+R. From 1985 to January
1991, Mr. Garbarino was associated in various capacities with Foster Management Company (Foster), a private investment company specializing in developing businesses to consolidate fragmented industries. In his association with
Foster, Mr. Garbarino was a general partner and consultant and held various senior executive positions (including Chief Executive Officer, Chief Operating Officer and Chief Financial Officer) in Chartwell Group Ltd., a Foster portfolio company
organized to consolidate through acquisitions the highly fragmented premium priced segment of the interior furnishings industry. Previously, Mr. Garbarino participated in the venture capital industry as a founder and general partner of Fairfield
Venture Partners, L.P. and as vice president and treasurer of Business Development Services, Inc., a venture capital subsidiary of General Electric Company. Mr. Garbarino is a Certified Public Accountant and previously worked at Ernst & Whinney
(a predecessor to Ernst & Young LLP).



Lynne M. Rosen, a
founder of OH+R, was appointed Chief Operating Officer in October 2001. She had served as Senior Vice President, Operations of the Company since March 1999. From 1997 to 1999, Ms. Rosen served as Senior Vice President, Planning and Development. Ms.
Rosen had previously held the positions of Vice President and Assistant Secretary since the Merger. From April 1988 through June 1992, Ms. Rosen held various positions with Occupational Orthopaedic Center, Inc., including general manager. Ms. Rosen
was an athletic trainer at the University of Pennsylvania Sports Medicine Center from 1986 to March 1988 and at the University of Rhode Island from 1985 to 1986.



H. Nicholas Kirby was appointed Senior Vice President, Sales and Development in September 2003. Prior to that he served as
Senior Vice President, Corporate Development from January 1998 and as Vice President, Corporate Development from June 1996. From August 1994 to June 1996, he was the Companys Director of Operations in Maine. Mr. Kirby was a founder and
President of LINK Performance and Recovery Systems, Inc. (LINK) from January 1986 until the sale of the company to OH+R in August 1994. LINK was an occupational health company headquartered in Portland, Maine.



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Keith G. Frey joined the Company as Vice President, Administration in 2000 and was appointed Chief
Financial Officer and Secretary in October 2000. Prior to joining the Company, Mr. Frey served as a part-time consultant to the Company from September 1999. From 1991 until its sale in 1998, he was a principal in IL International Inc., a
contemporary lighting company, and served as President of its North American operations. From 1987 to 1991, Mr. Frey was Chief Financial Officer of Chartwell Group Ltd., an interior furnishings company. From 1981 to 1987, he served as chief
financial officer of two start-up operations. Mr. Frey also spent thirteen years with General Mills, Inc. in senior financial positions in various consumer products divisions both in England and the United States. He is a Chartered Accountant.



William B. Patterson, MD, MPH, FACOEM was appointed Chief
Medical Officer in January 2003. He has also served as Chair of the Companys Medical Policy Board since September 1998. He served as Medical Director of the Companys Massachusetts operations from August 1997 when New England Health
Center, a company of which he was the founder and president was acquired by the Company, until June, 2000. Dr. Patterson is board certified in both internal medicine and occupational/environmental medicine. He has served as President of the New
England College of Occupational and Environmental Medicine and is on its Board of Directors. Dr. Patterson is as an assistant professor at the Boston University School of Public Health. He has a teaching appointment at the Harvard School of Public
Health and has been a consultant to many large corporations and government agencies in occupational and environmental medicine.



Edward L. Cahill has served as a director of the Company since November 1996. Mr. Cahill is a Managing Partner of HLM Venture Partners, a venture capital
firm specializing in health care companies. He was a founding partner of Camden Partners (aka Cahill, Warnock), a private equity firm. Prior to founding Camden Partners in July 1995, Mr. Cahill had been a Managing Director at Alex Brown
& Sons Incorporated where, from 1986 through 1995, he headed the firms Health Care Investment Banking Group. Mr. Cahill is also a director of Guava Technologies, Johns Hopkins Medicine and several private companies.



Kevin J. Dougherty served as a director of OH+R from July 1993 and has been a
director of the Company since the Merger. Mr. Dougherty is currently a General Partner of The Venture Capital Fund of New England, a venture capital firm he joined in April 1986, and a director of several private companies. Previously, he
participated in the venture capital industry as Vice President of 3i Capital Corporation from 1985 to 1986, and as Vice President of Massachusetts Capital Resource Company from 1981 to 1985. Prior to that, Mr. Dougherty served as a commercial banker
at Bankers Trust Company and the First National Bank of Boston.



Angus M. Duthie served as a director of OH+R from June 1992 and has been a director of the Company since the Merger. Mr. Duthie is currently a General Partner of Prince Ventures, L.P., a venture capital firm he co-founded in 1978, and a
director of several private companies. Mr. Duthie has over 30 years of experience involving portfolio management.



Steven W. Garfinkle has served as a director of the Company since July 1998. Since January 2002, Mr. Garfinkle has served as Chairman and Chief
Executive Officer of Advanced Care Solutions, Inc., a start-up medical staffing company. From November 1999 to December 2001, he served as President and Chief Executive Officer of Maestro Learning, Inc. From September 1998 to November 1999, he was a
principal in NorthStar Health Advisors LLC, a private healthcare consultancy group. Mr. Garfinkle served as Chairman and Chief Executive Officer of Prism Health Group Inc. (Prism) from 1992 until Prism was sold to Mariner Health, Inc. in
1997 and from 1991 to 1992 was President of New England Health Strategies. From 1982 to 1991, Mr. Garfinkle served as Chief Operating Officer and in several other senior management positions for the Mediplex Group, Inc.



Donald W. Hughes has served as a director of the Company since December 1997
and is a General Partner and Chief Financial Officer of Cahill, Warnock. Prior to joining Cahill, Warnock in February 1997, Mr. Hughes had served as Vice President, Chief Financial Officer and Secretary of Capstone Pharmacy Services, Inc.



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(Nasdaq: DOSE) from December 1995, and as Executive Vice President and Chief Financial Officer of Broventure Company Inc., a closely-held investment
management company from July 1984 to November 1995. Mr. Hughes is also a director of Touchstone Applied Science Associates, Inc. (OTCBB: TASA) and several private companies.



Frank H. Leone has served as a director of the Company since July 1998. In 1985, Mr. Leone founded and has since served as
President/Chief Executive Officer of RYAN Associates, and he is the founder and Executive Director of the National Association of Occupational Health Professionals (N.A.O.H.P.). Mr. Leone is also the executive editor of four leading occupational
health periodicals: VISIONS, Partners, the Workers Compensation Managed Care Bulletin, and the Clinical Care Update.



The directors are elected to three-year terms or until their successors have been duly elected and qualified. The terms of
Kevin J. Dougherty and Frank H. Leone expire at the 2004 Annual Meeting of Stockholders. The terms of Angus M. Duthie, John C. Garbarino and Steven W. Garfinkle expire in 2005. The terms of Edward L. Cahill and Donald W. Hughes expire in 2006.



Pursuant to the terms of a Stockholders Agreement (the
Stockholders Agreement) dated as of November 6, 1996, by and among the Company and certain of the Companys stockholders, Angus M. Duthie was elected a director in 1999 as the designee of the Telor Principal Stockholders, as
defined in the Stockholders Agreement. The Stockholders Agreement was amended on May 24, 2001 in connection with the distribution by Prince Venture Partners III, L.P. to its partners of the shares of Common Stock held by it, for the
purpose of terminating the right of the Telor Principal Stockholders to designate a director, and releasing them from their obligations under the Stockholders Agreement arising from their status as Telor Principal Stockholders. Under the
Stockholders Agreement as amended and restated on March 24, 2003 in connection with the Companys repurchase of its Preferred Stock, certain of the Companys stockholders have agreed to vote all of their shares of Common Stock to
elect certain nominees to the Companys board of directors. The Stockholders Agreement provides that such nominees are to be determined as follows: (a) the Chief Executive Officer of the Company (presently, John C. Garbarino); (b) a
person designated by the OH+R Principal Stockholders, as defined in the Stockholders Agreement (presently, Kevin J. Dougherty); (c) two persons designated by Cahill, Warnock Strategic Partners Fund, L.P. (presently, Edward L. Cahill and Donald
W. Hughes); (d) a person designated by the Chief Executive Officer (presently, Angus M. Duthie); and (e) two persons unaffiliated with the management of the Company (the Independent Directors) and mutually agreeable to all of the other
directors (presently, Steven W. Garfinkle and Frank H. Leone).



Executive officers serve at the discretion of the Companys Board of Directors. There are no family relationships among the executive officers and directors nor are there any arrangements or understandings between any executive officer
and any other person pursuant to which the executive officer was selected.



Other Key Officers



As of March 1, 2004, other
key contributing officers of the Company were:



|                  |  |     |  |                                              
|----------------- |  | --- |  | ---------------------------------------------
|Name              |  | Age |  | Position with the Company                    
|Mark S. Flieger   |  | 47  |  | Senior Vice President, Information Services  
|                  |  |    
|Janice M. Goguen  |  | 40  |  | Vice President, Finance and Controller       
|                  |  |    
|Patti E. Walkover |  | 49  |  | Vice President, Reimbursement and Contracting
|                  |  |    
|Mary E. Kenney    |  | 55  |  | Vice President, Northeast Operations         
|                  |  |    
|Thomas J. Ward    |  | 48  |  | Vice President, Operations                   



Mark S. Flieger joined
the Company as Vice President, Information Services in July 2000 and in December 2001 was appointed Senior Vice President, Information Services. From 1995 to 2000, he held leadership positions with Harvard Pilgrim Health Care, including Senior
Director, Information Technology Project Office,



33



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Y2K Program Manager, and Manager, IT Services for a five center primary care practice in Rhode Island. From 1992 to 1995, Mr. Flieger served as Director of
Information Systems and Claims for Health Advantage of Rhode Island, Inc., a Preferred Provider Organization of 2,000 providers and 13 hospitals serving over 60,000 members in Southern New England. Other prior positions include Programmer Analyst
and then Manager of Computer Training and Support at Health Systems, Inc. from 1987 to 1992. From 1983 to 1987 he served as a Systems Analyst for the Center for Health Promotion and Environmental Disease Prevention within the Massachusetts
Department of Public Health.



Janice M. Goguen has served Vice
President, Finance and Controller since May 2000. Previously, she had served as Corporate Controller since joining the Company in October 1997. From November 1992 through October 1997, Ms. Goguen was Corporate Controller for AdvantageHEALTH
Corporation, which merged with HEALTHSOUTH Corporation. From August 1985 to November 1992, Ms. Goguen was employed by Ernst & Young, LLP where she planned, managed and executed audits of publicly held, privately owned, and non-profit companies.
Ms. Goguen is a Certified Public Accountant.



Patti E. Walkover
was appointed Vice President, Reimbursement and Contracting in January 2003. She joined the Company in March 1999 as Vice President, Network Operations. From April 1996 to February 1999, Ms. Walkover served as Vice President, New Markets and Vice
President of Operations, respectively, for Healthcare First, a regionally based workers compensation managed care company, where she was responsible for network development and operations in New England and New York. Healthcare First was
acquired by Gates McDonald in October 1998. Ms. Walkover was Director of Occupational Health and Workers Compensation Managed Care at VHA East in Philadelphia from February 1993 to March 1996 where she developed the TeamWorks occupational
health plan. Her prior positions include Program Director for the Occupational Health Center at Chester County Hospital (January 1992 to January 1993), and Administrative Director at the Crozier Center for Occupational Health (November 1989 to
December 1991), a multi-site occupational health program in greater Philadelphia.



Mary E. Kenney has served as Vice President, Northeast Operations since October 2001. She joined the Company in January 1995 as Manager of Clinical Services, Maine, and served as Regional Operations Director, Maine
from May 1998 through September 2001. From May 1990 through December 1994, Ms. Kenney served as Executive Director for the Center for Health Promotion, a division of Maine Medical Center, the largest single provider of occupational medical services
in the state of Maine. Other leadership positions included Program Director for Health Promotion and Cardiac Rehabilitation for Geisinger Medical Center in Pennsylvania. In these positions Ms. Kenney was responsible for the start-up and development
of the programs, as well as financial and operational oversight.



Thomas J. Ward joined the Company as Vice President, Operations in April 2002. Prior to joining the Company, Mr. Ward served ten years with Concentra, Inc., the nations largest company focusing on occupational health services, most
recently as Vice President of Business Development. From March 1992 through April 2001, he served as Vice President of Operations with responsibility for a $75 million business unit. From 1987 until February 1992, Mr. Ward served as Director of
Operations of The Holly Clinic in Denver, CO where he successfully developed a start-up occupational medicine business into five large, profitable centers. From 1982 through 1987, he served as Director of Operations for Medical Centers of Colorado
in Denver, CO, a multi-site urgent care/occupational medicine group. From 1980 to 1982 Mr. Ward served as Assistant Administrator, Ambulatory Services for The Childrens Hospital in Denver, CO.



Audit Committee Financial Expert



The board of directors of the Company has determined that the chair of the
audit committee, Donald W. Hughes, has the attributes of an audit committee financial expert pursuant to the regulations of the SEC. However, Mr. Hughes may not be considered independent pursuant to the listing standards of
the Nasdaq Stock Market, if the Companys securities were so listed (which they are not), since Mr. Hughes is a general partner of a stockholder of the Company that owns in excess of 10% of the Companys common stock.



34



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Stockholders should understand that this designation is a disclosure requirement of the SEC related to Mr. Hughes experience and understanding
with respect to certain accounting and auditing matters. The designation does not impose on Mr. Hughes any duties, obligations or liability that are greater than are generally imposed on him as a member of the audit committee and board of directors,
and his designation as an audit committee financial expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.



Code of Ethics



The Company has a code of conduct applicable to all employees, including all officers and its independent directors who are
not employees of the company, with respect to their Company-related activities. Among other directives, this code of conduct contains guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable
laws and regulations. The full text of the Companys code of conduct may be obtained without charge by an oral or written request to the Companys chief financial officer at the Companys principal executive offices.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended (the
Act), requires the Companys executive officers, as defined for the purposes of Section 16(a) of the Act, and directors and persons who beneficially own more than ten percent of the Companys Common Stock to file reports of
ownership and changes in ownership with the SEC. Except for the late filing of Forms 4 with respect to the grant of stock options in December 2003 to Edward L Cahill, Kevin J. Dougherty, Angus M. Duthie, Keith G. Frey, Steven W. Garfinkle, Donald W.
Hughes, Frank H. Leone, and William B. Patterson, and based solely on reports and other information submitted by the executive officers, directors and such beneficial owners, the Company believes that during the fiscal year ended December 31, 2003,
all such reports were timely filed.



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##### Table of Contents

ITEM 11. EXECUTIVE COMPENSATION



Summary
Compensation



The following table sets forth certain
information regarding the compensation paid by the Company to the Companys Chief Executive Officer, and the other executive officers whose salary and bonus exceeded $100,000 in 2003 (together the Named Executive Officers) for
services rendered in all capacities to the Company and its subsidiaries for the fiscal years ended December 31, 2003, 2002 and 2001.



SUMMARY COMPENSATION TABLE



|                                                                                       |  |              |                                 |                     |                       |                             |   |                           |  |                     |  |   |                   
|-------------------------------------------------------------------------------------- |  | ------------ | ------------------------------- | ------------------- | --------------------- | --------------------------- | - | ------------------------- |  | ------------------- |  | - | ------------------
|Name and Principal Position                                                            |  | Year         |                                 | Annual Compensation |                       | Long TermCompensationAwards |   | All otherCompensation (1)
|                                                                                       |  |              | SecuritiesUnderlyingOptions (#) |                    
|                                                                                       |  | Salary       |                                 | Bonus               |                       |                            
|John C. Garbarino President and Chief Executive Officer                                |  | 200320022001 |                                 | $                   | 226,646230,000215,000 |                             | $ | 10,00010,500             |  | 26,200100,00025,000 |  | $ | 13,48313,03712,684
|Lynne M. Rosen Chief Operating Officer (2)                                             |  | 200320022001 |                                 |                     | 182,685185,000165,000 |                             |   | 10,00010,000             |  | 39,50020,000       |  |   | 4,4613,7862,290   
|William B. Patterson, MD, MPH (3)(4) Chief Medical Officer, Chair-Medical Policy Board |  | 200320022001 |                                 |                     | 182,685185,000146,250 |                             |   | 10,0007,500              |  | 5,00010,00016,500   |  |   | 9,6508,5152,553   
|H. Nicholas Kirby Senior Vice President, Sales and Development                         |  | 200320022001 |                                 |                     | 158,262160,000150,000 |                             |   | 10,0005,000              |  | 10,0003,000        |  |   | 4,2244,4734,154   
|Keith G. Frey Chief Financial Officer and Secretary                                    |  | 200320022001 |                                 |                     | 158,262160,000140,000 |                             |   | 10,00010,000             |  | 15,00020,00020,000  |  |   | 9,7469,7419,758   



---

|(1) | Consists of the Companys matching contributions under its 401(k) plan, car allowances, and group life and disability insurance premiums.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Chief Operating Officer since October 1, 2001; Senior Vice President, Operations from March 1999.
|--- | -------------------------------------------------------------------------------------------------

|(3) | Dr. Patterson was appointed an executive officer of the Company in December 2001.
|--- | ---------------------------------------------------------------------------------

|(4) | During 2001, the Company also paid Dr. Patterson $178,520 as final payments due him in connection with the sale of his business to the Company in 1997. This amount was comprised of
an additional purchase price payment of $111,645 based on the performance of his former business during the twelve months ended July 31, 2001, a principal payment of $62,500 under a subordinated note, and accrued interest thereon of $4,375.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36



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##### Table of Contents

Option Grants



The following table sets forth information with respect to stock options granted to the Named Executive Officers during the fiscal year ended December 31,
2003.



OPTION GRANTS IN LAST FISCAL YEAR



Individual Grants



|                              |  |                                                     |  |                                             |    |  |                        |      |                |          |                                                                                                 |   |        |  |   |       
|----------------------------- |  | --------------------------------------------------- |  | ------------------------------------------- | -- |  | ---------------------- | ---- | -------------- | -------- | ----------------------------------------------------------------------------------------------- | - | ------ |  | - | ------
|Name                          |  | Number ofSecuritiesUnderlyingOptions Granted(#) (1) |  | % of TotalOptionsGranted toEmployeesin 2003 |    |  | ExercisePricePer Share |      | ExpirationDate |          | Potential Realizable Value atAssumed AnnualRates of Stock Price AppreciationFor Option Term
(2)
|                              |  |                                                     |  |                                             | 5% |  | 10%                   
|John C. Garbarino             |  | 26,200                                              |  | 29.5                                        | %  |  | $                      | 1.45 |                | 01/02/13 |                                                                                                 | $ | 23,892 |  | $ | 60,546
|                              |  |                                                     |  |                                             |    | 
|Lynne M. Rosen                |  |                                                    |  |                                            |    |  |                        |     |                |         |                                                                                                 |   |       |  |   |      
|                              |  |                                                     |  |                                             |    | 
|William B. Patterson, MD, MPH |  | 5,000                                               |  | 5.6                                         |    |  |                        | 1.45 |                | 12/17/13 |                                                                                                 |   | 4,559  |  |   | 11,555
|                              |  |                                                     |  |                                             |    | 
|H. Nicholas Kirby             |  |                                                    |  |                                            |    |  |                        |     |                |         |                                                                                                 |   |       |  |   |      
|                              |  |                                                     |  |                                             |    | 
|Keith G. Frey                 |  | 15,000                                              |  | 16.9                                        |    |  |                        | 1.45 |                | 12/17/13 |                                                                                                 |   | 13,678 |  |   | 34,664

---

|(1) | Options granted vest ratably over 4 years on each of the first four anniversary dates of the grant date.
|--- | --------------------------------------------------------------------------------------------------------

|(2) | The dollar amounts under these columns are the result of calculations assuming 5% and 10% growth rates as set by the Securities and Exchange Commission and, therefore, are not
intended to forecast future price appreciation, if any, of the Companys Common Stock.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Option Exercises and Year-End Values



The following table sets forth information concerning option holdings as of December 31, 2003 with respect to the Named Executive Officers.



AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES



|                               |  |                              |             |               |               |                                                                 |             |                                                         |               |  |   |       |  |   |      
|------------------------------ |  | ---------------------------- | ----------- | ------------- | ------------- | --------------------------------------------------------------- | ----------- | ------------------------------------------------------- | ------------- |  | - | ----- |  | - | -----
|Name                           |  | SharesAcquiredOnExercise (#) |             | ValueRealized |               | Number of SecuritiesUnderlying UnexercisedOptions at FY-End (#) |             | Value of Unexercised In-The-Money Options at FY-End (1)
|                               |  |                              | Exercisable |               | Unexercisable |                                                                 | Exercisable |                                                         | Unexercisable
|John C. Garbarino              |  |                             |             | $             |              |                                                                 | 148,319     |                                                         | 141,200       |  | $ | 2,500 |  | $ | 7,500
|                               |  |                              |             |               |               |                                                                
|Lynne M. Rosen                 |  |                             |             |               |              |                                                                 | 69,455      |                                                         | 52,125        |  |   | 988   |  |   | 2,963
|                               |  |                              |             |               |               |                                                                
|William B. Patterson, MD, MPH. |  |                             |             |               |              |                                                                 | 39,500      |                                                         | 28,000        |  |   | 250   |  |   | 750  
|                               |  |                              |             |               |               |                                                                
|H. Nicholas Kirby              |  |                             |             |               |              |                                                                 | 50,120      |                                                         | 12,500        |  |   | 250   |  |   | 750  
|                               |  |                              |             |               |               |                                                                
|Keith G. Frey                  |  |                             |             |               |              |                                                                 | 45,000      |                                                         | 50,000        |  |   | 500   |  |   | 1,500

---

|(1) | Based on the fair market value of the Companys common stock as of December 31, 2003 of $1.30 minus the exercise price of options.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Employment Agreements



John C. Garbarino has an employment agreement with the Company dated June 6, 1996. The term of the agreement is two years from such date and renews
automatically for successive one-year periods until terminated. The agreement provides for an annual salary of $180,000, subject to increase on an annual basis in the discretion of the board of directors, and bonus as may be determined by the
Compensation Committee of the board of directors. Mr. Garbarino is subject to a covenant not to compete with the Company for six months after the termination of his employment. If the Company terminates the agreement without cause (as
defined in the agreement), or if Mr. Garbarino becomes incapacitated, or if Mr. Garbarino resigns from the Company for just cause (as defined in the agreement), then the Company is obligated to pay to Mr. Garbarino six months base
salary in consideration of his covenant not to compete.



Director
Compensation



Except for the Independent Directors, the
Companys directors do not receive any cash compensation for service on the Companys board of directors or any committee thereof, but all directors are reimbursed for expenses actually incurred in connection with attending meetings of the
Companys board of directors and any committee thereof. In 2003, each of the Independent Directors received $2,000 for each meeting of the Companys board of directors he attended.



Upon election to the Companys board of directors, each Independent
Director was granted a non-qualified stock option to purchase 20,000 shares of the Companys Common Stock. In December 2003, each Independent Director was granted a non-qualified stock option to purchase 5,000 shares of the Companys
Common Stock as compensation for services rendered in 2003. Except for the Independent Directors, the Company granted in December 2003 to each director who was not an employee a non-qualified stock option to purchase 2,000 shares of the
Companys Common Stock as compensation for services rendered in 2003. The exercise price of all such option grants was the fair market value of the Companys Common Stock on the date of grant. All such options vest ratably over four years
on each of the first four anniversary dates of the dates of grant and are exercisable for a period of ten years.



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##### Table of Contents

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The following table sets forth certain information regarding beneficial ownership of the Companys Common Stock as of March 1, 2004 by (i) each
person known by the Company to own beneficially more than five percent of the Common Stock of the Company, (ii) each director and nominee for director of the Company, (iii) each Executive Officer of the Company named in the Summary Compensation
Table and (iv) all directors and executive officers of the Company as a group. Except as otherwise indicated, all shares are owned directly. Except as indicated by footnote, and subject to community property laws where applicable, the Company
believes that the persons named in the table have sole voting and investment power with respect to all shares of Common Stock indicated.



|                                                                                                             |  |                         |  |                            |  
|------------------------------------------------------------------------------------------------------------ |  | ----------------------- |  | -------------------------- | -
|Name and Address of Beneficial Owner                                                                         |  | SharesBeneficiallyOwned |  | Percent ofTotalVotingPower |  
|Cahill, Warnock Strategic Partners Fund, L.P. (1) (2) One South Street, Suite 2150 Baltimore, MD 21202       |  | 770,871                 |  | 25.0                       | %
|                                                                                                             |  |                        
|Venrock Entities (1) (3) 30 Rockefeller Plaza, Room 5508 New York, NY 10112                                  |  | 269,123                 |  | 8.7                        | %
|                                                                                                             |  |                        
|FleetBoston Financial Corporation (1) (4) 175 Federal Street, 10thFloor Boston, MA 02110                     |  | 229,159                 |  | 7.4                        | %
|                                                                                                             |  |                        
|The Venture Capital Fund of New England III, L.P. (1) (5) 30 Washington Street Wellesley Hills, MA 02481     |  | 191,319                 |  | 6.2                        | %
|                                                                                                             |  |                        
|Asset Management Associates 1989, L.P. (1) (6) 480 Cowper Street, 2ndFloor Palo Alto, CA 94301               |  | 184,954                 |  | 6.0                        | %
|                                                                                                             |  |                        
|Pantheon Global PCC Limited (7) Transamerica Center 600 Montgomery Street, 23rdFloor San Francisco, CA 94111 |  | 196,775                 |  | 6.4                        | %
|                                                                                                             |  |                        
|John C. Garbarino (1) (8) 175 Derby Street, Suite 36 Hingham, MA 02043                                       |  | 246,938                 |  | 7.4                        | %
|                                                                                                             |  |                        
|Lynne M. Rosen (1) (9)                                                                                       |  | 98,486                  |  | 3.1                        | %
|                                                                                                             |  |                        
|H. Nicholas Kirby (10)                                                                                       |  | 59,620                  |  | 1.9                        | %
|                                                                                                             |  |                        
|Keith G. Frey (11)                                                                                           |  | 45,000                  |  | 1.4                        | %
|                                                                                                             |  |                        
|William B. Patterson, MD, MPH (12)                                                                           |  | 50,300                  |  | 1.6                        | %
|                                                                                                             |  |                        
|Edward L. Cahill (13)                                                                                        |  | 25,000                  |  | *                          |  
|                                                                                                             |  |                        
|Kevin J. Dougherty (14)                                                                                      |  | 25,000                  |  | *                          |  
|                                                                                                             |  |                        
|Angus M. Duthie (15)                                                                                         |  | 45,680                  |  | 1.5                        | %
|                                                                                                             |  |                        
|Donald W. Hughes (16)                                                                                        |  | 24,200                  |  | *                          |  
|                                                                                                             |  |                        
|Steven W. Garfinkle (17)                                                                                     |  | 32,500                  |  | 1.0                        | %
|                                                                                                             |  |                        
|Frank H. Leone (18)                                                                                          |  | 32,500                  |  | 1.0                        | %
|                                                                                                             |  |                        
|All directors and executive officers as a group (11 persons) (19)                                            |  | 685,224                 |  | 18.2                       | %

---

|* | Less than 1%
|- | ------------



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##### Table of Contents

|(1) | Each of the stockholders who is a party to a certain Amended and Restated Stockholders Agreement dated as of March 24, 2003, by and among the Company and certain of its
stockholders (the Stockholders Agreement) may be deemed to share voting power with respect to, and therefore may be deemed to beneficially own, all of the shares of the Common Stock subject to the Stockholders Agreement. Such
stockholders disclaim such beneficial ownership.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Edward L. Cahill and Donald W. Hughes, directors of the Company, are General Partners of Cahill, Warnock Strategic Partners, L.P., the General Partner of Cahill, Warnock Strategic
Partners Fund, L.P. David L. Warnock is also a General Partner of Cahill, Warnock Strategic Partners, L.P. The General Partners of Cahill, Warnock Strategic Partners, L.P. share voting and investment power with respect to the shares held by Cahill,
Warnock Strategic Partners Fund, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General Partners of Cahill, Warnock Strategic Partners, L.P. disclaims beneficial ownership of the shares held by Cahill, Warnock
Strategic Partners Fund, L.P.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Consists of 130,861 shares of Common Stock held by Venrock Associates and 138,262 shares of Common Stock held by Venrock Associates II, L.P. Michael C. Brooks, Eric S. Copeland,
Anthony B. Evnin, Bryan E. Roberts, Ray A. Rothrock, Anthony Sun, and Michael F. Tyrell are General Partners of Venrock Associates and of Venrock Associates II, L.P. The General Partners of Venrock Associates and of Venrock Associates II, L.P. share
voting and investment power with respect to the shares held by Venrock Associates and by Venrock Associates II, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General Partners of Venrock Associates and Venrock
Associates II, L.P. disclaims beneficial ownership of the shares held by Venrock Associates and Venrock Associates II, L.P.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Consists of 115,636 shares of Common Stock reported as beneficially owned in Schedule 13G/A dated February 14, 2003 as filed with the SEC by FleetBoston Financial Corporation as a
holding company on behalf of its subsidiary, BancBoston Ventures Inc., and 113,523 shares of Common Stock held in the name of BancBoston Ventures Inc.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Kevin J. Dougherty, a director of the Company, is a General Partner of FH&Co. III, L.P., the General Partner of The Venture Capital Fund of New England III, L.P. Richard A.
Farrell, Harry J. Healer, Jr. and William C. Mills III are also General Partners of FH&Co. III, L.P. The General Partners of FH&Co. III, L.P. share voting and investment power with respect to the shares held by The Venture Capital Fund of
New England III, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General Partners of FH&Co. III, L.P. disclaims beneficial ownership of the shares held by The Venture Capital Fund of New England III, L.P.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Craig C. Taylor, Franklin P. Johnson Jr., John F. Shoch and W. Ferrell Sanders are General Partners of AMC Partners 89, L.P., the General Partner of Asset Management Associates
1989, L.P. The General Partners of AMC Partners 89, L.P. share voting and investment power with respect to the shares held by Asset Management Associates 1989, L.P. and may be deemed to be the beneficial owners of such shares. Each of the General
Partners of AMC Partners 89, L.P. disclaims beneficial ownership of the shares held by Asset Management Associates 1989, L.P. except to the extent of any pecuniary interest therein
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Reported as beneficially owned in Schedule 13G dated July 10, 2000 as filed with the SEC to report shares held by Pantheon Global PCC Limited for its own account for the benefit of
its shareholders, Pantheon Global Secondary Fund, L.P., Pantheon Global Secondary Fund, Ltd. and Pantheon International Participations, PLC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Includes 174,869 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(9) | Includes 75,705 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(10) | Includes 52,620 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------

|(11) | Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|(12) | Includes 42,000 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(13) | Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004. Does not include 770,871 shares of Common
Stock held by Cahill, Warnock Strategic Partners Fund, L.P. (see Note 2) and 42,713 shares of Common Stock held by Strategic Associates, L.P. Mr. Cahill is a General Partner of Cahill, Warnock Strategic Partners, L.P., the General Partner of each of
Cahill, Warnock Strategic Partners Fund, L.P. and of Strategic Associates, L.P. Mr. Cahill disclaims any beneficial ownership of the shares held by Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Associates, L.P.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004. Mr. Dougherty disclaims any beneficial
ownership in the shares held by The Venture Capital Fund of New England III, L.P. See Note 5.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Includes 25,000 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------

|(16) | Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004. Does not include 770,871 shares of Common
Stock held by Cahill, Warnock Strategic Partners Fund, L.P. (see Note 2) and 42,713 shares of Common Stock held by Strategic Associates, L.P. Mr. Hughes is a General Partner of Cahill, Warnock Strategic Partners, L.P., the General Partner of each of
Cahill, Warnock Strategic Partners Fund, L.P. and of Strategic Associates, L.P. Mr. Hughes disclaims any beneficial ownership of the shares held by Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Associates, L.P.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) | Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|(18) | Consists entirely of shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|(19) | Includes an aggregate of 554,394 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of March 1, 2004. Does not include an aggregate of
1,039,994 shares of Common Stock with respect to which certain directors disclaim beneficial ownership. See Notes 2, 5, 13, 14 and 16.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

EQUITY COMPENSATION PLAN INFORMATION



|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                             |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants and Rights |  | Weighted-average Exercise Price of Outstanding Options, Warrants and Rights |      | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
|                                                           |  | (a)                                                                                         |  | (b)                                                                         |      | (c)                                                                                                                                        
|Equity compensation plans approved by security holders (1) |  | 1,228,576                                                                                   |  | $                                                                           | 2.08 |                                                                                                                                             | 147,761
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                             |     |                                                                                                                                             |       
|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                             |        
|Total                                                      |  | 1,228,576                                                                                   |  | $                                                                           | 2.08 |                                                                                                                                             | 147,761

---

|(1) | Includes the Companys 1993, 1996, and 1998 Stock Plans. The 1998 Stock Plan, as approved by the Companys stockholders, reserved 150,000 shares of the Companys
Common Stock for the granting of non-qualified stock options, incentive stock options, and stock appreciation rights. The Companys board of directors has subsequently approved, without stockholder approval, the reservation of an additional
770,000 shares of the Companys Common Stock under the 1998 Stock Plan for the granting of non-qualified stock options and stock appreciation rights.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Each of the Companys Stock Plans expires ten years from inception, after which no new options may be granted from them. Since the expiration of the 1993 Stock Plan in February
2003, options to purchase 49,028 shares under the 1993 Stock Plan have been forfeited by former employees and are no longer available for re-issuance.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM l3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



No relationships or related transactions exist that require reporting by the Company for the year ended December 31, 2003.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The following table presents fees for professional services rendered by PricewaterhouseCoopers LLP (PwC) for the audit of the Companys annual financial statements for the years ended December 31,
2003 and 2002 and fees billed for audit-related services, tax services and all other services rendered by PwC for the years ended December 31, 2003 and 2002.



|                   |  |      |     |      |   |    
|------------------ |  | ---- | --- | ---- | - | ---
|(in thousands)     |  | 2003 |     | 2002
|Audit fees         |  | $    | 167 |      | $ | 136
|Audit-related fees |  |      |    |      |   |   
|                   |  |      |     |      |   |    
|Tax fees (1)       |  |      | 57  |      |   | 54 
|All other fees     |  |      |    |      |   |   
|                   |  |      |     |      |   |    
|                   |  | $    | 224 |      | $ | 190
|                   |  |      |     |      |   |    

---

|(1) | Primarily tax compliance services, including U.S. federal and state income tax returns.
|--- | ---------------------------------------------------------------------------------------



All audit related services, tax services and other services were pre-approved by the Companys audit committee, which
concluded that the provision of such services by PwC was compatible with the maintenance of that firms independence in the conduct of its auditing functions. The Audit Committee Charter provides for pre-approval of audit, audit-related and tax
services specifically described by the audit committee on an annual basis. In addition, individual engagements anticipated to exceed pre-established thresholds must be separately approved.



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##### Table of Contents

PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(a)(1) and (2) Financial Statements and Schedules



The auditors report, consolidated financial statements and financial statement schedule listed in the Index to the Consolidated Financial Statements
and Financial Statement Schedule on page 45 hereof are filed as part of this report, commencing on page 46 hereof.



Schedule II Valuation and Qualifying Accounts



(a)(3) Exhibits



|      |     |  |                                                                                                                                                                                                                                                                  
|----- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |    
|3.01  |     |  | Restated Certificate of Incorporation filed with the Delaware Secretary of State on April 21, 2003 (Filed as Exhibit 3.01 to Form 10-Q for the quarterly period ended March 31, 2003, File No.
0-21428, and incorporated by reference herein).                   
|      |    
|3.02  |     |  | Restated Bylaws, as amended.*                                                                                                                                                                                                                                    
|      |    
|4.01  |     |  | Form of Common Stock Certificate (Filed as Exhibit 4.01 to Form 10-Q for the quarterly period ended June 30, 1996, File No. 0-21428, and incorporated by reference herein).                                                                                      
|      |    
|4.02  | (a) |  | Amended and Restated Revolving Credit and Security Agreement dated December 15, 2003 by and between the Company, CM Occupational Health, Limited Liability Company and OHR-SSM, LLC, and
CapitalSource Finance LLC (Lender).++                                 
|      |    
|4.02  | (b) |  | Amended and Restated Revolving Note by and between the Company, CM Occupational Health, Limited Liability Company and OHR-SSM, LLC, and Lender to pay Lender $7,250,000.++                                                                                       
|      |    
|10.01 |     |  | Employment Agreement by and between the Company and John C. Garbarino dated as of June 6, 1996 (Filed as Exhibit 10.02 to Form 10-Q for the quarterly period ended June 30, 1996, File No.
0-21428, and incorporated by reference herein).                       
|      |    
|10.02 | (a) |  | Series A Convertible Preferred Stock Repurchase Agreement among the Company and certain security holders dated as of March 24, 2003.**                                                                                                                           
|      |    
|(b    | )   |  | Amended and Restated Stockholders Agreement among the Company and certain security holders dated as of March 24, 2003.**                                                                                                                                        
|      |    
|(c    | )   |  | Amended and Restated Registration Rights Agreement among the Company and certain security holders dated as of March 24, 2003.**                                                                                                                                  
|      |    
|(d    | )   |  | Promissory Notes dated March 24, 2003 payable to certain security holders.**                                                                                                                                                                                     
|      |    
|(e    | )   |  | Subordination Agreement dated March 24, 2003 by and among the Company, certain security holders, and DVI Business Credit Corporation and DVI Financial Services Inc, which has been assigned to
Lender.**                                                        
|      |    
|10.03 | (a) |  | Lease Agreement dated August 30, 2002 by and between the Company and Somerset Capital Group, Ltd. (Somerset) (Filed as Exhibit 10.07(a) to Form 10-Q for the quarterly period ended
September 30 2002, File No. 0-21428, and incorporated by reference herein).
|      |    
|(b    | )   |  | Letter dated August 29, 2002 to the Company from Somerset (Filed as Exhibit 10.07(a) to Form 10-Q for the quarterly period ended September 30 2002, File No. 0-21428, and incorporated by
reference herein).                                                     



43



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|      |  |                                                                                                                                                                           
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.04 |  | 1998 Stock Plan (as fully amended).**                                                                                                                                     
|      | 
|21.01 |  | Subsidiaries of the Company.++                                                                                                                                            
|      | 
|23.01 |  | Consent of PricewaterhouseCoopers LLP.++                                                                                                                                  
|      | 
|31.01 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.++
|      | 
|31.02 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.++
|      | 
|32.01 |  | Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.++

---

|* | Previously filed as the exhibit stated in Form 10-K for the fiscal year ended December 31, 1996, File No. 0-21428, and incorporated by reference herein.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Previously filed as the exhibits stated in Form 10-K for the fiscal year ended December 31, 2002, File No. 0-21428, and incorporated by reference herein.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|++ | Filed herewith.
|-- | ---------------



The Company agrees to furnish to the SEC a copy of any instrument evidencing long-term debt, which is not otherwise required to be filed.



(b) Reports on Form 8-K



A report on Form 8-K was filed with the SEC on November 18, 2003 to report
under Items 7 and 12 a press release announcing the Companys financial results for the quarter ended September 30, 2003.



44



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OCCUPATIONAL HEALTH + REHABILITATION INC



CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE



For the Years Ended December 31, 2003 and 2002



INDEX



|                                                                               |  |   
|------------------------------------------------------------------------------ |  | --
|Report of Independent Auditors                                                 |  | 46
|                                                                               | 
|Consolidated Financial Statements                                              |  |   
|Consolidated Balance Sheets.                                                   |  | 47
|Consolidated Statements of Operations.                                         |  | 48
|Consolidated Statements of Stockholders Equity (Deficit) and Redeemable Stock |  | 49
|Consolidated Statements of Cash Flows.                                         |  | 50
|Notes to Consolidated Financial Statements                                     |  | 51
|                                                                               | 
|Schedule II  Valuation and Qualifying Accounts                                |  | 67



45



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##### Table of Contents

REPORT OF INDEPENDENT AUDITORS



Board of Directors
and Shareholders

Occupational Health + Rehabilitation Inc:



In our opinion, the consolidated financial statements listed in the index appearing on page 45 present fairly, in all material respects, the financial position of
Occupational Health + Rehabilitation Inc and their subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



|                                                                                              
|----------------------------------------------------------------------------------------------
|/s/    PRICEWATERHOUSECOOPERS LLP                                                             
|                                                                                              
|Boston, Massachusetts March 5, 2004, except for Note 10 as to which the date is March 30, 2004





46



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OCCUPATIONAL HEALTH + REHABILITATION INC



CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002

(dollar amounts in thousands)



|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                                                                 |  | 2003 |        |   | 2002 |  
|ASSETS                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|Current assets:                                                                                                                                                                                                  |  |      |        |   |      |   |        |  
|Cash and cash equivalents                                                                                                                                                                                        |  | $    | 1,744  |   |      | $ | 1,674  |  
|Accounts receivable, less allowance for doubtful accounts of $1,082 and $969 in 2003 and 2002, respectively                                                                                                      |  |      | 8,771  |   |      |   | 9,736  |  
|Deferred tax assets                                                                                                                                                                                              |  |      | 691    |   |      |   | 654    |  
|Prepaid expenses and other assets                                                                                                                                                                                |  |      | 812    |   |      |   | 899    |  
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|Total current assets                                                                                                                                                                                             |  |      | 12,018 |   |      |   | 12,963 |  
|Property and equipment, net                                                                                                                                                                                      |  |      | 3,111  |   |      |   | 3,169  |  
|Goodwill, net                                                                                                                                                                                                    |  |      | 6,687  |   |      |   | 6,174  |  
|Other intangible assets, net                                                                                                                                                                                     |  |      | 152    |   |      |   | 92     |  
|Deferred tax assets                                                                                                                                                                                              |  |      | 1,990  |   |      |   | 1,908  |  
|Other assets                                                                                                                                                                                                     |  |      | 141    |   |      |   | 91     |  
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|Total assets                                                                                                                                                                                                     |  | $    | 24,099 |   |      | $ | 24,397 |  
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS EQUITY                                                                                                                                                           |  |      |        |   |      |   |        |  
|Current liabilities:                                                                                                                                                                                             |  |      |        |   |      |   |        |  
|Accounts payable                                                                                                                                                                                                 |  | $    | 1,073  |   |      | $ | 755    |  
|Accrued expenses                                                                                                                                                                                                 |  |      | 3,016  |   |      |   | 3,172  |  
|Accrued payroll                                                                                                                                                                                                  |  |      | 1,817  |   |      |   | 2,053  |  
|Current portion of long-term debt                                                                                                                                                                                |  |      | 8,462  |   |      |   | 2,332  |  
|Current portion of obligations under capital leases                                                                                                                                                              |  |      | 782    |   |      |   | 580    |  
|Restructuring liability                                                                                                                                                                                          |  |      |       |   |      |   | 22     |  
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|Total current liabilities                                                                                                                                                                                        |  |      | 15,150 |   |      |   | 8,914  |  
|Long-term debt, less current maturities                                                                                                                                                                          |  |      | 851    |   |      |   | 942    |  
|Obligations under capital leases                                                                                                                                                                                 |  |      | 854    |   |      |   | 1,040  |  
|Deferred credit                                                                                                                                                                                                  |  |      |       |   |      |   | 530    |  
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|Total liabilities                                                                                                                                                                                                |  |      | 16,855 |   |      |   | 11,426 |  
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|Commitments and contingencies                                                                                                                                                                                    |  |      |        |   |      |   |        |  
|Minority interests                                                                                                                                                                                               |  |      | 1,430  |   |      |   | 1,422  |  
|Redeemable, Series A convertible preferred stock, $.001 par value, no shares authorized, issued or outstanding in 2003; 1,666,667 shares
authorized and 1,416,667 shares issued and outstanding in 2002          |  |      |       |   |      |   | 10,653 |  
|Stockholders equity:                                                                                                                                                                                            |  |      |        |   |      |   |        |  
|Preferred stock, $.001 par value, 5,000,000 shares authorized in 2003 and 3,333,333 shares authorized in 2002; none issued and
outstanding                                                                       |  |      |       |   |      |   |       |  
|Common stock, $.001 par value, 10,000,000 shares authorized; 3,088,111 and 1,580,366 shares issued in 2003 and 2002, respectively; and
3,088,111 and 1,479,864 shares outstanding in 2003 and 2002, respectively |  |      | 3      |   |      |   | 1      |  
|Additional paid-in capital                                                                                                                                                                                       |  |      | 13,037 |   |      |   | 8,390  |  
|Accumulated deficit                                                                                                                                                                                              |  |      | (7,226 | ) |      |   | (6,995 | )
|Less treasury stock, at cost, 100,502 shares                                                                                                                                                                     |  |      |       |   |      |   | (500   | )
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|Total stockholders equity                                                                                                                                                                                       |  |      | 5,814  |   |      |   | 896    |  
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|Total liabilities, redeemable stock and stockholders equity                                                                                                                                                     |  | $    | 24,099 |   |      | $ | 24,397 |  
|                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  



The accompanying notes
are an integral part of these consolidated financial statements.



47



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OCCUPATIONAL HEALTH + REHABILITATION INC



CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2003, 2002 and 2001

(dollar amounts in thousands, except per share amounts)



|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                       |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Revenue                                                |  | $    | 53,538 |   |      | $ | 56,949 |      |  | $ | 57,017 |  
|Expenses:                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Operating                                              |  |      | 46,309 |   |      |   | 49,803 |      |  |   | 48,476 |  
|General and administrative                             |  |      | 4,697  |   |      |   | 4,883  |      |  |   | 5,096  |  
|Depreciation and amortization                          |  |      | 1,405  |   |      |   | 1,012  |      |  |   | 1,265  |  
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|                                                       |  |      | 52,411 |   |      |   | 55,698 |      |  |   | 54,837 |  
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Income from operations                                 |  |      | 1,127  |   |      |   | 1,251  |      |  |   | 2,180  |  
|Nonoperating income (losses):                          |  |      |        |   |      |   |        |      |  |   |        |  
|Interest income                                        |  |      | 8      |   |      |   | 26     |      |  |   | 45     |  
|Interest expense                                       |  |      | (650   | ) |      |   | (423   | )    |  |   | (507   | )
|Minority interest and contractual settlements, net     |  |      | (815   | ) |      |   | (496   | )    |  |   | (329   | )
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|(Loss) income before income taxes                      |  |      | (330   | ) |      |   | 358    |      |  |   | 1,389  |  
|Tax (benefit) provision                                |  |      | (99    | ) |      |   | 215    |      |  |   | (2,695 | )
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Net (loss) income                                      |  | $    | (231   | ) |      | $ | 143    |      |  | $ | 4,084  |  
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Net (loss) income per common share - basic             |  | $    | (0.14  | ) |      | $ | (0.36  | )    |  | $ | 2.29   |  
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Net (loss) income per common share - assuming dilution |  | $    | (0.14  | ) |      | $ | (0.36  | )    |  | $ | 1.08   |  
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  







The accompanying notes are an integral part of these consolidated financial
statements.



48



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OCCUPATIONAL HEALTH + REHABILITATION INC



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

AND REDEEMABLE STOCK

For the Years Ended December 31, 2003, 2002 and 2001

(dollar amounts in thousands)



|                                            |  |                                               |         |   |              |           |                          |   |        |                    |   |        |                |  |   |                                   |   |  |          |   |  |   |      |   |  |   |        |  
|------------------------------------------- |  | --------------------------------------------- | ------- | - | ------------ | --------- | ------------------------ | - | ------ | ------------------ | - | ------ | -------------- |  | - | --------------------------------- | - |  | -------- | - |  | - | ---- | - |  | - | ------ | -
|                                            |  | RedeemableConvertiblePreferred Stock Series A |         |   | Common Stock |           | AdditionalPaid-inCapital |   |        | AccumulatedDeficit |   |        | Treasury Stock |  |   | TotalStockholdersEquity(Deficit) |  
|                                            |  |                                               | Shares  |   | Amount       |           |                          |   | Shares |                    |   | Amount |                | 
|Balance at December 31, 2000                |  | $                                             | 9,279   |   |              | 1,479,510 |                          | $ | 1      |                    | $ | 9,764  |                |  | $ | (11,222                           | ) |  | 100,502  |   |  | $ | (500 | ) |  | $ | (1,957 | )
|Accretion of preferred stock issuance costs |  |                                               | 14      |   |              |           |                          |   |        |                    |   | (14    | )              |  |   |                                   |   |  |          |   |  |   |      |   |  |   | (14    | )
|Exercise of stock options                   |  |                                               |         |   |              | 354       |                          |   |        |                    |   |       |                |  |   |                                   |   |  |          |   |  |   |      |   |  |   |       |  
|Accrual of preferred stock dividends        |  |                                               | 680     |   |              |           |                          |   |        |                    |   | (680   | )              |  |   |                                   |   |  |          |   |  |   |      |   |  |   | (680   | )
|Net income                                  |  |                                               |         |   |              |           |                          |   |        |                    |   |        |                |  |   | 4,084                             |   |  |          |   |  |   |      |   |  |   | 4,084  |  
|                                            |  |                                               |         |   |              |           |                          |   |        |                    |   |        |                |  |   |                                   |   |  |          |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2001                |  |                                               | 9,973   |   |              | 1,479,864 |                          |   | 1      |                    |   | 9,070  |                |  |   | (7,138                            | ) |  | 100,502  |   |  |   | (500 | ) |  |   | 1,433  |  
|Accrual of preferred stock dividends        |  |                                               | 680     |   |              |           |                          |   |        |                    |   | (680   | )              |  |   |                                   |   |  |          |   |  |   |      |   |  |   | (680   | )
|Net income                                  |  |                                               |         |   |              |           |                          |   |        |                    |   |        |                |  |   | 143                               |   |  |          |   |  |   |      |   |  |   | 143    |  
|                                            |  |                                               |         |   |              |           |                          |   |        |                    |   |        |                |  |   |                                   |   |  |          |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2002                |  |                                               | 10,653  |   |              | 1,479,864 |                          |   | 1      |                    |   | 8,390  |                |  |   | (6,995                            | ) |  | 100,502  |   |  |   | (500 | ) |  |   | 896    |  
|Accrual of preferred stock dividends        |  |                                               | 146     |   |              |           |                          |   |        |                    |   | (146   | )              |  |   |                                   |   |  |          |   |  |   |      |   |  |   | (146   | )
|Repurchase of preferred stock               |  |                                               | (10,799 | ) |              | 1,608,247 |                          |   | 2      |                    |   | 5,293  |                |  |   |                                   |   |  |          |   |  |   |      |   |  |   | 5,295  |  
|Retirement of treasury stock                |  |                                               |         |   |              |           |                          |   |        |                    |   | (500   | )              |  |   |                                   |   |  | (100,502 | ) |  |   | 500  |   |  |   |       |  
|Net loss                                    |  |                                               |         |   |              |           |                          |   |        |                    |   |        |                |  |   | (231                              | ) |  |          |   |  |   |      |   |  |   | (231   | )
|                                            |  |                                               |         |   |              |           |                          |   |        |                    |   |        |                |  |   |                                   |   |  |          |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2003                |  | $                                             |        |   |              | 3,088,111 |                          | $ | 3      |                    | $ | 13,037 |                |  | $ | (7,226                            | ) |  |         |   |  | $ |     |   |  | $ | 5,814  |  
|                                            |  |                                               |         |   |              |           |                          |   |        |                    |   |        |                |  |   |                                   |   |  |          |   |  |   |      |   |  |   |        |  





The accompanying notes are an integral part of these consolidated financial statements.



49



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OCCUPATIONAL HEALTH + REHABILITATION INC



CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2003, 2002 and 2001

(dollar amounts in thousands)



|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                         |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Operating activities:                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|Net (loss) income                                                                        |  | $    | (231   | ) |      | $ | 143    |      |  | $ | 4,084  |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |      |        |   |      |   |        |      |  |   |        |  
|Depreciation                                                                             |  |      | 1,336  |   |      |   | 961    |      |  |   | 911    |  
|Amortization                                                                             |  |      | 69     |   |      |   | 51     |      |  |   | 354    |  
|Provision for doubtful accounts                                                          |  |      | 1,008  |   |      |   | 1,069  |      |  |   | 715    |  
|Minority interest                                                                        |  |      | 853    |   |      |   | 891    |      |  |   | 699    |  
|Imputed interest on non-interest bearing promissory notes payable                        |  |      | 91     |   |      |   | 112    |      |  |   | 112    |  
|Loss on disposal of fixed assets                                                         |  |      | 33     |   |      |   | 13     |      |  |   | 19     |  
|Deferred tax (benefit) expense                                                           |  |      | (119   | ) |      |   | 206    |      |  |   | (2,768 | )
|Changes in operating assets and liabilities:                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Accounts receivable                                                                      |  |      | (43    | ) |      |   | 406    |      |  |   | (911   | )
|Prepaid expenses and other assets                                                        |  |      | 28     |   |      |   | (390   | )    |  |   | 535    |  
|Restructuring liability                                                                  |  |      | (22    | ) |      |   | (50    | )    |  |   | (145   | )
|Accounts payable and accrued expenses                                                    |  |      | (44    | ) |      |   | (806   | )    |  |   | 352    |  
|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                                |  |      | 2,959  |   |      |   | 2,606  |      |  |   | 3,957  |  
|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Investing activities:                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|Property and equipment additions                                                         |  |      | (678   | ) |      |   | (891   | )    |  |   | (993   | )
|Cash paid for acquisitions and other intangibles, net of cash acquired                   |  |      | (482   | ) |      |   | (115   | )    |  |   | 584    |  
|Cash received on note receivable                                                         |  |      |       |   |      |   |       |      |  |   | 248    |  
|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash used in investing activities                                                    |  |      | (1,160 | ) |      |   | (1,006 | )    |  |   | (161   | )
|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Financing activities:                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|Proceeds (repayment) from lines of credit and loans payable                              |  |      | 3,061  |   |      |   | (198   | )    |  |   | (2,153 | )
|Proceeds from lease lines                                                                |  |      | 139    |   |      |   | 766    |      |  |   | 398    |  
|Payments of long-term debt and capital lease obligations                                 |  |      | (1,181 | ) |      |   | (1,205 | )    |  |   | (1,072 | )
|Payments made for debt issuance costs                                                    |  |      | (98    | ) |      |   | (10    | )    |  |   | (32    | )
|Distributions to joint venture partners                                                  |  |      | (845   | ) |      |   | (886   | )    |  |   | (773   | )
|Repurchase of preferred stock                                                            |  |      | (2,805 | ) |      |   |       |      |  |   |       |  
|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash used by financing activities                                                    |  |      | (1,729 | ) |      |   | (1,533 | )    |  |   | (3,632 | )
|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net increase in cash and cash equivalents                                                |  |      | 70     |   |      |   | 67     |      |  |   | 164    |  
|Cash and cash equivalents at beginning of year                                           |  |      | 1,674  |   |      |   | 1,607  |      |  |   | 1,443  |  
|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents at end of year                                                 |  | $    | 1,744  |   |      | $ | 1,674  |      |  | $ | 1,607  |  
|                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Noncash items:                                                                           |  |      |        |   |      |   |        |      |  |   |        |  
|Accrual of dividends payable                                                             |  | $    | 146    |   |      | $ | 680    |      |  | $ | 680    |  
|Repurchase of preferred stock                                                            |  |      | 8,099  |   |      |   |       |      |  |   |       |  
|Capital leases, excluding proceeds received from lease lines                             |  |      | 539    |   |      |   | 648    |      |  |   |       |  
|Retirement of treasury stock                                                             |  |      | 500    |   |      |   |       |      |  |   |       |  



The accompanying notes
are an integral part of these consolidated financial statements.



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##### Table of Contents

OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollar amounts in thousands, except per share amounts)



1. Summary of Significant Accounting Policies



Occupational Health + Rehabilitation Inc (the Company), a
leading occupational healthcare provider, specializes in the prevention, treatment and management of work related injuries and illnesses as well as regulatory compliance services. The Company develops and operates occupational health centers and
contracts with other healthcare providers to develop integrated occupational healthcare delivery systems. The Company typically operates the centers under management and submanagement agreements with professional corporations (Physician
Practices) that practice exclusively through such centers. Additionally, the Company has entered into joint ventures and management agreements with health systems to provide management and related services to the centers and networks of
providers established by the joint ventures or health systems.



Principles of Consolidation



The consolidated
financial statements include the accounts of the Company and its joint ventures and partnerships. All of the outstanding voting equity instruments of the Physician Practices are owned by shareholders nominated by the Company. Through employee
agreements, the Company restricts transfer of Physician Practice ownership without its consent and can, at any time, require the nominated shareholder to transfer ownership to a Company designee. It is through this structure and through long-term
management agreements entered into with the Physician Practices that the Company has an other than temporary controlling financial interest in the Physician Practices.



Most states in which the Company operates have laws and regulations that are often vague limiting the corporate practice of
medicine and the sharing of fees between physicians and non-physicians. The Company believes it has structured all of its operations so that they comply with such laws and regulations; however, there can be no assurance that an enforcement agency
could not find to the contrary or that future interpretations of such laws and regulations will not require structural and organizational modifications of the Companys business.



All intercompany accounts and transactions have been eliminated.



Cash and Cash Equivalents



Cash and cash equivalents include cash on hand, demand deposits and
short-term investments with original maturities of three months or less. Cash and cash equivalents include cash balances of majority-owned joint ventures of $1,358 and $1,398 at December 31, 2003 and 2002, respectively. These funds are utilized only
for joint venture purposes unless paid as dividends to the joint venture participants.



Property and Equipment



Property and equipment is stated at cost. Depreciation is computed by the straight-line method over the useful lives of the respective assets. Medical equipment is depreciated over 10 years and furniture and office equipment is depreciated
over 5 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Depreciation of assets under capital leases is included with depreciation.



Goodwill and Other Intangible Assets



The Company has adopted the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, which was effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization.
Had the Company adopted SFAS 142 during 2001, net income for the year ended December 31, 2001 would have been $4,218.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as determined based on the projected undiscounted cash flows of the entity acquired, over the remaining amortization period, the Companys carrying value of the goodwill
will be reduced by the estimated shortfall of cash flows. No such impairment existed at December 31, 2003 or 2002. Other intangible assets include noncompete agreements and deferred financing costs which are being amortized using the straight-line
method over periods of three to five years.



Joint Ventures



The Company has entered into joint ventures with health
systems for which the Company owns varying percentages but no less than a majority. Accordingly, these joint ventures are consolidated for financial reporting purposes. The minority equity holders portions of the equity in the joint ventures
are disclosed as an obligation on the balance sheets. The minority equity holders portions of the operating results are disclosed in the statements of operations as a nonoperating gain or loss. In connection with certain joint venture
agreements, the minority equity holder has agreed to the funding of defined initial operating losses. These amounts are recorded as nonoperating gains in the period losses are incurred.



Contractual Settlements



The Company has entered into management contracts to manage the day-to-day operations of certain clinics. Generally, these contracts require a payment by
the Company at the inception of the agreement, which is recorded as an intangible asset and amortized over the initial term of the contract. The contracts generally require the sharing of profits and losses at varying percentages throughout the
contract term. The funding/payment of these contractual settlement amounts are recorded as nonoperating gains or losses.



The Company recorded $38 and $395 of funded operating losses and contractual settlements for the years ended December 31, 2003 and 2002, respectively, as
nonoperating gains.



Revenue Recognition



Revenue is recorded at estimated net amounts to be received from employers,
third-party payers and others for services rendered. The Company operates in certain states that regulate the amounts which the Company can charge for its services associated with work-related injuries and illnesses.



Professional Liability Coverage



The Company maintains entity professional liability insurance coverage on a
claims-made basis in all states in which it has operating centers. The Company also maintains shared professional liability insurance coverage in the name of its employed physicians on a claims-made basis. At December 31, 2003, the Company recorded
an actuarially determined liability equal to the estimated required reserves for future payments for claims that have been reported and claims that have occurred but have not been reported. The Company intends to renew its existing policies and is
not aware of any reason it will not be able to do so. Nor is it aware of any claims that may result in a loss in excess of amounts covered by its existing insurance.



Stock Compensation Arrangements



The Company has a Stock Option Program. SFAS 123, Accounting for Stock Based Compensation, encourages entities to recognize
as expense over the vesting period the fair market value of all stock-based



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of Accounting Principles Board (APB) No.
25, Accounting for Stock Issued to Employees, and provide pro forma net income and pro forma earnings per share disclosures for employee stock grants as if the fair-value method defined in SFAS 123 had been applied.



The Company accounts for its Stock Option Program under the recognition and
measurement principles of APB 25. Consequently, no compensation cost related to the Stock Option Program is reflected in net income since all options under this program had an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to the Stock Option Program.



|                                                                                                                                            |  |      |       |   |      |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                                                                                            |  | 2003 |       |   | 2002 |  
|Net loss available to common stockholders, as reported                                                                                      |  | $    | (377  | ) |      | $ | (537  | )
|                                                                                                                                            |  |     
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |      | (223  | ) |      |   | (152  | )
|                                                                                                                                            |  |      |       |   |      |   |       |  
|Pro forma net loss available to common stockholders                                                                                         |  | $    | (600  | ) |      | $ | (689  | )
|                                                                                                                                            |  |      |       |   |      |   |       |  
|Loss per share:                                                                                                                             |  |      |       |   |      |   |       |  
|Basic - as reported                                                                                                                         |  | $    | (0.14 | ) |      | $ | (0.36 | )
|                                                                                                                                            |  |      |       |   |      |   |       |  
|- pro forma                                                                                                                                 |  | $    | (0.22 | ) |      | $ | (0.47 | )
|                                                                                                                                            |  |      |       |   |      |   |       |  
|Assuming dilution - as reported                                                                                                             |  | $    | (0.14 | ) |      | $ | (0.36 | )
|                                                                                                                                            |  |      |       |   |      |   |       |  
|- pro forma                                                                                                                                 |  | $    | (0.22 | ) |      | $ | (0.47 | )
|                                                                                                                                            |  |      |       |   |      |   |       |  



Estimates and
Assumptions



The preparation of financial statements in
conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Fair Value of Financial Instruments



The Companys financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses, and long-term debt. The Company believes that the carrying value of its financial instruments approximates fair value.



Segment Reporting



The Company follows SFAS 131, Disclosures about Segments of an Enterprise
and Related Information, which establishes standards for related disclosures about products and services, geographic areas, and major customers. All of the Companys efforts are devoted to occupational healthcare that are managed and reported
in one segment. The Company derives all of its revenues from services provided in the United States.



Recent Accounting Standards



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of SFAS 123,
Accounting for Stock Based Compensation. SFAS 148



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS 123. SFAS 148 does not change
the provisions of SFAS 123 that permit entities to continue to apply the intrinsic value method of APB 25.



SFAS 148 is intended to encourage the adoption of the accounting provisions of SFAS 123. Under the provisions of SFAS 148, companies that choose to adopt
the accounting provisions of SFAS 123 will be permitted to select from three transition methods:



(a) Prospective method. Apply the recognition provisions to all employee compensation awards granted, modified, or settled after the
beginning of the fiscal year in which the recognition provisions are first applied. The prospective method, however, may no longer be applied for adoptions of the accounting provisions of SFAS 123 for periods beginning after December 15, 2003.



(b) Modified prospective method. Recognize
stock-based employee compensation cost from the beginning of the fiscal year in which the recognition provisions are first applied as if the fair value based accounting method had been used to account for all employee awards granted, modified, or
settled in fiscal years beginning after December 15, 2004.



(c) Retroactive restatement method. Restate all periods presented to reflect stock-based employee compensation cost under the fair value based accounting method for all employee awards granted, modified, or settled in
fiscal years beginning after December 15, 2004.



The Company
has elected to follow APB 25, and SFAS 148 has no impact on the Companys financial statements.



In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. The primary objective of FIN 46 is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities.
The adoption of FIN 46 during 2003 did not have a material impact on the Companys financial statements.



In April 2003, the FASB issued SFAS 149 which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,and establishes accounting and reporting standards for derivative instruments including derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. Adoption of SFAS 149 did not have a material impact on the Companys financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
clarifies the accounting for certain financial instruments with characteristics of debt that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of
financial position. SFAS 150 became effective for financial instruments entered into or modified after May 31, 2003, and otherwise became effective July 1, 2003. Adoption of SFAS 150 did not have a material impact on the Companys financial
statements.



Income Taxes



The Company accounts for income taxes under a liability approach. Under this
approach, deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and tax basis of



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



assets and liabilities, as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense or benefit is the
result of changes between deferred tax assets and liabilities. A valuation allowance is established when, based on an evaluation of objective verifiable evidence, there is a likelihood that some portion or all of the deferred tax assets will not be
realized.



Reclassifications



Certain amounts from prior years have been reclassified on the accompanying
Consolidated Financial Statements to conform to the 2003 presentation.



2.
Joint Ventures, Acquisitions and Contractual Settlements



Effective January 31, 2003, the Company terminated its long-term management contract with Eastern Rehabilitation Network (ERN), an affiliate of Hartford Hospital, Hartford, Connecticut. As consideration for agreeing to the
termination, the Company acquired title to the four occupational health centers in Connecticut which it had previously managed for ERN. In addition, ERN agreed to terminate its network provider agreement with Hartford Medical Group
(HMG), also an affiliate of Hartford Hospital, under which the Company had managed seven occupational health centers owned by HMG. The Company agreed to pay ERN $25 for its share of the networks assets. There will be a final
settlement between the parties after the Company has collected all amounts owed to, and paid all amounts owed by, the network as of the termination date. It is estimated that settlement will occur in June 2004.



In 2002, the Company recognized revenue of $2,286 for the seven occupational
health centers owned by HMG which it no longer manages. Because a significant portion of the revenue was paid to third party providers for services rendered to the Companys patients, the loss of revenue has not had a material impact on the
Companys operating profit.



On April 1, 2003, the Company
purchased an occupational health practice in Murfreesboro, TN for a total consideration of $525, payable in cash of $150 at closing, and $125 on each of March 31, 2004, 2005, and 2006, and consolidated the operations into its existing center. The
note is non-interest bearing and has been discounted. The Company recognized $493 in goodwill and other intangible assets on the transaction.



Effective April 30, 2003, the Company terminated its long-term management contract with a hospital system in Nashville, TN and concurrently purchased five
centers which it had previously managed for a total consideration of $1,700, payable in cash of $300 at closing, and $400, $500, and $500 on October 1, 2003, 2004, and 2005, respectively. The note is non-interest bearing and has been discounted. In
connection with the purchase, the seller forgave the loan payable balance of $1,200 (before discount) due under the long-term management contract. Accordingly, the Company offset against the purchase price the net deferred credit previously recorded
on the management contract which amounted to $550. This deferred credit represented the net difference between payments made by the hospital system for working capital deficiencies and the discounted value of the non-interest bearing loan payable to
the hospital system. The net of the aforementioned items resulted in the recognition of $98 in fixed assets and $35 in goodwill and other intangible assets and had no impact on the Companys statement of operations.



In January 2002, the Company entered into an affiliation with a hospital
system in New Jersey to operate its employee health and occupational health programs. In February 2002, the Company purchased two occupational health clinics located in New Jersey and transferred the hospital systems occupational health
program to these centers. The combined purchase price of these entities was $610, of which $70 was in cash and the balance in the form of a subordinated note payable in varying installments through February 2005. The Company recognized goodwill of
$621 on these transactions. Effective July 1, 2002, the Company assumed the 40% ownership interest of its joint venture partner in its Rochester, NY center and recognized $193 in goodwill on the transaction. Effective August 1, 2002, the Company
increased its ownership in its joint venture in the St. Louis, MO market to 96% from 80%, and recognized $90 in goodwill on the transaction.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



In 2001, the Company purchased an occupational medicine business in St. Louis, MO for $77 and
recognized goodwill of $57. The acquired revenue stream was incorporated into the Companys existing Missouri centers.



All acquisitions have been accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the dates of acquisition. The results of operations of the acquired practices are included in the consolidated financial statements from the respective dates of acquisition.



In connection with certain acquisitions, the Company entered into
contractual arrangements whereby the selling parties were entitled to receive contingent cash consideration based upon the achievement of certain minimum operating results. Obligations related to these contingencies were reflected as additional
goodwill in the periods they became known. At December 31, 2003, there were no contingent obligations outstanding.



The pro forma results of operations as if the 2003 and 2002 acquisitions had occurred at the beginning of the preceding fiscal year are as follows
(unaudited):



|                                    |  |      |        |   |      |   |        |  
|----------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                    |  | 2003 |        |   | 2002 |  
|Total revenue                       |  | $    | 53,652 |   |      | $ | 57,406 |  
|Net (loss) income                   |  |      | (251   | ) |      |   | 148    |  
|Net (loss) per common share - basic |  | $    | (0.15  | ) |      | $ | (0.36  | )



The pro forma
financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effective on the assumed dates or of the future results of operations of the combined entities. These results
highlight the financial condition of the operations prior to the Companys influence on the acquired businesses.



3. Property and Equipment



Property and equipment, inclusive of assets under capital leases, consist of the following at December 31, 2003 and 2002:



|                               |  |      |        |   |      |   |        |  
|------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                               |  | 2003 |        |   | 2002 |  
|Medical equipment              |  | $    | 1,795  |   |      | $ | 1,520  |  
|Furniture and office equipment |  |      | 4,739  |   |      |   | 4,212  |  
|Leasehold improvements         |  |      | 950    |   |      |   | 757    |  
|Vehicles                       |  |      | 13     |   |      |   | 13     |  
|                               |  |      |        |   |      |   |        |  
|                               |  |      | 7,497  |   |      |   | 6,502  |  
|Less accumulated depreciation  |  |      | (4,386 | ) |      |   | (3,333 | )
|                               |  |      |        |   |      |   |        |  
|                               |  | $    | 3,111  |   |      | $ | 3,169  |  
|                               |  |      |        |   |      |   |        |  



Depreciation expense
was $1,336, $961, and $911 for the years ended December 31, 2003, 2002, and 2001, respectively.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



Property and equipment under capital leases consists of the following at December 31, 2003 and 2002:



|                               |  |      |       |   |      |   |       |  
|------------------------------ |  | ---- | ----- | - | ---- | - | ----- | -
|                               |  | 2003 |       |   | 2002 |  
|Medical equipment              |  | $    | 102   |   |      | $ | 118   |  
|Furniture and office equipment |  |      | 2,186 |   |      |   | 1,586 |  
|Leasehold improvements         |  |      | 202   |   |      |   | 202   |  
|                               |  |      |       |   |      |   |       |  
|                               |  |      | 2,490 |   |      |   | 1,906 |  
|Less accumulated depreciation  |  |      | (689  | ) |      |   | (218  | )
|                               |  |      |       |   |      |   |       |  
|                               |  | $    | 1,801 |   |      | $ | 1,688 |  
|                               |  |      |       |   |      |   |       |  



The Company entered
into capital lease obligations of $678, $1,414, and $398 in 2003, 2002, and 2001, respectively.



4. Long-Term Debt, Other Credit Arrangements, and Liquidity



Long-term debt consists of the following at December 31, 2003 and 2002:



|                                                                                                                       |  |      |       |      |   |      
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                                                                                       |  | 2003 |       | 2002
|8% Subordinated promissory notes                                                                                       |  | $    | 2,700 |      | $ |     
|Promissory notes bearing interest at rates ranging from 0% to 12%, due in periodic installments through September 2005 |  |      | 1,656 |      |   | 1,378
|Credit line collateralized by certain accounts receivable                                                              |  |      | 4,957 |      |   | 1,896
|                                                                                                                       |  |      |       |      |   |      
|                                                                                                                       |  |      | 9,313 |      |   | 3,274
|Less current portion                                                                                                   |  |      | 8,462 |      |   | 2,332
|                                                                                                                       |  |      |       |      |   |      
|                                                                                                                       |  | $    | 851   |      | $ | 942  
|                                                                                                                       |  |      |       |      |   |      



The non-interest
bearing notes payable over three years to a hospital system and to the sellers of an occupational health practice have both been discounted at 5.25%.



On March 24, 2003, the Company repurchased all of its outstanding Series A Convertible Preferred Stock in exchange for (i) $2,700 in cash at closing, (ii)
subordinated debt in the principal amount of $2,700, and (iii) 1,608,247 shares of the Companys Common Stock.



In April 2003, the Company purchased an occupational health practice in Murfreesboro, TN for a total consideration of $525, of which $150 was paid in
cash, with the balance due in equal installments over the succeeding three years. At December 31, 2003, the discounted amount payable was $352.



In May 2003, the Company purchased five occupational health clinics located in Tennessee which it had previously managed for a total consideration of
$1,700, of which $300 was paid in cash with the balance payable in varying installments through October 2005. At December 31, 2003, the discounted amount payable was $939.



In February 2002, the Company purchased two occupational health clinics located in New Jersey. The purchase price of these
clinics was $610, of which $70 was paid in cash and the balance in the form of a subordinated note payable in varying installments through February 2005. At December 31, 2003, the amount payable was $340.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



In June 2000, a joint venture partnership of the Company issued a promissory note for $86 in
connection with the construction of leasehold improvements for one of the partnerships centers. The note is payable in equal installments over 60 months and the interest rate is 12%. At December 31, 2003, the amount payable was $25.



On December 15, 2000, the Company entered into an agreement
with DVI Business Credit Corporation (DVI), an asset-based lender, for a revolving line of credit (the DVI Credit Line) of up to $7,250. The DVI Credit Line was collateralized by present and future assets of certain
operations of the Company. The borrowing base consisted of a certain percentage of eligible accounts receivable (as defined in the agreement). Under the terms of the agreement, the Company paid a commitment fee of 0.5% of the unused portion of the
DVI Credit Line and certain additional fees. The interest rate under the Credit Line was the prime rate plus 1%.



Effective March 18, 2003, the financial covenants under the DVI Credit Line included a quarterly tangible net worth requirement of $2,500 (defined as
shareholders equity plus subordinated debt, and minority interests less intangible assets, goodwill, deferred tax assets, leasehold improvements, deposits and certain prepayments), a leverage coverage ratio not greater than 5.00 to 1.00, and a
fixed charge ratio not less than 1.25 to 1.00 as well as certain restrictions relating to the acquisition of new businesses without the prior approval of DVI. The Company was not in compliance with one of its financial covenants for the three months
ended June 2002, nor with certain of its covenants during the three months ended March 31 and June 30, 2003 and was granted waivers by DVI in each instance.



On August 21, 2003, shortly before filing for Chapter 11 bankruptcy protection, DVI sold the Companys loan to a subsidiary of CapitalSource Inc.
(CapitalSource), a publicly traded asset-based lender. As of September 30, 2003, the Company did not meet any of its three financial covenants and was granted a waiver by CapitalSource.



On December 15, 2003, the Company entered into an agreement with
CapitalSource for a new three-year revolving line of credit (the CapitalSource Credit Line) of up to $7,250. The CapitalSource Credit Line is collateralized by present and future assets of certain operations of the Company. The borrowing
base consists of a certain percentage of eligible accounts receivable (as defined in the agreement). Under the terms of the agreement, the Company pays a commitment fee of 0.6% of the unused portion of the CapitalSource Credit Line and certain other
fees. The interest rate under the CapitalSource Credit Line is the prime rate plus 1%, subject to a floor of 4% on the prime rate.



The financial covenants under the CapitalSource Credit Line consist of a fixed charge ratio (defined as the ratio, for a defined period, of earnings
before interest, taxes, depreciation, amortization, and other non-cash charges and non-recurring gains and losses to the sum of payments on long-term debt, exclusive of the Notes, and capital leases, accrued interest and dividends, and capital
expenditures and income taxes paid in cash) of not less than 1.20 to 1.00, tested monthly on a trailing six months basis, commencing January 2004, and minimum liquidity (defined as the sum of unrestricted cash on hand, the Companys pro
rata share of cash on hand in its joint ventures, and the unborrowed availability under the CapitalSource Credit Line) of $1,000. In 2003, the fixed charge ratio was set at not less than 1.00 to 1.00 on a trailing four months basis through
November 30, 2003 and a trailing five months basis through December 31, 2003. During the term of the agreement, the Company may enter into new capital lease obligations of up to $1,000 and must obtain the prior approval of CapitalSource before
acquiring any new business. The Company was in compliance with its financial covenants through December 31, 2003. As of and for the trailing five months ended December 31, 2003, the Companys fixed charge ratio was 1.29 and its minimum
liquidity $2,469.



Based on its projections, the Company
expects to be in compliance during 2004 with its covenants under the CapitalSource Credit Line, as amended by a waiver granted on March 30, 2004. See Liquidity below for further discussion of events of default and associated waivers. However, there
can be no assurance that the Company will meet its projections and if it does not, it may not be compliance with its covenants in the future.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



At December 31, 2003, the maximum amount available under the lenders borrowing base formula was
$6,260, of which $4,957 was outstanding.



Aggregate maturities
of obligations under long-term debt agreements are as follows:



|     |  |   |      
|---- |  | - | -----
|2004 |  | $ | 8,462
|2005 |  |   | 740  
|2006 |  |   | 111  
|     |  |   |      
|     |  | $ | 9,313
|     |  |   |      



Interest paid in 2003,
2002, and 2001 was $471, $440, and $509, respectively.



Liquidity



Under the terms of its subordinated
promissory notes (the Notes), the Company is required to make principal debt payments of $900 on each of March 24, June 24, and September 24, 2004 together with accrued interest thereon. If the Company does not fulfill its contractual
payment obligations, the interest rate on the unpaid principal and interest increases to 15% from 8% until such default is cured. A default under the Notes permits the Note holders to accelerate payment of all unpaid principal and interest. However,
under the CapitalSource Credit Line, no amounts can be paid to the Note holders without the express approval of CapitalSource. On March 24, 2004, the Company paid $450 of the $900 principal amount due together with accrued interest thereon of $36.
Beginning March 24, 2004, the unpaid principal and interest is $2,286. The Company elected to enter into such default in order to conserve its cash resources for operating purposes. The default under the Notes created a cross default under the
CapitalSource Credit Line. Accordingly, the Company obtained a waiver from CapitalSource on March 30, 2004 which waives any similar cross default that will occur as a result of any additional partial payment of the Notes by the Company through March
31, 2005. Also on March 30, 2004, the Note holders agreed to waive such default through March 31, 2005 and agreed not to pursue any remedies related to the failure to make a full installment payment on the Notes. The Company anticipates making
additional payments on the Notes in future months and expects to generate sufficient funds to repay the full principal amount of $2,700 by December 31, 2004. However, if cash is needed for operations the Company will continue to defer payments on
the Notes.



The Company expects that its principal use of funds
in the foreseeable future will be for the repayment of the Notes, and for acquisitions and the formation of joint ventures, working capital requirements, other debt repayments, and purchases of property and equipment. The Company believes that the
funds available to it under the Credit Line, together with cash generated from operations and other sources of funds it anticipates will be available to it, will be adequate to meet these projected needs.



5. Leases



The Company maintains operating leases for commercial property and office equipment. The commercial leases contain renewal
options and require the Company to pay certain utilities and taxes over established base amounts. Operating lease expenses were $3,987, $3,748, and $3,511 for the years ended December 31, 2003, 2002, and 2001, respectively.



In March 2001, the Company entered into an agreement for an Equipment
Facility (the Lease Line) of $750 to provide secured financing. Borrowings under the facility are repayable over 42 months. The interest rate is based upon the 31 month Treasury Note (T-Note) plus a spread and fluctuates with
any change in the T-Note rate up until the time of payment commencement for each draw down.At December 31, 2003, the full amount of the Lease Line had been utilized. Interest rates range from 9.9% to 11.0%.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



In August 2002, the Company entered into an agreement for secured equipment lease financing in the
approximate amount of $1,600 (the Secured Line). Borrowings under the facility are repayable over 36 months. The lease-rate factors are based upon the 36-month Treasury Note yield ten days prior to payment commencement for each draw
down. At the end of the lease term, the Company may either purchase the equipment for its fair market value, renew the lease on a year-to-year basis at its then fair market value, or return the equipment with no further obligation. The Company has
utilized this lease line primarily to fund its equipment needs relating to the upgrade of its practice management system. At December 31, 2003, the full amount of the Secured Line had been utilized. Interest rates range from 3.2% to 9.6%.



In December 2003, the Company entered into an agreement for
secured equipment lease financing of approximately $330 with GE Healthcare Financial Services, Inc. Borrowings under the facility are repayable over 60 months. The interest rate is to be set at 4.80 percentage points above the yield on 5 Year
Interest Rate Swaps on the payment commencement date for each draw down. At December 31, 2003, the 5 Year Interest Rate Swap was 3.61% and the Company had not drawn down on the lease line.



The Company has also entered into other equipment lease arrangements with
various lenders. Interest rates on these leases range from 8.4% to 14.8%.



Future minimum lease payments under capital leases and noncancelable operating leases are as follows:



|                                            |  |               |       |                 |   |       
|------------------------------------------- |  | ------------- | ----- | --------------- | - | ------
|                                            |  | CapitalLeases |       | OperatingLeases
|2004                                        |  | $             | 871   |                 | $ | 3,636 
|2005                                        |  |               | 715   |                 |   | 3,024 
|2006                                        |  |               | 150   |                 |   | 2,436 
|2007                                        |  |               | 21    |                 |   | 1,869 
|2008 and thereafter                         |  |               | 17    |                 |   | 3,141 
|                                            |  |               |       |                 |   |       
|Total minimum lease payments                |  |               | 1,774 |                 | $ | 14,106
|                                            |  |               |       |                 |   |       
|Less: amounts representing interest         |  |               | 138   |                 |   |       
|                                            |  |               |       |                 |   |       
|Present value of net minimum lease payments |  | $             | 1,636 |                 |   |       
|                                            |  |               |       |                 |   |       



6. Income Taxes



For the years ended December 31, 2003 and 2002, the provision for income
taxes consist of the following:



|               |  |      |      |   |      |   |     |  
|-------------- |  | ---- | ---- | - | ---- | - | --- | -
|               |  | 2003 |      |   | 2002 |  
|Current:       |  |      |      |   |      |   |     |  
|Federal        |  | $    |     |   |      | $ | (18 | )
|State          |  |      | 20   |   |      |   | 27  |  
|               |  |      |      |   |      |   |     |  
|Total current  |  |      | 20   |   |      |   | 9   |  
|               |  |      |      |   |      |   |     |  
|Deferred:      |  |      |      |   |      |   |     |  
|Federal        |  |      | (90  | ) |      |   | 164 |  
|State          |  |      | (29  | ) |      |   | 42  |  
|               |  |      |      |   |      |   |     |  
|Total deferred |  |      | (119 | ) |      |   | 206 |  
|               |  |      |      |   |      |   |     |  
|Total          |  | $    | (99  | ) |      | $ | 215 |  
|               |  |      |      |   |      |   |     |  



Income tax paid, net
of (refunds), in 2003, 2002, and 2001 was $17, $(2), and $40, respectively.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



In 2003 and 2002, the Companys effective tax rates of (30.2%) and 60.1%, respectively, differ
from the federal statutory tax rate primarily due to state income taxes and the disproportionately greater impact that certain permanent adjustments had on the relatively low level of earnings.



At December 31, 2003 and 2002, the components of the Companys deferred
tax assets and liabilities were:



|                                 |  |      |       |   |      |   |       |  
|-------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                 |  | 2003 |       |   | 2002 |  
|Deferred tax assets:             |  |      |       |   |      |   |       |  
|Net operating loss carryforwards |  | $    | 2,279 |   |      | $ | 2,157 |  
|Other                            |  |      | 651   |   |      |   | 654   |  
|                                 |  |      |       |   |      |   |       |  
|Total deferred tax assets        |  |      | 2,930 |   |      |   | 2,811 |  
|                                 |  |     
|Deferred tax liabilities:        |  |      |       |   |      |   |       |  
|Depreciation and amortization    |  |      | (249  | ) |      |   | (249  | )
|                                 |  |      |       |   |      |   |       |  
|Deferred tax assets, net         |  | $    | 2,681 |   |      | $ | 2,562 |  
|                                 |  |      |       |   |      |   |       |  



At December 31, 2003,
the Company had federal net operating loss carryforwards of $6,264 which begin to expire in 2009. Of this amount, $2,625 is subject to an annual limitation on usage under the change in stock ownership rules of the Internal Revenue Code.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



7. Stockholders Equity and Redeemable Preferred Stock



Net Income (Loss) Per Common Share



The Company calculates earnings per share in accordance with SFAS 128,
Earnings Per Share, which requires disclosure of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options and convertible securities while diluted earnings per share includes such amounts. For purposes
of the net income (loss) per share calculation, the income (loss) available to common shareholders has been adjusted for accrued but unpaid dividends on the preferred stock ($146, $680, and $680 in 2003, 2002 and 2001, respectively) and for
preferred stock accretion of issuance costs ($0, $0, and $14 in 2003, 2002, and 2001, respectively). For 2003 and 2002, the effect of dilutive options, convertible preferred stock and a convertible note payable is not considered since it would be
antidilutive.



|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                       |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Basic Earnings per Share:                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Net (loss) income                                                      |  | $    | (231  | ) |      | $ | 143   |      |  | $ | 4,084 |  
|Dividends accrued and accretion on preferred stock redemption value    |  |      | (146  | ) |      |   | (680  | )    |  |   | (694  | )
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Net (loss) income available to common shareholders                     |  | $    | (377  | ) |      | $ | (537  | )    |  | $ | 3,390 |  
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Total weighted average shares outstanding (000) - basic                |  |      | 2,727 |   |      |   | 1,480 |      |  |   | 1,480 |  
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Net (loss) income per common share - basic                             |  | $    | (0.14 | ) |      | $ | (0.36 | )    |  | $ | 2.29  |  
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|                                                                       |  |      |      
|                                                                       |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Diluted Earnings per Share:                                            |  |      |       |   |      |   |       |      |  |   |       |  
|Net (loss) income                                                      |  | $    | (231  | ) |      | $ | 143   |      |  | $ | 4,084 |  
|Dividends accrued and accretion on preferred stock redemption value    |  |      | (146  | ) |      |   | (680  | )    |  |   | (694  | )
|Interest expense on convertible subordinated debt                      |  |      |      |   |      |   |      |      |  |   | 12    |  
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Net (loss) income available to common shareholders                     |  | $    | (377  | ) |      | $ | (537  | )    |  | $ | 3,402 |  
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Share data (000)                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Total weighted average shares outstanding                              |  |      | 2,727 |   |      |   | 1,480 |      |  |   | 1,480 |  
|Incremental shares from assumed conversion of Series A preferred stock |  |      |      |   |      |   |      |      |  |   | 1,417 |  
|Options                                                                |  |      |      |   |      |   |      |      |  |   | 239   |  
|Convertible subordinated debt                                          |  |      |      |   |      |   |      |      |  |   | 25    |  
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Total weighted average shares outstanding  assuming dilution          |  |      | 2,727 |   |      |   | 1,480 |      |  |   | 3,161 |  
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Net (loss) income available per common share - assuming dilution       |  | $    | (0.14 | ) |      | $ | (0.36 | )    |  | $ | 1.08  |  
|                                                                       |  |      |       |   |      |   |       |      |  |   |       |  



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



For the years ended December 31, 2003 and 2002, $(0.14) and $(0.36) are both the basic and diluted
net loss per common share. The weighted average shares outstanding for the following potentially dilutive securities were excluded from the computation of diluted loss per common share because the effect would have been antidilutive.



|                                                                       |  |       |  |       |  |     
|---------------------------------------------------------------------- |  | ----- |  | ----- |  | ----
|                                                                       |  | 2003  |  | 2002  |  | 2001
|Share data (000)                                                       |  |       |  |       |  |     
|Incremental shares from assumed conversion of Series A preferred stock |  |      |  | 1,417 |  |    
|Stock options                                                          |  | 1,229 |  | 1,301 |  | 856 
|                                                                       |  |       |  |       |  |     
|                                                                       |  | 1,229 |  | 2,718 |  | 856 
|                                                                       |  |       |  |       |  |     



Preferred Stock



At December 31, 2003, 5,000,000 shares of preferred
stock, $.001 par value, were authorized and unissued. In 2002, 1,666,667 of such shares were designated as Series A Convertible Preferred Stock (Series A). On November 6, 1996, the Company issued 1,416,667 shares of redeemable Series A
in a private placement at a purchase price of $6.00 per share. Each share of Series A was convertible, at the option of the holder, into one share of Common Stock, subject to certain adjustments.



On March 24, 2003, the Company repurchased all of its outstanding Series A
for (i) $2,700 in cash at closing, (ii) subordinated promissory notes (the Notes) in the principal amount of $2,700, and (iii) 1,608,247 shares of the Companys Common Stock. The Notes bear interest at 8% and are payable in three
equal principal installments, together with interest accrued thereon, 12, 15, and 18 months after the date of issuance. In the event a principal payment is not made when due, the interest rate on the unpaid principal and interest amount will
increase to 15% until the default is cured. A default under the Notes permits the Note holders to accelerate payment of all unpaid principal and interest. However, under the CapitalSource Credit Line, no amounts can be paid to the Note holders
without the express approval of CapitalSource. On March 24, 2004, the Company paid $450 of the $900 principal amount due together with accrued interest thereon of $36. Beginning March 24, 2004, the unpaid principal and interest is $2,286. The
default under the Notes created a cross default under the CapitalSource Credit Line. Accordingly, the Company obtained a waiver from CapitalSource on March 30, 2004 which waives any similar cross default that will occur as a result of any additional
partial payment of the Notes by the Company through March 31, 2005. Also on March 30, 2004, the Note holders agreed to waive such default through March 31, 2005 and agreed not to pursue any remedies related to the failure to make a full installment
payment on the Notes. The Company anticipates making additional payments on the Notes in future months and expects to generate sufficient funds to repay the full principal amount of $2,700 by December 31, 2004. However, if cash is needed for
operations the Company will continue to defer payments on the Notes.



Commencing November 6, 1999, dividends became payable on the shares of Series A when and if declared by the Companys board of directors and thereafter accrued at an annual cumulative rate of $0.48 per share, subject to certain
adjustments. At December 31, 2002, $2,153 of dividends were accrued and included in the carrying value of the preferred stock.



Shares Reserved for Future Issuance



At December 31, 2003, the Company has reserved 1,228,576 shares of common stock for future issuance under its Stock Plans.



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



8. Benefit Plans



Stock Plans



1998 Stock Plan: In January 1998, the Companys board of directors adopted the 1998 Stock Plan which provided for the granting of up to 150,000
non-qualified stock options, incentive stock options, and stock appreciation rights to employees, directors, and consultants of the Company. In 2001, 2002, and 2003, the Companys board of directors increased the number of shares of common
stock issuable under the plan by 141,000, 200,000, and 50,000, respectively. At December 31, 2003, 920,000 shares were issuable under the 1998 Stock Plan.



1996 Stock Plan: In October 1996, the Companys board of directors adopted the 1996 Stock Plan, which provides for the granting of up to 265,000
nonqualified stock options and stock appreciation rights to employees, directors and consultants of the Company.



Non-qualified options granted under both the 1998 and 1996 Stock Plans may not be priced at less than 50% of the fair market value of the common stock on
the date of grant.



1993 Stock Plan: The Companys 1993
Stock Plan provided for the granting of options to purchase up to 245,000 shares of the Companys common stock during its ten year term, which elapsed in February 2003. No new options may now be granted from the plan. At December 31, 2003,
options to purchase 49,028 shares had been forfeited since the expiration of the plan and are no longer available for re-issuance.



The options in all of the above plans generally become exercisable over a four-year period and generally expire in ten years.



A summary of the activity under the stock plans follows:



|                                  |  |           |   |  |                                  |      |      |           |   |                                  |   |      |  |           |                                  |  |   |     
|--------------------------------- |  | --------- | - |  | -------------------------------- | ---- | ---- | --------- | - | -------------------------------- | - | ---- |  | --------- | -------------------------------- |  | - | ----
|                                  |  | 2003      |   |  | Weighted- Average Exercise Price |      | 2002 |           |   | Weighted- Average Exercise Price |   | 2001 |  |           | Weighted- Average Exercise Price
|Outstanding, at beginning of year |  | 1,301,631 |   |  | $                                | 2.54 |      | 1,095,117 |   |                                  | $ | 2.93 |  | 975,020   |                                  |  | $ | 3.15
|Granted                           |  | 109,700   |   |  |                                  | 1.45 |      | 308,500   |   |                                  |   | 1.29 |  | 147,000   |                                  |  |   | 2.04
|Exercised                         |  |          |   |  |                                  |     |      |          |   |                                  |   |     |  | (354      | )                                |  |   | 1.77
|Canceled                          |  | (182,755  | ) |  |                                  | 4.99 |      | (101,986  | ) |                                  |   | 2.91 |  | (26,549   | )                                |  |   | 2.75
|                                  |  |           |   |  |                                  |      |      |           |   |                                  |   |      |  |           |                                  |  |   |     
|Outstanding, at end of year       |  | 1,228,576 |   |  | $                                | 2.08 |      | 1,301,631 |   |                                  | $ | 2.54 |  | 1,095,117 |                                  |  | $ | 2.93
|                                  |  |           |   |  |                                  |      |      |           |   |                                  |   |      |  |           |                                  |  |   |     



Related information
for options outstanding and exercisable as of December 31, 2003 under the stock plans is as follows:



|                         |  |                     |  |                     |  |                                         
|------------------------ |  | ------------------- |  | ------------------- |  | ----------------------------------------
|Range of exercise prices |  | Options Outstanding |  | Options Exercisable |  | Weighted- Average Remaining Life (years)
|$ 1.20 - 1.77            |  | 546,057             |  | 186,732             |  | 7.21                                    
|2.00 - 2.98              |  | 481,150             |  | 320,593             |  | 7.25                                    
|3.00 - 3.75              |  | 128,410             |  | 125,910             |  | 3.95                                    
|4.50 - 6.00              |  | 72,959              |  | 72,959              |  | 3.61                                    
|                         |  |                     |  |                     |  |                                         
|                         |  | 1,228,576           |  | 706,194             |  |                                         
|                         |  |                     |  |                     |  |                                         



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



Pro Forma Information for Stock-Based Compensation



Pro forma information regarding net income and earnings per share, as if the
Company had used the fair value method of SFAS 123 to account for stock options issued under its Plans, is presented below. The fair value of stock activity under these plans was estimated at the date of grant using the minimum value method for
options granted prior to 1996, the date of the Companys merger, and the Black-Scholes option pricing model for options granted in and subsequent to 1996. The following weighted-average assumptions were used to determine the fair value for
2003, 2002, and 2001, respectively: a risk-free interest rate of 3.5% in 2003, 3.4% in 2002, and 4.6% in 2001; an expected dividend yield of 0% each year; an average volatility factor of the expected market price of the Companys common
stock over the expected life of the options of 1.056 in 2003, 1.219 in 2002, and 0.938 in 2001; and a weighted-average expected life of the options of five to six years.



For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the related vesting
period. Pro forma information is as follows:



|                                              |  |      |       |   |      |   |       |      |  |   |      
|--------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | -----
|                                              |  | 2003 |       |   | 2002 |   |       | 2001
|Pro forma net (loss) income                   |  | $    | (600  | ) |      | $ | (809  | )    |  | $ | 2,844
|Pro forma net (loss) income per share  basic |  | $    | (0.22 | ) |      | $ | (0.55 | )    |  | $ | 1.92 



Retirement Plan



The Company has a qualified 401(k) plan for employees
meeting certain eligibility requirements. The Company contributes up to 2% of an employees cash compensation depending on the employees contribution percentage. Company contributions to the 401(k) plan were $290, $294, and $278 during
2003, 2002, and 2001, respectively.



9. Restructuring Charges



During the fourth quarter of 1999, the Company began to
implement a restructuring plan to close certain centers that were either outside of the Companys core occupational health focus or were deemed not capable of achieving significant profitability due to specific market factors. As a result of
the restructuring plan and other actions, the Company recorded restructuring and other charges of $2,262 during the fourth quarter of 1999. The restructuring plan also included the streamlining of certain other remaining operations and the
elimination or combining of various other positions within the Company.



The total number of employees terminated in conjunction with the restructuring plan was 64, all of whom terminated employment with the Company by the end of the first quarter of 2000. The employees affected by the restructuring plan
included medical, physical therapy and administrative staff at the closed centers.



The restructuring charges primarily included severance and other expenses related to the terminations, fixed asset disposals and goodwill impairments for centers that were closed, contractual expenses including lease
abandonment costs, receivable write-downs related to accounts receivable at centers that were deemed uncollectible, and miscellaneous related charges. The lease abandonment charge included an estimate of sublet income.



During 2001 and 2000, the Company negotiated buyout terms for some or all of
the space at certain of the closed centers. At December 31, 2003, the Company had no obligation for future lease payments or other charges relating to the closed centers.



65



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OCCUPATIONAL HEALTH + REHABILITATION INC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(dollar amounts in thousands, except per share amounts)



The initial charge recognized at December 31, 1999 and the status of the related accrued liabilities
at December 31, 2003 and 2002 are as follows:



|                                      |  |               |          |                   |          |                   |          |   |          |  |   |    |  |   |  
|------------------------------------- |  | ------------- | -------- | ----------------- | -------- | ----------------- | -------- | - | -------- |  | - | -- |  | - | -
|                                      |  | InitialCharge |          | December 31, 2002 |          | December 31, 2003
|Description                           |  |               | Payments |                   | Accruals |                   | Payments |   | Accruals
|Accrued liabilities:                  |  |               |          |                   |          |                   |          |   |          |  |   |    |  |   |  
|Severance costs                       |  | $             | 151      |                   | $        |                  |          | $ |         |  | $ |   |  | $ | 
|Lease abandonment costs               |  |               | 683      |                   |          | 50                |          |   | 22       |  |   | 22 |  |   | 
|Miscellaneous                         |  |               | 68       |                   |          |                  |          |   |         |  |   |   |  |   | 
|                                      |  |               |          |                   |          |                   |          |   |          |  |   |    |  |   |  
|                                      |  |               | 902      |                   | $        | 50                |          | $ | 22       |  | $ | 22 |  | $ | 
|                                      |  |               |          |                   |          |                   |          |   |          |  |   |    |  |   |  
|Asset impairments:                    |  |               |          |                   |          |                   |          |   |          |  |   |    |  |   |  
|Fixed asset write-downs and disposals |  |               | 319      |                   |          |                   |          |   |          |  |   |    |  |   |  
|Goodwill impairment                   |  |               | 340      |                   |          |                   |          |   |          |  |   |    |  |   |  
|Receivable write-down                 |  |               | 690      |                   |          |                   |          |   |          |  |   |    |  |   |  
|Miscellaneous                         |  |               | 11       |                   |          |                   |          |   |          |  |   |    |  |   |  
|                                      |  |               |          |                   |          |                   |          |   |          |  |   |    |  |   |  
|                                      |  | $             | 2,262    |                   |          |                   |          |   |          |  |   |    |  |   |  
|                                      |  |               |          |                   |          |                   |          |   |          |  |   |    |  |   |  



10. Subsequent Event



As discussed in Note 4, on March 24, 2004, the Company
paid $450 of the $900 principal amount due on its Notes together with accrued interest thereon of $36. Under the terms of the Notes, the Company is required to make principal debt payments of $900 on each of March 24, June 24, and September 24, 2004
together with accrued interest thereon. If the Company does not fulfill its contractual payment obligations, the interest rate on the unpaid principal and interest increases to 15% from 8% until such default is cured. A default under the Notes
permits the Note holders to accelerate payment of all unpaid principal and interest. However, under the CapitalSource Credit Line, no amounts can be paid to the Note holders without the express approval of CapitalSource. Beginning March 24, 2004,
the unpaid principal and interest is $2,286. The default under the Notes created a cross default under the CapitalSource Credit Line. Accordingly, the Company obtained a waiver from CapitalSource on March 30, 2004 which waives any similar cross
default that will occur as a result of any additional partial payment of the Notes by the Company through March 31, 2005. Also on March 30, 2004, the Note holders agreed to waive such default through March 31, 2005 and agreed not to pursue any
remedies related to the failure to make a full installment payment on the Notes.



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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS



Occupational Health + Rehabilitation Inc

December 31, 2003



|                   |  |                                              |           |   |      |   |            |      |  |   |           |  
|------------------ |  | -------------------------------------------- | --------- | - | ---- | - | ---------- | ---- |  | - | --------- | -
|                   |  | Allowance for Doubtful Accounts December 31, |          
|                   |  | 2003                                         |           |   | 2002 |   |            | 2001 | 
|Beginning balance  |  | $                                            | 969,300   |   |      | $ | 1,168,800  |      |  | $ | 1,255,200 |  
|Charged to revenue |  |                                              | 1,007,500 |   |      |   | 1,069,300  |      |  |   | 714,900   |  
|Deductions (1)     |  |                                              | (894,800  | ) |      |   | (1,268,800 | )    |  |   | (801,300  | )
|                   |  |                                              |           |   |      |   |            |      |  |   |           |  
|Ending balance     |  | $                                            | 1,082,000 |   |      | $ | 969,300    |      |  | $ | 1,168,800 |  
|                   |  |                                              |           |   |      |   |            |      |  |   |           |  

---

|(1) | Uncollectible accounts written off, net of recoveries.
|--- | ------------------------------------------------------



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



March 30, 2004



Occupational Health + Rehabilitation IncBy:

/s/    JOHN C.
GARBARINOJohn C. Garbarino President, Chief Executive Officer and Director




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                              |  |                                                                       |  |               
|--------------------------------------------- |  | --------------------------------------------------------------------- |  | --------------
|Signature                                     |  | Title                                                                 |  | Date          
|                                              |  |                                                                      
|/s/    JOHN C.
GARBARINOJohn C.
Garbarino     |  | President and Chief Executive Officer (principal executive officer)   |  | March 30, 2004
|                                              |  |                                                                      
|/s/    KEITH G.
FREYKeith G. Frey             |  | Chief Financial Officer and Secretary (principal financial officer)   |  | March 30, 2004
|                                              |  |                                                                      
|/s/    JANICE M.
GOGUENJanice M.
Goguen       |  | Vice President, Finance and Controller (principal accounting officer) |  | March 30, 2004
|                                              |  |                                                                      
|/s/    EDWARD L.
CAHILLEdward L.
Cahill       |  | Director                                                              |  | March 30, 2004
|                                              |  |                                                                      
|/s/    KEVIN J.
DOUGHERTYKevin J.
Dougherty   |  | Director                                                              |  | March 30, 2004
|                                              |  |                                                                      
|/s/    ANGUS M.
DUTHIEAngus M.
Duthie         |  | Director                                                              |  | March 30, 2004
|                                              |  |                                                                      
|/s/    STEVEN W.
GARFINKLESteven W.
Garfinkle |  | Director                                                              |  | March 30, 2004
|                                              |  |                                                                      
|/s/    DONALD W.
HUGHESDonald W.
Hughes       |  | Director                                                              |  | March 30, 2004
|                                              |  |                                                                      
|/s/    FRANK H.
LEONEFrank H.
Leone           |  | Director                                                              |  | March 30, 2004



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                  
|            | 
|4.02 (a)    |  | Amended and Restated Revolving Credit and Security Agreement dated December 15, 2003 by and between the Company, CM Occupational Health, Limited Liability Company and OHR-SSM, LLC, and
CapitalSource Finance LLC (Lender)
|            | 
|4.02 (b)    |  | Amended and Restated Revolving Note by and between the Company, CM Occupational Health, Limited Liability Company and OHR-SSM, LLC, and Lender to pay Lender $7,250,000                                                      
|            | 
|21.01       |  | Subsidiaries of the Company                                                                                                                                                                                                  
|            | 
|23.01       |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                        
|            | 
|31.01       |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                      
|            | 
|31.02       |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                      
|            | 
|32.01       |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                        



69