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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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Form 10-Q/A



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(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 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 001-15699



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Concentra Operating
Corporation

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 75-2822620                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|5080 Spectrum Drive, Suite 400W Addison, Texas                 |  | 75001                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(972) 364-8000

(Registrants telephone number, including area code)



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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 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 the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



The registrant is a wholly-owned subsidiary of Concentra Inc., a Delaware corporation. As of November 1, 2003, there were 35,553,873 shares outstanding of
Concentra Inc. common stock, none of which were publicly traded. Currently there is no established trading market for these shares.



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EXPLANATORY NOTE



Concentra Operating Corporation (the Company) hereby amends its Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, that was filed with the Securities and Exchange Commission on November 13, 2003 in order to restate its results to reflect certain non-cash deferred income tax adjustments. In connection with the preparation of its 2003
financial statements, the Company determined that, due to its 2002 adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), the deferred income tax liabilities related to
goodwill amortization expense will no longer reverse on a scheduled basis and can no longer be utilized to support the realization of deferred income tax assets. Accordingly, the Company determined that an adjustment to record additional income tax
expense was necessary in order to increase its deferred income tax asset valuation allowance in its financial statements, as presented in the 2002 Form 10-K/A and the Form 10-Qs as filed for the quarterly periods of 2003. The implementation of
these adjustments resulted in increases in both the Companys deferred income tax asset valuation allowance and its provision for income taxes by $6.1 million for 2002 and by $0.6 million, $0.3 million, and $3.6 million for the first three
quarters of 2003, respectively. These non-cash adjustments did not affect revenue, operating income, taxes payable or net operating loss carry-forwards. Changes related to these adjustments have been made in the following parts of the Form 10-Q:



Item 1. Financial Statements; and



Item 2. Managements Discussion and Analysis of Financial Condition and Results
Operations.



Please note that the information contained in this
Form 10-Q/A, including the financial statements and the notes thereto, does not reflect events occurring subsequent to the original filing date of the original Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, except as
described above. Such events include, among others, the events described in our current reports on Form 8-K. The Company therefore recommends that this report be read in conjunction with the Companys reports filed subsequent to the original
filing date. The filing of this Form 10-Q/A shall not be deemed an admission that the original Form 10-Q, when filed, included any untrue statement of material fact or omitted to state a material fact necessary to make a statement not misleading.



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CONCENTRA OPERATING CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q/A



|                                                                                                                  |  |                                                                                       |  |     
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                                                                                                                  |  |                                                                                       |  | Page
|PART I. FINANCIAL INFORMATION                                                                                     |  |                                                                                      
|                                                                                                                  |  |                                                                                      
|Item 1.                                                                                                           |  | Financial Statements                                                                  |  | 4   
|                                                                                                                  | 
|Condensed Consolidated Balance Sheets at September 30, 2003 (Unaudited) and December 31, 2002                     |  | 4                                                                                    
|                                                                                                                  | 
|Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2003 and 2002 |  | 5                                                                                    
|                                                                                                                  | 
|Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2003 and 2002           |  | 6                                                                                    
|                                                                                                                  | 
|Notes to Consolidated Financial Statements (Unaudited)                                                            |  | 7                                                                                    
|                                                                                                                  |  |                                                                                      
|Item 2.                                                                                                           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 23  
|                                                                                                                  |  |                                                                                      
|Item 3.                                                                                                           |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 32  
|                                                                                                                  |  |                                                                                      
|Item 4.                                                                                                           |  | Controls and Procedures                                                               |  | 32  
|                                                                                                                  | 
|PART II. OTHER INFORMATION                                                                                        |  |                                                                                      
|                                                                                                                  |  |                                                                                      
|Item 6.                                                                                                           |  | Exhibits and Reports on Form 8-K                                                      |  | 33  
|                                                                                                                  | 
|Signatures                                                                                                        |  | 34                                                                                   
|                                                                                                                  | 
|Exhibit Index                                                                                                     |  | 35                                                                                   



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PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



CONCENTRA OPERATING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                            |  |                    |          |   |                   |   |          |  
|------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                            |  | September 30, 2003 |          |   | December 31, 2002 |  
|                                            |  | (Unaudited)        |          |   |                   |  
|                                            |  | (Restated)         |          |   | (Restated)        |  
|ASSETS                                      |  |                    |          |   |                   |   |          |  
|Current assets:                             |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                   |  | $                  | 12,244   |   |                   | $ | 19,002   |  
|Accounts receivable, net                    |  |                    | 185,792  |   |                   |   | 167,561  |  
|Prepaid expenses and other current assets   |  |                    | 31,413   |   |                   |   | 27,770   |  
|                                            |  |                    |          |   |                   |   |          |  
|Total current assets                        |  |                    | 229,449  |   |                   |   | 214,333  |  
|                                            |  |                   
|Property and equipment, net                 |  |                    | 124,261  |   |                   |   | 134,981  |  
|Goodwill and other intangible assets, net   |  |                    | 485,917  |   |                   |   | 486,231  |  
|Other assets                                |  |                    | 16,466   |   |                   |   | 15,146   |  
|                                            |  |                    |          |   |                   |   |          |  
|Total assets                                |  | $                  | 856,093  |   |                   | $ | 850,691  |  
|                                            |  |                    |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY        |  |                    |          |   |                   |   |          |  
|Current liabilities:                        |  |                    |          |   |                   |   |          |  
|Revolving credit facility                   |  | $                  |         |   |                   | $ |         |  
|Current portion of long-term debt           |  |                    | 4,881    |   |                   |   | 3,825    |  
|Accounts payable and accrued expenses       |  |                    | 105,838  |   |                   |   | 108,049  |  
|                                            |  |                    |          |   |                   |   |          |  
|Total current liabilities                   |  |                    | 110,719  |   |                   |   | 111,874  |  
|Long-term debt, net                         |  |                    | 623,313  |   |                   |   | 476,001  |  
|Deferred income taxes and other liabilities |  |                    | 61,914   |   |                   |   | 58,628   |  
|Fair value of hedging arrangements          |  |                    |         |   |                   |   | 33,472   |  
|                                            |  |                    |          |   |                   |   |          |  
|Total liabilities                           |  |                    | 795,946  |   |                   |   | 679,975  |  
|Stockholders equity:                       |  |                    |          |   |                   |   |          |  
|Common stock                                |  |                    |         |   |                   |   |         |  
|Paid-in capital                             |  |                    | 170,422  |   |                   |   | 311,077  |  
|Retained deficit                            |  |                    | (110,275 | ) |                   |   | (140,361 | )
|                                            |  |                    |          |   |                   |   |          |  
|Total stockholders equity                  |  |                    | 60,147   |   |                   |   | 170,716  |  
|                                            |  |                    |          |   |                   |   |          |  
|Total liabilities and stockholders equity  |  | $                  | 856,093  |   |                   | $ | 850,691  |  
|                                            |  |                    |          |   |                   |   |          |  



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



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CONCENTRA OPERATING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands)



|                                                            |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | ---------- |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|                                                            |  | 2003                             |         |   | 2002                            |   |         | 2003       |  |   | 2002    |  
|                                                            |  | (Restated)                       |         |   |                                 |   |         | (Restated) |  |   |         |  
|Revenue:                                                    |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|Health Services                                             |  | $                                | 134,950 |   |                                 | $ | 128,002 |            |  | $ | 379,906 |   |  | $ | 354,728 |  
|Network Services                                            |  |                                  | 65,368  |   |                                 |   | 55,164  |            |  |   | 188,879 |   |  |   | 168,653 |  
|Care Management Services                                    |  |                                  | 68,535  |   |                                 |   | 71,632  |            |  |   | 212,496 |   |  |   | 225,577 |  
|                                                            |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|Total revenue                                               |  |                                  | 268,853 |   |                                 |   | 254,798 |            |  |   | 781,281 |   |  |   | 748,958 |  
|Cost of Services:                                           |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|Health Services                                             |  |                                  | 108,336 |   |                                 |   | 104,040 |            |  |   | 310,686 |   |  |   | 302,152 |  
|Network Services                                            |  |                                  | 35,280  |   |                                 |   | 34,762  |            |  |   | 106,311 |   |  |   | 103,750 |  
|Care Management Services                                    |  |                                  | 61,258  |   |                                 |   | 67,494  |            |  |   | 188,496 |   |  |   | 201,525 |  
|                                                            |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|Total cost of services                                      |  |                                  | 204,874 |   |                                 |   | 206,296 |            |  |   | 605,493 |   |  |   | 607,427 |  
|                                                            |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|Total gross profit                                          |  |                                  | 63,979  |   |                                 |   | 48,502  |            |  |   | 175,788 |   |  |   | 141,531 |  
|General and administrative expenses                         |  |                                  | 31,883  |   |                                 |   | 27,880  |            |  |   | 89,937  |   |  |   | 77,505  |  
|Amortization of intangibles                                 |  |                                  | 969     |   |                                 |   | 853     |            |  |   | 2,971   |   |  |   | 2,716   |  
|                                                            |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|Operating income                                            |  |                                  | 31,127  |   |                                 |   | 19,769  |            |  |   | 82,880  |   |  |   | 61,310  |  
|                                                            |  |                                  |         |  
|Interest expense, net                                       |  |                                  | 13,790  |   |                                 |   | 15,507  |            |  |   | 42,944  |   |  |   | 48,555  |  
|(Gain) loss on change in fair value of hedging arrangements |  |                                  | (5,456  | ) |                                 |   | 7,712   |            |  |   | (9,869  | ) |  |   | 8,896   |  
|Loss on early retirement of debt                            |  |                                  | 7,837   |   |                                 |   | 7,381   |            |  |   | 7,837   |   |  |   | 7,381   |  
|Other, net                                                  |  |                                  | 804     |   |                                 |   | (109    | )          |  |   | 2,187   |   |  |   | (1,420  | )
|                                                            |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                           |  |                                  | 14,152  |   |                                 |   | (10,722 | )          |  |   | 39,781  |   |  |   | (2,102  | )
|Provision (benefit) for income taxes                        |  |                                  | 3,653   |   |                                 |   | (3,544  | )          |  |   | 10,012  |   |  |   | 1,443   |  
|                                                            |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  
|Net income (loss)                                           |  | $                                | 10,499  |   |                                 | $ | (7,178  | )          |  | $ | 29,769  |   |  | $ | (3,545  | )
|                                                            |  |                                  |         |   |                                 |   |         |            |  |   |         |   |  |   |         |  





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



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CONCENTRA OPERATING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)



|                                                                                         |  |                                 |          |   |            |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---------- | - | ------- | -
|                                                                                         |  | Nine Months Ended September 30, |         
|                                                                                         |  | 2003                            |          |   | 2002       |  
|                                                                                         |  | (Restated)                      |          |   | (Restated) |  
|Operating Activities:                                                                    |  |                                 |          |   |            |   |         |  
|Net income (loss)                                                                        |  | $                               | 29,769   |   |            | $ | (3,545  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                 |          |   |            |   |         |  
|Depreciation of property and equipment                                                   |  |                                 | 34,139   |   |            |   | 32,044  |  
|Amortization of intangibles                                                              |  |                                 | 2,971    |   |            |   | 2,716   |  
|(Gain) loss on change in fair value of hedging arrangements                              |  |                                 | (9,869   | ) |            |   | 8,896   |  
|Write-off of deferred financing costs                                                    |  |                                 | 7,837    |   |            |   | 1,152   |  
|Write-off of fixed assets                                                                |  |                                 | 82       |   |            |   | 259     |  
|Changes in assets and liabilities, net of acquired assets and liabilities:               |  |                                 |          |   |            |   |         |  
|Accounts receivable, net                                                                 |  |                                 | (17,909  | ) |            |   | 2,942   |  
|Prepaid expenses and other assets                                                        |  |                                 | (864     | ) |            |   | (6,671  | )
|Accounts payable and accrued expenses                                                    |  |                                 | 4,416    |   |            |   | (11,425 | )
|                                                                                         |  |                                 |          |   |            |   |         |  
|Net cash provided by operating activities                                                |  |                                 | 50,572   |   |            |   | 26,368  |  
|                                                                                         |  |                                 |          |   |            |   |         |  
|Investing Activities:                                                                    |  |                                 |          |   |            |   |         |  
|Purchases of property, equipment and other assets                                        |  |                                 | (21,104  | ) |            |   | (27,127 | )
|Acquisitions, net of cash acquired                                                       |  |                                 | (5,094   | ) |            |   | (1,829  | )
|Proceeds from the licensing of internally-developed software                             |  |                                 |         |   |            |   | 515     |  
|                                                                                         |  |                                 |          |   |            |   |         |  
|Net cash used in investing activities                                                    |  |                                 | (26,198  | ) |            |   | (28,441 | )
|                                                                                         |  |                                 |          |   |            |   |         |  
|Financing Activities:                                                                    |  |                                 |          |   |            |   |         |  
|Borrowings (payments) under the revolving credit facility, net                           |  |                                 |         |   |            |   |        |  
|Proceeds from the issuance of debt                                                       |  |                                 | 486,500  |   |            |   | 3,450   |  
|Repayments of debt                                                                       |  |                                 | (339,568 | ) |            |   | (50,689 | )
|Payment to terminate hedging arrangements                                                |  |                                 | (23,603  | ) |            |   |        |  
|Payment of deferred financing costs                                                      |  |                                 | (11,135  | ) |            |   | (1,135  | )
|Distributions to minority interests                                                      |  |                                 | (2,316   | ) |            |   | (1,194  | )
|Contribution to parent                                                                   |  |                                 | (141,152 | ) |            |   |        |  
|Contribution from issuance of common stock by parent                                     |  |                                 | 242      |   |            |   | 355     |  
|Proceeds from the issuance of common stock to parent                                     |  |                                 |         |   |            |   | 52,970  |  
|Other                                                                                    |  |                                 | (100     | ) |            |   | (43     | )
|                                                                                         |  |                                 |          |   |            |   |         |  
|Net cash provided by (used in) financing activities                                      |  |                                 | (31,132  | ) |            |   | 3,714   |  
|                                                                                         |  |                                 |          |   |            |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                                     |  |                                 | (6,758   | ) |            |   | 1,641   |  
|                                                                                         |  |                                
|Cash and Cash Equivalents, beginning of period                                           |  |                                 | 19,002   |   |            |   | 8,950   |  
|                                                                                         |  |                                 |          |   |            |   |         |  
|Cash and Cash Equivalents, end of period                                                 |  | $                               | 12,244   |   |            | $ | 10,591  |  
|                                                                                         |  |                                 |          |   |            |   |         |  
|Supplemental Disclosure of Cash Flow Information:                                        |  |                                 |          |   |            |   |         |  
|Interest paid, net                                                                       |  | $                               | 45,563   |   |            | $ | 53,413  |  
|Income taxes paid, net                                                                   |  | $                               | 2,656    |   |            | $ | 1,864   |  
|Liabilities and debt assumed in acquisitions                                             |  | $                               | 1,020    |   |            | $ | 500     |  
|Non-cash Investing and Financing Activities:                                             |  |                                 |          |   |            |   |         |  
|Capital lease obligations                                                                |  | $                               | 1,351    |   |            | $ |        |  



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



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The accompanying unaudited consolidated financial statements have been prepared by Concentra Operating Corporation (the Company or
Concentra Operating) pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments (each of which is of a normal, recurring nature) which, in the opinion of management, are necessary for a
fair statement of the results of the interim periods presented. Results for interim periods should not be considered indicative of results for a full year. These consolidated financial statements do not include all disclosures associated with the
annual consolidated financial statements and, accordingly, should be read in conjunction with the attached Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and
footnotes for the year ended December 31, 2002, included in the Companys 2002 Form 10-K/A, where certain terms have been defined. Earnings per share has not been reported for all periods presented, as Concentra Operating is a wholly-owned
subsidiary of Concentra Inc. (Concentra Holding) and has no publicly held shares.



(1) Reclassifications and Business Combinations



Certain reclassifications have been made in the 2002 financial statements to conform to classifications used in 2003. The consolidated statements of operations for the three months and nine months ended September 30,
2002 and the consolidated statements of cash flows for the nine months ended September 30, 2002 have been adjusted to include the historical results of Em3 Corporation (Em3) and OccMed Systems, Inc. (OccMed). Effective
December 1, 2002, the Company acquired substantially all of the assets and liabilities of Em3 and OccMed. Because the Companys controlling stockholder, Welsh, Carson, Anderson & Stowe (WCAS), also controlled these two acquired
companies, the accounting for these acquisitions was viewed as a reorganization of entities under common control. Accordingly, the historical costs of the acquired companies assets and liabilities were utilized as if WCAS contributed their
interest in the acquired companies to the Company at their historical cost. The remainder acquired by the Company was accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards No.
(SFAS) 141, Business Combinations (SFAS 141) whereby assets and liabilities are stepped-up to fair value with the remainder allocated to goodwill. Accordingly, the Company has consolidated Em3 and
OccMeds historical financial statements with those of the Company, and the equity interests of other investors, which were 34% for Em3 and 31% for OccMed, have been reflected as a minority interest in the Companys financial statements
for periods prior to December 1, 2002. The Companys net income for the three months and nine months ended September 30, 2002 was reduced by $1.6 million and $5.6 million, respectively, as a result of the historical restatement for the Em3 and
OccMed acquisitions. As a result, the amounts reported in the accompanying consolidated financial statements of the Company differ from amounts previously reported in the Companys Form 10-Q for the quarter ended September 30, 2002.



(2) Stock Based Compensation Plans (Restated)



Concentra Holding issues stock options to the Companys employees and
outside directors. The Company accounts for these plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized related to stock option
grants when the exercise price is equal to the market price on the date of grant.



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



For purposes of disclosures pursuant to SFAS 123, as amended by SFAS 148, the estimated fair value of
options is amortized to expense over the options vesting period. Had compensation cost for these plans been determined consistent with SFAS 123, the Companys net income would have been decreased to the following supplemental pro forma
net income (loss) amounts (in thousands):



|                                                                                                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                                |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                                                                |  | 2003                            |        |   | 2002                           |   |        | 2003 |  |   | 2002   |  
|Net income (loss):                                                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                                     |  | $                               | 10,499 |   |                                | $ | (7,178 | )    |  | $ | 29,769 |   |  | $ | (3,545 | )
|Deduct: Incremental stock-based employee compensation expense determined under the fair value method for all awards, net of related tax
effects |  |                                 | (1,140 | ) |                                |   | (853   | )    |  |   | (3,443 | ) |  |   | (2,498 | )
|                                                                                                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Supplemental pro forma                                                                                                                          |  | $                               | 9,359  |   |                                | $ | (8,031 | )    |  | $ | 26,326 |   |  | $ | (6,043 | )
|                                                                                                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



For purposes of this
disclosure, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used:



|                                                   |  |                                 |   |  |                                |   |  |      |   |  |      |  
|-------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                                                   |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                                   |  | 2003                            |   |  | 2002                           |   |  | 2003 |   |  | 2002 |  
|Risk-free interest rates                           |  | 3.0                             | % |  | 3.1                            | % |  | 2.7  | % |  | 3.2  | %
|Expected volatility                                |  | 17.8                            | % |  | 28.8                           | % |  | 17.8 | % |  | 28.8 | %
|Expected dividend yield                            |  |                                |   |  |                               |   |  |     |   |  |     |  
|Expected weighted average life of options in years |  | 5.0                             |   |  | 4.7                            |   |  | 4.9  |   |  | 4.8  |  



(3) Recent Accounting
Pronouncements



In July 2001, the Financial Accounting
Standards Board (the FASB) issued SFAS 143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying
amount of the long-lived asset. The Company adopted SFAS 143 on January 1, 2003. The adoption did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.



In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities(SFAS 146). SFAS 146 addresses the accounting for costs to terminate a contract that is not a capital lease, costs to consolidate facilities and relocate employees and involuntary termination benefits
under one-time benefit arrangements that are not an ongoing benefit program or an individual deferred compensation contract. A liability for contract termination costs should be recognized and measured at fair value when either the contract is
terminated or the entity ceases to use the right conveyed by the contract. A liability for one-time termination benefits should be recognized and measured at fair value at the communication date if the employee would not be retained beyond a minimum
retention period (i.e., either a legal notification period or 60 days if no legal requirement exists). For employees who will be retained beyond the minimum retention period, a liability should be accrued ratably over the future service period. The
Company adopted SFAS 146 on January 1, 2003. The adoption did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.



In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure
(SFAS 148). SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation (SFAS 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The additional disclosure requirements of



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



SFAS 148 are effective for fiscal years ending after December 15, 2002. The Company has elected to continue to follow
the intrinsic value method of accounting, as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, to account for employee stock options. See Note 2, Stock Based Compensation Plans for the disclosures
required by SFAS 148.



In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a majority of the entitys residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either
(a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans
or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply
to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We do not have any variable interest entities.



In April 2003, the FASB issued SFAS 149, Amendment of Statement of 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 was generally effective for contracts entered into or modified after June 30, 2003 and did not have an impact on the Companys financial statements.



In May 2003, the FASB issued SFAS 150, Accounting for Certain Instruments
with Characteristics of Both Liability and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150
requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 did not have any financial impact on the Companys financial statements.



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



(4) Goodwill and Other Intangible Assets (Restated)



The net carrying value of goodwill and other intangible assets is comprised
of the following (in thousands):



|                                                         |  |                    |         |   |                   |   |         |  
|-------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                         |  | September 30, 2003 |         |   | December 31, 2002 |  
|Amortized intangible assets, gross:                      |  |                    |         |   |                   |   |         |  
|Customer contracts                                       |  | $                  | 6,190   |   |                   | $ | 6,190   |  
|Covenants not to compete                                 |  |                    | 4,305   |   |                   |   | 4,305   |  
|Customer lists                                           |  |                    | 3,420   |   |                   |   | 3,420   |  
|Servicing contracts                                      |  |                    | 3,293   |   |                   |   | 3,293   |  
|Licensing and royalty agreements                         |  |                    | 285     |   |                   |   | 285     |  
|                                                         |  |                    |         |   |                   |   |         |  
|                                                         |  |                    | 17,493  |   |                   |   | 17,493  |  
|Accumulated amortization of amortized intangible assets: |  |                    |         |   |                   |   |         |  
|Customer contracts                                       |  |                    | (2,950  | ) |                   |   | (1,770  | )
|Covenants not to compete                                 |  |                    | (2,322  | ) |                   |   | (1,411  | )
|Customer lists                                           |  |                    | (2,985  | ) |                   |   | (2,430  | )
|Servicing contracts                                      |  |                    | (631    | ) |                   |   | (384    | )
|Licensing and royalty agreements                         |  |                    | (202    | ) |                   |   | (123    | )
|                                                         |  |                    |         |   |                   |   |         |  
|                                                         |  |                    | (9,090  | ) |                   |   | (6,118  | )
|                                                         |  |                    |         |   |                   |   |         |  
|Amortized intangible assets, net                         |  |                    | 8,403   |   |                   |   | 11,375  |  
|Non-amortized intangible assets:                         |  |                    |         |   |                   |   |         |  
|Goodwill                                                 |  |                    | 477,360 |   |                   |   | 474,702 |  
|Trademarks                                               |  |                    | 154     |   |                   |   | 154     |  
|                                                         |  |                    |         |   |                   |   |         |  
|                                                         |  | $                  | 485,917 |   |                   | $ | 486,231 |  
|                                                         |  |                    |         |   |                   |   |         |  



The change in the net
carrying amount of amortized intangible assets is due to amortization. The increase in goodwill is due to acquisitions partially offset by a decrease of $1.6 million related to the reclass of the deferred income tax valuation allowance associated
with the net operating losses of an acquired company.



The net
carrying value of goodwill by operating segment is as follows (in thousands):



|                         |  |                    |         |                   |   |        
|------------------------ |  | ------------------ | ------- | ----------------- | - | -------
|                         |  | September 30, 2003 |         | December 31, 2002
|Health Services          |  | $                  | 246,384 |                   | $ | 243,726
|Network Services         |  |                    | 184,902 |                   |   | 184,902
|Care Management Services |  |                    | 46,074  |                   |   | 46,074 
|                         |  |                    |         |                   |   |        
|                         |  | $                  | 477,360 |                   | $ | 474,702
|                         |  |                    |         |                   |   |        



Amortization expense
for intangible assets with finite lives was $1.0 million and $0.9 million for the three months ended September 30, 2003 and 2002, respectively and $3.0 million and $2.7 million for the nine months ended September 30, 2003 and 2002, respectively.
Estimated amortization expense on intangible assets with finite lives for the five succeeding fiscal years ending December 31 is as follows (in thousands):



|     |  |   |      
|---- |  | - | -----
|2003 |  | $ | 3,912
|2004 |  |   | 3,293
|2005 |  |   | 2,031
|2006 |  |   | 483  
|2007 |  |   | 393  



SFAS 142, Goodwill
and Other Intangible Assets (SFAS 142), requires the Company to perform an annual goodwill impairment test, on a reporting unit basis. A reporting unit is the operating segment unless, at businesses one



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



level below that operating segment (the component level), discrete financial information is prepared and regularly
reviewed by management, and the businesses are not otherwise aggregated due to having certain common characteristics, in which case such component is the reporting unit. A fair value approach using projected cash flows and comparative market
multiples is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its fair value.



The Company completed its 2003 annual impairment test of goodwill and determined that no impairment existed at July 1, 2003.
However, the fair value of Care Management Services goodwill exceeded its carrying amount by a relatively modest amount, due primarily to this reporting units recent performance trends. Although Care Management Services earnings
have improved during the last twelve months, a non-cash goodwill impairment charge to income may be incurred for this reporting unit in a future period, depending on the prospective growth of earnings.



(5) Revolving Credit Facility and Long-Term Debt



The Companys long-term debt as of September 30, 2003, and December 31,
2002, consisted of the following (in thousands):



|                                         |  |                    |         |   |                   |   |         |  
|---------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                         |  | September 30, 2003 |         |   | December 31, 2002 |  
|Term loan due 2009                       |  | $                  | 334,163 |   |                   | $ |        |  
|Tranche B term loan due 2006             |  |                    |        |   |                   |   | 224,626 |  
|Tranche C term loan due 2007             |  |                    |        |   |                   |   | 112,314 |  
|9.5% Senior Subordinated Notes due 2010  |  |                    | 150,000 |   |                   |   |        |  
|13.0% Senior Subordinated Notes due 2009 |  |                    | 142,500 |   |                   |   | 142,500 |  
|Other                                    |  |                    | 1,531   |   |                   |   | 386     |  
|                                         |  |                    |         |   |                   |   |         |  
|                                         |  |                    | 628,194 |   |                   |   | 479,826 |  
|Less: Current maturities                 |  |                    | (4,881  | ) |                   |   | (3,825  | )
|                                         |  |                    |         |   |                   |   |         |  
|Long-term debt, net                      |  | $                  | 623,313 |   |                   | $ | 476,001 |  
|                                         |  |                    |         |   |                   |   |         |  



The Company had no
revolving credit borrowings at September 30, 2003 and December 31, 2002, respectively. As of September 30, 2003, and December 31, 2002, accrued interest was $6.4 million and $11.4 million, respectively.



In February 2003, the Company entered into a five-year capital lease for
software. The Company paid $1.5 million to the lessor at the lease execution, with the remaining $1.5 million to be paid in February 2004. At the end of the five-year term, the Company has the option to extend the term of the agreement. The software
will be amortized over the primary term of the lease.



On
August 13, 2003, the Company completed a series of refinancing transactions (the Refinancing Transactions) that included issuing $150.0 million aggregate principal amount of 9.5% senior subordinated notes (the 9.5% Subordinated
Notes) and entering into a new $435.0 million senior secured term credit facility (the New Credit Facility). The New Credit Facility consists of a $335.0 million term loan facility (the New Term Loan) and a $100.0
million revolving loan facility (the New Revolving Credit Facility). The Company used the proceeds from the 9.5% Senior Subordinated Notes offering and the New Credit Facility together with cash on hand to: (1) repay the $335.2 million
of outstanding indebtedness under the Companys previous credit facility, (2) terminate previously existing interest rate hedging arrangements valued at $23.6 million (3) transfer $141.2 million of cash proceeds to the Companys parent,
Concentra Holding, to enable it to redeem a portion of its 14.0% senior discount debentures, (4) pay $4.6 million of accrued interest on the previous credit facility and hedging arrangements and (5) pay approximately $11.3 million of related fees
and expenses. In connection with the termination of the existing credit facility, the Company recorded approximately $7.8 million of debt extinguishment costs in the third quarter of 2003 for the write-off of related deferred financing fees and
other expenses.



On August 13, 2003, the Company entered into
the New Credit Facility with a consortium of banks. Borrowings under the New Revolving Credit Facility and New Term Loan bear interest, at the Companys option, at either (1) the



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



Alternate Base Rate (ABR), as defined, plus a margin initially equal to 2.25% for the loans under the New
Revolving Credit Facility and 2.75% for the New Term Loan or (2) the reserve-adjusted Eurodollar rate plus a margin initially equal to 3.25% for the loans under the New Revolving Credit Facility and 3.75% for the New Term Loan. The margins for
borrowings under the New Revolving Credit Facility will be subject to reduction based on changes in the Companys leverage ratios and certain other performance criteria. The New Term Loan matures on June 30, 2009, and requires quarterly
principal payments of $0.8 million through June 30, 2008, $47.7 million for each of the following two quarters, $95.5 million on March 31, 2009 and any remaining balance due on June 30, 2009. The New Revolving Credit Facility provides for borrowing
up to $100.0 million and matures on August 13, 2008. As part of the New Credit Facility, the Company was required to pay fees of $5.2 million to the lenders approving the agreement and $0.4 million of other related expenses. These fees and expenses
were capitalized as deferred financing costs and will be amortized over the life of the New Credit Facility. The New Credit Facility contains prepayment requirements that would occur based on certain net asset sales outside the ordinary course of
business by the Company, from the proceeds of specified debt and equity issuances by the Company and if the Company has excess cash flow, as defined in the agreement. The Company was not required to make prepayments under these provisions in the
third quarter of 2003. However, management anticipates that the Company may meet these requirements in future periods, based upon its financial projections.



Prior to August 13, 2003, the Company had a credit agreement (the Previous Credit Facility) with a consortium of banks, providing for term
loans and a $100 million revolving credit facility. The term loans were issued as a $250 million term loan (the Tranche B Term Loan) and a $125 million term loan (the Tranche C Term Loan) bearing interest, at the
Companys option, at the ABR, as defined, plus 2.25% and 2.50%, respectively, or the one, two, three, or six month Eurodollar Rate, as defined, plus 3.25% and 3.50%, respectively. In 2000, the Company and its lenders amended and restated the
Previous Credit Facility whereby the Tranche B Term Loan and the Tranche C Term Loan bore interest, at the Companys option, at the ABR, as defined, plus 3.00% and 3.25%, respectively, or the Eurodollar Rate, as defined, plus 4.00% and 4.25%,
respectively. In 2002, the Company prepaid $16.7 million and $8.3 million of its Tranche B Term Loan and Tranche C Term Loan, respectively. The Tranche B Term Loan would have matured on June 30, 2006, and required quarterly principal payments of
$0.6 million through June 30, 2005, and $54.7 million for each of the remaining four quarters or until all principal was repaid. The Tranche C Term Loan would have matured on June 30, 2007, and required quarterly principal payments of $0.3 million
through June 30, 2006, and $27.1 million for each of the remaining four quarters or until all principal was repaid. The Revolving Credit Facility provided for borrowing up to $100 million and would have matured on August 17, 2005. As part of the
Refinancing Transactions, the Company repaid all amounts outstanding under the Previous Credit Facility and expensed the write-off of related $7.8 million of deferred financing fees and expenses.



The 9.5% Subordinated Notes were issued on August 13, 2003 for $150.0 million
and are general unsecured indebtedness with semi-annual interest payments due on February 15 and August 15, commencing on February 15, 2004. These notes mature on August 15, 2010. As part of the issuance of the 9.5% Subordinated Notes, the Company
was required to pay fees of $4.5 million in arrangement fees and $0.8 million of other related expenses. These fees and expenses were capitalized as deferred financing costs and will be amortized over the life of the 9.5% Subordinated Notes. At any
time prior to August 15, 2006, the Company can redeem, with proceeds from new equity, up to 35% of the aggregate principal amount of the 9.5% Subordinate Notes at a redemption price of 109.5% of the principal amount of the notes redeemed, plus
accrued and unpaid interest to the redemption date. Prior to August 15, 2007, the Company may redeem all, but not less than all, of the 9.5% Subordinated Notes at a redemption price of 100.0% of the principal amount of the notes plus the applicable
premium, as defined, and accrued and unpaid interest to the redemption date. The Company can also redeem all or part of the 9.5% Subordinated Notes on or after August 15, 2007 at 104.8% of the principal amount of the notes redeemed, plus accrued and
unpaid interest to the redemption date, with the redemption premium decreasing annually to 100.0% of the principal amount on August 15, 2009. Upon a change of control, as defined, each holder of the 9.5% Subordinated Notes may require the Company to
repurchase all or a portion of that holders notes at a purchase price of 101.0% of the aggregate principal amount of notes repurchased, plus accrued and unpaid interest. On October 14, 2003 the Company completed an exchange offer in which it
exchanged the 9.5% Subordinated Notes for notes that were registered under the Securities Act of 1933. The 9.5% Subordinated Notes, as well as the 13.0% senior subordinated notes (the 13.0% Subordinated Notes), the Previous Credit
Facility and the New Credit Facility, are guaranteed on a joint and several basis by each and every current wholly-owned subsidiary, the results of which are consolidated in the results of the Company. These guarantees are full and unconditional.
The Company has certain subsidiaries that are not wholly-owned and do not guarantee the 13.0% Subordinated Notes or the 9.5% Subordinated Notes. For financial information on guarantor and non-guarantor subsidiaries, see Note 10. Condensed
Consolidating Financial Information.



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



The Previous Credit Facility required the Company to enter into interest rate hedge agreements for
the purpose of reducing the effect of variable interest rate fluctuations on a certain portion of the Previous Credit Facility. Accordingly, the Company entered into an interest rate collar agreement on November 17, 1999, which it subsequently
amended on May 17, 2000. The interest rate collar agreement converted $200 million of certain variable rate debt to fixed rates. Had it not been cancelled as a part of the Refinancing Transactions, this agreement would have expired by its terms on
November 17, 2004. Under the agreement, the Company generally paid and received the three month LIBOR rate (the Swap Rate) to and from the counterparty on the notional amount subject to the following limitations: the minimum rate the
Company paid was 6.3% when the Swap Rate was less than 5.9%; the maximum rate the Company paid was 6.3%, unless the Swap Rate was greater than 7.5% and less than 8.5%; and, if the Swap Rate was greater than 8.5%, the Company paid 8.5% until November
17, 2002. After November 17, 2002 through the maturity of the agreement, there was no maximum rate the Company paid if the Swap Rate exceeded 7.5%.



The Company entered into an additional interest rate collar agreement on May 17, 2000. This agreement converted $100 million of certain variable rate debt
to fixed rates and, had it not been cancelled as a part of the Refinancing Transactions, would have expired by its terms on May 17, 2005. Under the terms of this agreement, the Company generally paid and received the Swap Rate to and from the
counterparty on the notional amount subject to the following restrictions: the minimum rate the Company paid was 7.05% when the Swap Rate was less than 6.0%; the maximum rate the Company paid was 7.05%, unless the Swap Rate was greater than 8.25%.
Through the maturity of the agreement, there was no maximum rate the Company paid if the Swap Rate exceeded 8.25%.



In connection with the acquisition of National Healthcare Resources, Inc. in November 2001, the Company assumed an interest rate collar agreement, which
converted $23.6 million of certain variable rate debt to fixed rates and expired on May 19, 2003. Under the terms of this agreement, the Company generally paid and received the Swap Rate to and from the counterparty on the notional amount subject to
the following restrictions: the minimum rate the Company paid was 6.5% when the Swap Rate was less than that amount; the maximum rate the Company paid was 8.0% when the Swap Rate was greater than that amount; and if the Swap Rate was between 6.5%
and 8.0%, the Company paid the Swap Rate. At May 19, 2003, the counterparty elected to exercise its option to fix the interest rate at 7.11% for an additional two years. However, as were the Companys other interest rate hedge agreements, this
agreement was cancelled as a part of the Refinancing Transactions.



In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended, which has been effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes
additional accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize the fair value of all hedging arrangements as assets or liabilities in the financial statements. It also requires
the recognition of changes in the fair value of these derivatives. These market value adjustments are to be included either in the income statement or other comprehensive income (equity), depending on the nature of the hedged transaction.



During 2000, the Company adopted SFAS 133, and, as a result,
subsequent changes in the fair value of its interest rate hedging arrangements, including the Companys interest rate collar agreements, were recognized each period in earnings. All earnings adjustments resulting from changes in the fair values
of the interest rate collars were non-cash charges or credits and did not impact cash flows from operations or operating income. There were periods with significant non-cash increases or decreases to the Companys earnings relating to the
change in the fair value of the interest rate collars. Further, if the Company held each of these collars to maturity (2004 and 2005), the earnings adjustments would have offset each other on a cumulative basis and would have ultimately equaled
zero. These hedging arrangements were eliminated as part of the Refinancing Transactions, and the costs related to recognizing changes in their fair market value were charged to expense in the third quarter of 2003. The Company increased its
interest expense by $2.0 million and $10.4 million for the third quarter and first nine months of 2003, respectively and $4.0 million and $11.4 million for the third quarter and first nine months of 2002, respectively, through net cash paid to the
counterparty under these collars. The New Credit Facility does not require the Company to enter into any hedging arrangements.



The New Credit Facility, the 9.5% Subordinated Notes and the 13.0% Subordinated Notes contain certain customary covenants, including, without limitation,
restrictions on the incurrence of indebtedness, the sale of assets, certain mergers and acquisitions, the payment of dividends on the Companys capital stock, the repurchase or redemption of capital stock, transactions with affiliates,
investments, cross default provisions with other indebtedness of Concentra Operating and Concentra Holding, capital expenditures and changes in control of the Company. Under the New Credit Facility, the



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



Company is also required to satisfy certain financial covenant ratio tests including leverage ratios, interest
coverage ratios and fixed charge coverage ratios. The Previous Credit Facility contained similar covenants and financial covenant ratio tests. The Company was in compliance with its covenants, including its financial covenant ratio tests, for the
first three quarters of 2003. While less restrictive than the requirements under the Previous Credit Facility, the ratio tests under the New Credit Facility become more restrictive for future quarters through the fourth quarter of 2008. The
Companys ability to be in compliance with these more restrictive ratios will be dependent on its ability to increase its cash flows over current levels. The Company believes it will be in compliance with its covenants for the next twelve
months.



The fair value of the Companys borrowings under
the New Credit Facility was $337.5 million at September 30, 2003 and was $323.5 million at December 31, 2002 under the Previous Credit Facility. The fair value of the Companys 9.5% Subordinated Notes was $156.8 million at September 30, 2003.
The fair value of the Companys 13.0% Subordinated Notes was $158.2 million and $143.2 million at September 30, 2003 and December 31, 2002, respectively. The fair values of the financial instruments were determined utilizing available market
information. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts.



(6) Subsequent Events



In November 2003, the Company announced that it was considering the commencement of a series of refinancing transactions that would include issuing an
additional $30.0 million of its 9.5% Subordinated Notes. Subject to acceptable market and interest rate conditions, the Company anticipates completing this offering during the fourth quarter of 2003. The Company intends to distribute the net
proceeds from the additional 9.5% Subordinated Notes along with approximately $25.0 million of cash to the Companys parent, Concentra Holding, to enable it to redeem all of its outstanding 14.0% senior discount debentures and pay related fees
and expenses. In conjunction with this offering, the Company anticipates extending the maturity of Concentra Holdings $55.0 million bridge loan agreement from June 2004 to early 2005.



(7) Unusual Charge Reserves



During the nine months ended September 30, 2003, the Company paid
approximately $1.2 million related to the unusual charges that occurred in the first quarter of 1998, fourth quarter of 1998, third quarter of 1999, fourth quarter of 2001 and fourth quarter of 2002. At September 30, 2003, approximately $1.1 million
of the unusual cost accrual remained for facility obligations with terms expiring through 2006, costs related to personnel reductions and other unusual charges. The Company anticipates that the majority of this liability will be paid over the next
24 months.



(8) Changes in Stockholders Equity



In addition to the effects on Stockholders Equity from the
Companys 2003 results of operations that decreased the retained deficit, the Companys paid-in capital decreased in 2003 on a year to date basis primarily due to the $141.2 million transfer of cash proceeds to Concentra Holding to enable
it to redeem a portion of its 14.0% senior discount debentures, partially offset by $2.4 million of tax benefits from Concentra Holding.



(9) Segment Information (Restated)



Operating segments represent components of the Companys business that are evaluated regularly by key management in assessing performance and
resource allocation. The Companys comprehensive services are organized into the following segments: Health Services, Network Services and Care Management Services.



Health Services provides specialized injury and occupational healthcare services to employers through its centers. Health
Services delivers primary and rehabilitative care, including the diagnosis, treatment and management of work-related injuries and illnesses. Health Services also provides non-injury, employment-related health services, including physical
examinations, pre-placement substance abuse testing, job-specific return to work evaluations and other related programs. To meet the requirements of large employers whose workforce extends beyond the geographic coverage available to the
Companys centers, this segment has also developed a network of select occupational healthcare



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



providers that use the Companys proprietary technology to benchmark treatment methodologies and outcomes
achieved. Health Services, and the joint ventures Health Services controls, own all the operating assets of the occupational healthcare centers, including leasehold interests and medical equipment.



The Network Services segment includes those businesses that primarily involve
the review and repricing of medical provider bills. For these services, the Company is primarily compensated based on the degree to which the Company achieves savings for its clients, as well as on a fee per bill or claims basis. This segment
includes the Companys specialized preferred provider organization, provider bill repricing and review, out-of-network bill review and first report of injury services.



Care Management Services includes the Companys professional services aimed at curtailing the cost of workers
compensation and auto insurance claims through field case management, telephonic case management, independent medical examinations and utilization management. These services also concentrate on monitoring the timing and appropriateness of medical
care.



Revenue from individual customers, revenue between
business segments and revenue, operating profit and identifiable assets of foreign operations are not significant.



The Companys unaudited financial data on a segment basis were as follows (in thousands):



|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                            |  | 2003                            |         |   | 2002                           |   |         | 2003 |  |   | 2002    |  
|Revenue:                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Health Services                                             |  | $                               | 134,950 |   |                                | $ | 128,002 |      |  | $ | 379,906 |   |  | $ | 354,728 |  
|Network Services                                            |  |                                 | 65,368  |   |                                |   | 55,164  |      |  |   | 188,879 |   |  |   | 168,653 |  
|Care Management Services                                    |  |                                 | 68,535  |   |                                |   | 71,632  |      |  |   | 212,496 |   |  |   | 225,577 |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                            |  |                                 | 268,853 |   |                                |   | 254,798 |      |  |   | 781,281 |   |  |   | 748,958 |  
|Gross profit:                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Health Services                                             |  |                                 | 26,614  |   |                                |   | 23,962  |      |  |   | 69,220  |   |  |   | 52,576  |  
|Network Services                                            |  |                                 | 30,088  |   |                                |   | 20,402  |      |  |   | 82,568  |   |  |   | 64,903  |  
|Care Management Services                                    |  |                                 | 7,277   |   |                                |   | 4,138   |      |  |   | 24,000  |   |  |   | 24,052  |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                            |  |                                 | 63,979  |   |                                |   | 48,502  |      |  |   | 175,788 |   |  |   | 141,531 |  
|Operating income (loss):                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Health Services                                             |  |                                 | 19,026  |   |                                |   | 17,018  |      |  |   | 47,339  |   |  |   | 32,374  |  
|Network Services                                            |  |                                 | 18,939  |   |                                |   | 12,544  |      |  |   | 52,512  |   |  |   | 42,310  |  
|Care Management Services                                    |  |                                 | 173     |   |                                |   | (2,748  | )    |  |   | 3,545   |   |  |   | 5,254   |  
|Corporate general and administrative expenses               |  |                                 | (7,011  | ) |                                |   | (7,045  | )    |  |   | (20,516 | ) |  |   | (18,628 | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                            |  |                                 | 31,127  |   |                                |   | 19,769  |      |  |   | 82,880  |   |  |   | 61,310  |  
|Interest expense, net                                       |  |                                 | 13,790  |   |                                |   | 15,507  |      |  |   | 42,944  |   |  |   | 48,555  |  
|(Gain) loss on change in fair value of hedging arrangements |  |                                 | (5,456  | ) |                                |   | 7,712   |      |  |   | (9,869  | ) |  |   | 8,896   |  
|Loss on early retirement of debt                            |  |                                 | 7,837   |   |                                |   | 7,381   |      |  |   | 7,837   |   |  |   | 7,381   |  
|Other, net                                                  |  |                                 | 804     |   |                                |   | (109    | )    |  |   | 2,187   |   |  |   | (1,420  | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                           |  |                                 | 14,152  |   |                                |   | (10,722 | )    |  |   | 39,781  |   |  |   | (2,102  | )
|Provision (benefit) for income taxes                        |  |                                 | 3,653   |   |                                |   | (3,544  | )    |  |   | 10,012  |   |  |   | 1,443   |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss)                                           |  | $                               | 10,499  |   |                                | $ | (7,178  | )    |  | $ | 29,769  |   |  | $ | (3,545  | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



(10) Condensed Consolidating
Financial Information (Restated)



As discussed in Note 5,
Revolving Credit Facility and Long-Term Debt, the 9.5% Subordinated Notes, the 13.0% Subordinated Notes, the New Credit Facility and the Previous Credit Facility are unconditionally guaranteed by, and



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



secured by a pledge of stock and assets of, each and every current wholly-owned subsidiary. The Company has certain
subsidiaries that are not wholly-owned and do not guarantee the 13.0% Subordinated Notes, the 9.5% Subordinated Notes, the New Credit Facility or the Previous Credit Facility. Presented below are condensed consolidating balance sheets as of
September 30, 2003 and December 31, 2002, the condensed consolidating statements of operations for the three months and nine months ended September 30, 2003 and 2002, and the condensed consolidating statements of cash flows for the three months and
nine months ended September 30, 2003 and 2002 of Concentra Operating (Parent and Issuer), guarantor subsidiaries (Guarantor Subsidiaries) and the subsidiaries that are not guarantors (Non-Guarantor Subsidiaries).



Investments in subsidiaries are accounted for using the equity method of
accounting. The financial information for the Guarantor and Non-Guarantor Subsidiaries are each presented on a combined basis. The elimination entries primarily eliminate investments in subsidiaries and intercompany balances and transactions.
Intercompany management fees of $1.1 million and $3.4 million are included in general and administrative expenses of the Non-Guarantor Subsidiaries for the three months and nine months ended September 30, 2003, respectively, and $1.1 million and
$3.4 million are included in general and administrative expenses of the Non-Guarantor Subsidiaries for the three months and nine months ended September 30, 2002, respectively. These amounts are reflected as a reduction of general and administrative
expenses for the Guarantor Subsidiaries. Separate financial statements for the Guarantor and Non-Guarantor Subsidiaries are not presented because management believes such financial statements would not be meaningful to investors. All information in
the tables below is presented in thousands.



Condensed
Consolidating Balance Sheets:



|                                            |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|------------------------------------------- |  | --------------------- | ------- | ---------------------- | - | ------- | -------------------------- |  | ------------ | ------ |  | ----- | -------- | - |  | - | -------
|                                            |  | At September 30, 2003
|                                            |  | Parent                |         | Guarantor Subsidiaries |   |         | Non-Guarantor Subsidiaries |  | Eliminations |        |  | Total
|Current assets:                             |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|Cash and cash equivalents                   |  | $                     |        |                        | $ | 5,610   |                            |  | $            | 6,634  |  | $     |         |   |  | $ | 12,244 
|Accounts receivable, net                    |  |                       |        |                        |   | 172,057 |                            |  |              | 13,735 |  |       |         |   |  |   | 185,792
|Prepaid expenses and other current assets   |  |                       | 1,282   |                        |   | 28,599  |                            |  |              | 1,532  |  |       |         |   |  |   | 31,413 
|                                            |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|Total current assets                        |  |                       | 1,282   |                        |   | 206,266 |                            |  |              | 21,901 |  |       |         |   |  |   | 229,449
|                                            |  |                       |         |                        |  
|Investment in subsidiaries                  |  |                       | 764,330 |                        |   | 32,097  |                            |  |              |       |  |       | (796,427 | ) |  |   |       
|Property and equipment, net                 |  |                       |        |                        |   | 116,524 |                            |  |              | 7,737  |  |       |         |   |  |   | 124,261
|Goodwill and other intangible assets, net   |  |                       |        |                        |   | 461,701 |                            |  |              | 24,216 |  |       |         |   |  |   | 485,917
|Other assets                                |  |                       | 21,967  |                        |   | (5,596  | )                          |  |              | 95     |  |       |         |   |  |   | 16,466 
|                                            |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|Total assets                                |  | $                     | 787,579 |                        | $ | 810,992 |                            |  | $            | 53,949 |  | $     | (796,427 | ) |  | $ | 856,093
|                                            |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|Current liabilities:                        |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|Revolving credit facility                   |  | $                     |        |                        | $ |        |                            |  | $            |       |  | $     |         |   |  | $ |       
|Current portion of long-term debt           |  |                       | 3,350   |                        |   | 1,531   |                            |  |              |       |  |       |         |   |  |   | 4,881  
|Accounts payable and accrued expenses       |  |                       | 8,905   |                        |   | 93,632  |                            |  |              | 3,301  |  |       |         |   |  |   | 105,838
|                                            |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|Total current liabilities                   |  |                       | 12,255  |                        |   | 95,163  |                            |  |              | 3,301  |  |       |         |   |  |   | 110,719
|                                            |  |                       |         |                        |  
|Long-term debt, net                         |  |                       | 623,313 |                        |   |        |                            |  |              |       |  |       |         |   |  |   | 623,313
|Deferred income taxes and other liabilities |  |                       |        |                        |   | 43,793  |                            |  |              |       |  |       | 18,121   |   |  |   | 61,914 
|Intercompany                                |  |                       | 91,864  |                        |   | (92,294 | )                          |  |              | 430    |  |       |         |   |  |   |       
|                                            |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|Total liabilities                           |  |                       | 727,432 |                        |   | 46,662  |                            |  |              | 3,731  |  |       | 18,121   |   |  |   | 795,946
|                                            |  |                       |         |                        |  
|Stockholders equity                        |  |                       | 60,147  |                        |   | 764,330 |                            |  |              | 50,218 |  |       | (814,548 | ) |  |   | 60,147 
|                                            |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        
|Total liabilities and stockholders equity  |  | $                     | 787,579 |                        | $ | 810,992 |                            |  | $            | 53,949 |  | $     | (796,427 | ) |  | $ | 856,093
|                                            |  |                       |         |                        |   |         |                            |  |              |        |  |       |          |   |  |   |        



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



|                                            |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|------------------------------------------- |  | -------------------- | ------- | ---------------------- | - | ------- | -------------------------- |  | - | ------------ | - |  | ----- | -------- | - |  | - | -------
|                                            |  | At December 31, 2002
|                                            |  | Parent               |         | Guarantor Subsidiaries |   |         | Non-Guarantor Subsidiaries |  |   | Eliminations |   |  | Total
|Current assets:                             |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|Cash and cash equivalents                   |  | $                    |        |                        | $ | 13,060  |                            |  | $ | 5,942        |   |  | $     |         |   |  | $ | 19,002 
|Accounts receivable, net                    |  |                      |        |                        |   | 156,751 |                            |  |   | 10,810       |   |  |       |         |   |  |   | 167,561
|Prepaid expenses and other current assets   |  |                      | 867     |                        |   | 25,546  |                            |  |   | 1,357        |   |  |       |         |   |  |   | 27,770 
|                                            |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|Total current assets                        |  |                      | 867     |                        |   | 195,357 |                            |  |   | 18,109       |   |  |       |         |   |  |   | 214,333
|                                            |  |                      |         |                        |  
|Investment in subsidiaries                  |  |                      | 709,466 |                        |   | 31,713  |                            |  |   |             |   |  |       | (741,179 | ) |  |   |       
|Property and equipment, net                 |  |                      |        |                        |   | 126,250 |                            |  |   | 8,731        |   |  |       |         |   |  |   | 134,981
|Goodwill and other intangible assets, net   |  |                      |        |                        |   | 462,240 |                            |  |   | 23,991       |   |  |       |         |   |  |   | 486,231
|Other assets                                |  |                      | 12,321  |                        |   | 2,730   |                            |  |   | 95           |   |  |       |         |   |  |   | 15,146 
|                                            |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|Total assets                                |  | $                    | 722,654 |                        | $ | 818,290 |                            |  | $ | 50,926       |   |  | $     | (741,179 | ) |  | $ | 850,691
|                                            |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|Current liabilities:                        |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|Revolving credit facility                   |  | $                    |        |                        | $ |        |                            |  | $ |             |   |  | $     |         |   |  | $ |       
|Current portion of long-term debt           |  |                      | 3,492   |                        |   | 333     |                            |  |   |             |   |  |       |         |   |  |   | 3,825  
|Accounts payable and accrued expenses       |  |                      | 11,694  |                        |   | 93,586  |                            |  |   | 2,769        |   |  |       |         |   |  |   | 108,049
|                                            |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|Total current liabilities                   |  |                      | 15,186  |                        |   | 93,919  |                            |  |   | 2,769        |   |  |       |         |   |  |   | 111,874
|                                            |  |                      |         |                        |  
|Long-term debt, net                         |  |                      | 475,948 |                        |   | 53      |                            |  |   |             |   |  |       |         |   |  |   | 476,001
|Deferred income taxes and other liabilities |  |                      |        |                        |   | 41,237  |                            |  |   |             |   |  |       | 17,391   |   |  |   | 58,628 
|Fair value of hedging arrangements          |  |                      | 33,472  |                        |   |        |                            |  |   |             |   |  |       |         |   |  |   | 33,472 
|Intercompany                                |  |                      | 27,332  |                        |   | (26,385 | )                          |  |   | (947         | ) |  |       |         |   |  |   |       
|                                            |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|Total liabilities                           |  |                      | 551,938 |                        |   | 108,824 |                            |  |   | 1,822        |   |  |       | 17,391   |   |  |   | 679,975
|                                            |  |                      |         |                        |  
|Stockholders equity                        |  |                      | 170,716 |                        |   | 709,466 |                            |  |   | 49,104       |   |  |       | (758,570 | ) |  |   | 170,716
|                                            |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        
|Total liabilities and stockholders equity  |  | $                    | 722,654 |                        | $ | 818,290 |                            |  | $ | 50,926       |   |  | $     | (741,179 | ) |  | $ | 850,691
|                                            |  |                      |         |                        |   |         |                            |  |   |              |   |  |       |          |   |  |   |        



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



Condensed Consolidating Statements of Operations:



|                                                     |  |                                       |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------- | ------- | - | ---------------------- | - | -------------------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                     |  | Three Months Ended September 30, 2003 |        
|                                                     |  | Parent                                |         |   | Guarantor Subsidiaries |   | Non-Guarantor Subsidiaries |  |   | Eliminations |   |  | Total |        
|Total revenue                                        |  | $                                     |        |   |                        | $ | 248,542                    |  | $ | 22,396       |   |  | $     | (2,085  | ) |  | $ | 268,853 |  
|Total cost of services                               |  |                                       |        |   |                        |   | 189,199                    |  |   | 17,760       |   |  |       | (2,085  | ) |  |   | 204,874 |  
|                                                     |  |                                       |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Total gross profit                                   |  |                                       |        |   |                        |   | 59,343                     |  |   | 4,636        |   |  |       |        |   |  |   | 63,979  |  
|                                                     |  |                                       |         |   |                       
|General and administrative expenses                  |  |                                       | 104     |   |                        |   | 30,275                     |  |   | 1,504        |   |  |       |        |   |  |   | 31,883  |  
|Amortization of intangibles                          |  |                                       |        |   |                        |   | 968                        |  |   | 1            |   |  |       |        |   |  |   | 969     |  
|                                                     |  |                                       |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Operating income (loss)                              |  |                                       | (104    | ) |                        |   | 28,100                     |  |   | 3,131        |   |  |       |        |   |  |   | 31,127  |  
|                                                     |  |                                       |         |   |                       
|Interest expense, net                                |  |                                       | 13,752  |   |                        |   | 42                         |  |   | (4           | ) |  |       |        |   |  |   | 13,790  |  
|Gain on change in fair value of hedging arrangements |  |                                       | (5,456  | ) |                        |   |                           |  |   |             |   |  |       |        |   |  |   | (5,456  | )
|Loss on early retirement of debt                     |  |                                       | 7,837   |   |                        |   |                           |  |   |             |   |  |       |        |   |  |   | 7,837   |  
|Other, net                                           |  |                                       |        |   |                        |   | 804                        |  |   |             |   |  |       |        |   |  |   | 804     |  
|                                                     |  |                                       |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) before income taxes                    |  |                                       | (16,237 | ) |                        |   | 27,254                     |  |   | 3,135        |   |  |       |        |   |  |   | 14,152  |  
|Provision (benefit) for income taxes                 |  |                                       | (5,683  | ) |                        |   | 9,336                      |  |   |             |   |  |       |        |   |  |   | 3,653   |  
|                                                     |  |                                       |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) before equity earnings                 |  |                                       | (10,554 | ) |                        |   | 17,918                     |  |   | 3,135        |   |  |       |        |   |  |   | 10,499  |  
|Equity earnings in subsidiaries                      |  |                                       | (21,053 | ) |                        |   |                           |  |   |             |   |  |       | 21,053  |   |  |   |        |  
|                                                     |  |                                       |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Net income (loss)                                    |  | $                                     | 10,499  |   |                        | $ | 17,918                     |  | $ | 3,135        |   |  | $     | (21,053 | ) |  | $ | 10,499  |  
|                                                     |  |                                       |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  



|                                                     |  |                                       |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------- | ------- | - | ---------------------- | - | ------- | -------------------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                     |  | Three Months Ended September 30, 2002 |        
|                                                     |  | Parent                                |         |   | Guarantor Subsidiaries |   |         | Non-Guarantor Subsidiaries |  |   | Eliminations |   |  | Total |        
|Total revenue                                        |  | $                                     |        |   |                        | $ | 237,250 |                            |  | $ | 19,921       |   |  | $     | (2,373  | ) |  | $ | 254,798 |  
|Total cost of services                               |  |                                       |        |   |                        |   | 193,524 |                            |  |   | 15,145       |   |  |       | (2,373  | ) |  |   | 206,296 |  
|                                                     |  |                                       |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Total gross profit                                   |  |                                       |        |   |                        |   | 43,726  |                            |  |   | 4,776        |   |  |       |        |   |  |   | 48,502  |  
|                                                     |  |                                       |         |   |                       
|General and administrative expenses                  |  |                                       | 28      |   |                        |   | 26,363  |                            |  |   | 1,489        |   |  |       |        |   |  |   | 27,880  |  
|Amortization of intangibles                          |  |                                       |        |   |                        |   | 850     |                            |  |   | 3            |   |  |       |        |   |  |   | 853     |  
|                                                     |  |                                       |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Operating income                                     |  |                                       | (28     | ) |                        |   | 16,513  |                            |  |   | 3,284        |   |  |       |        |   |  |   | 19,769  |  
|                                                     |  |                                       |         |   |                       
|Interest expense, net                                |  |                                       | 15,408  |   |                        |   | 109     |                            |  |   | (10          | ) |  |       |        |   |  |   | 15,507  |  
|Loss on change in fair value of hedging arrangements |  |                                       | 7,712   |   |                        |   |        |                            |  |   |             |   |  |       |        |   |  |   | 7,712   |  
|Loss on early retirement of debt                     |  |                                       | 7,381   |   |                        |   |        |                            |  |   |             |   |  |       |        |   |  |   | 7,381   |  
|Other, net                                           |  |                                       |        |   |                        |   | (109    | )                          |  |   |             |   |  |       |        |   |  |   | (109    | )
|                                                     |  |                                       |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) before income taxes                    |  |                                       | (30,529 | ) |                        |   | 16,513  |                            |  |   | 3,294        |   |  |       |        |   |  |   | (10,722 | )
|Provision (benefit) for income taxes                 |  |                                       | (10,685 | ) |                        |   | 7,141   |                            |  |   |             |   |  |       |        |   |  |   | (3,544  | )
|                                                     |  |                                       |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) before equity earnings                 |  |                                       | (19,844 | ) |                        |   | 9,372   |                            |  |   | 3,294        |   |  |       |        |   |  |   | (7,178  | )
|Equity earnings in subsidiaries                      |  |                                       | (12,666 | ) |                        |   |        |                            |  |   |             |   |  |       | 12,666  |   |  |   |        |  
|                                                     |  |                                       |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Net income (loss)                                    |  | $                                     | (7,178  | ) |                        | $ | 9,372   |                            |  | $ | 3,294        |   |  | $     | (12,666 | ) |  | $ | (7,178  | )
|                                                     |  |                                       |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  



18



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



|                                                     |  |                                      |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------ | ------- | - | ---------------------- | - | -------------------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                     |  | Nine Months Ended September 30, 2003 |        
|                                                     |  | Parent                               |         |   | Guarantor Subsidiaries |   | Non-Guarantor Subsidiaries |  |   | Eliminations |   |  | Total |        
|Total revenue                                        |  | $                                    |        |   |                        | $ | 726,143                    |  | $ | 61,699       |   |  | $     | (6,561  | ) |  | $ | 781,281 |  
|Total cost of services                               |  |                                      |        |   |                        |   | 563,204                    |  |   | 48,850       |   |  |       | (6,561  | ) |  |   | 605,493 |  
|                                                     |  |                                      |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Total gross profit                                   |  |                                      |        |   |                        |   | 162,939                    |  |   | 12,849       |   |  |       |        |   |  |   | 175,788 |  
|                                                     |  |                                      |         |   |                       
|General and administrative expenses                  |  |                                      | 327     |   |                        |   | 85,081                     |  |   | 4,529        |   |  |       |        |   |  |   | 89,937  |  
|Amortization of intangibles                          |  |                                      |        |   |                        |   | 2,965                      |  |   | 6            |   |  |       |        |   |  |   | 2,971   |  
|                                                     |  |                                      |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Operating income (loss)                              |  |                                      | (327    | ) |                        |   | 74,893                     |  |   | 8,314        |   |  |       |        |   |  |   | 82,880  |  
|                                                     |  |                                      |         |   |                       
|Interest expense, net                                |  |                                      | 42,790  |   |                        |   | 171                        |  |   | (17          | ) |  |       |        |   |  |   | 42,944  |  
|Gain on change in fair value of hedging arrangements |  |                                      | (9,869  | ) |                        |   |                           |  |   |             |   |  |       |        |   |  |   | (9,869  | )
|Loss on early retirement of debt                     |  |                                      | 7,837   |   |                        |   |                           |  |   |             |   |  |       |        |   |  |   | 7,837   |  
|Other, net                                           |  |                                      |        |   |                        |   | 2,187                      |  |   |             |   |  |       |        |   |  |   | 2,187   |  
|                                                     |  |                                      |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) before income taxes                    |  |                                      | (41,085 | ) |                        |   | 72,535                     |  |   | 8,331        |   |  |       |        |   |  |   | 39,781  |  
|Provision (benefit) for income taxes                 |  |                                      | (14,380 | ) |                        |   | 24,392                     |  |   |             |   |  |       |        |   |  |   | 10,012  |  
|                                                     |  |                                      |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) before equity earnings                 |  |                                      | (26,705 | ) |                        |   | 48,143                     |  |   | 8,331        |   |  |       |        |   |  |   | 29,769  |  
|Equity earnings in subsidiaries                      |  |                                      | (56,474 | ) |                        |   |                           |  |   |             |   |  |       | 56,474  |   |  |   |        |  
|                                                     |  |                                      |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Net income (loss)                                    |  | $                                    | 29,769  |   |                        | $ | 48,143                     |  | $ | 8,331        |   |  | $     | (56,474 | ) |  | $ | 29,769  |  
|                                                     |  |                                      |         |   |                        |   |                            |  |   |              |   |  |       |         |   |  |   |         |  



|                                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------ | ------- | - | ---------------------- | - | ------- | -------------------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                     |  | Nine Months Ended September 30, 2002 |        
|                                                     |  | Parent                               |         |   | Guarantor Subsidiaries |   |         | Non-Guarantor Subsidiaries |  |   | Eliminations |   |  | Total |        
|Total revenue                                        |  | $                                    |        |   |                        | $ | 699,658 |                            |  | $ | 55,725       |   |  | $     | (6,425  | ) |  | $ | 748,958 |  
|Total cost of services                               |  |                                      |        |   |                        |   | 569,475 |                            |  |   | 44,377       |   |  |       | (6,425  | ) |  |   | 607,427 |  
|                                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Total gross profit                                   |  |                                      |        |   |                        |   | 130,183 |                            |  |   | 11,348       |   |  |       |        |   |  |   | 141,531 |  
|                                                     |  |                                      |         |   |                       
|General and administrative expenses                  |  |                                      | 28      |   |                        |   | 72,884  |                            |  |   | 4,593        |   |  |       |        |   |  |   | 77,505  |  
|Amortization of intangibles                          |  |                                      |        |   |                        |   | 2,707   |                            |  |   | 9            |   |  |       |        |   |  |   | 2,716   |  
|                                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Operating income                                     |  |                                      | (28     | ) |                        |   | 54,592  |                            |  |   | 6,746        |   |  |       |        |   |  |   | 61,310  |  
|                                                     |  |                                      |         |   |                       
|Interest expense, net                                |  |                                      | 48,396  |   |                        |   | 186     |                            |  |   | (27          | ) |  |       |        |   |  |   | 48,555  |  
|Loss on change in fair value of hedging arrangements |  |                                      | 8,896   |   |                        |   |        |                            |  |   |             |   |  |       |        |   |  |   | 8,896   |  
|Loss on early retirement of debt                     |  |                                      | 7,381   |   |                        |   |        |                            |  |   |             |   |  |       |        |   |  |   | 7,381   |  
|Other, net                                           |  |                                      |        |   |                        |   | (1,420  | )                          |  |   |             |   |  |       |        |   |  |   | (1,420  | )
|                                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) before income taxes                    |  |                                      | (64,701 | ) |                        |   | 55,826  |                            |  |   | 6,773        |   |  |       |        |   |  |   | (2,102  | )
|Provision (benefit) for income taxes                 |  |                                      | (22,645 | ) |                        |   | 24,088  |                            |  |   |             |   |  |       |        |   |  |   | 1,443   |  
|                                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) before equity earnings                 |  |                                      | (42,056 | ) |                        |   | 31,738  |                            |  |   | 6,773        |   |  |       |        |   |  |   | (3,545  | )
|Equity earnings in subsidiaries                      |  |                                      | (38,511 | ) |                        |   |        |                            |  |   |             |   |  |       | 38,511  |   |  |   |        |  
|                                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  
|Net income (loss)                                    |  | $                                    | (3,545  | ) |                        | $ | 31,738  |                            |  | $ | 6,773        |   |  | $     | (38,511 | ) |  | $ | (3,545  | )
|                                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |  |       |         |   |  |   |         |  



19



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##### Table of Contents

CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



Condensed Consolidating Statement of Cash Flows:



|                                                     |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|---------------------------------------------------- |  | ------------------------------------ | -------- | - | ---------------------- | - | ------- | -------------------------- |  | - | ------------ | - | ----- | - | - |  | - | -------- | -
|                                                     |  | Nine Months Ended September 30, 2003 |         
|                                                     |  | Parent                               |          |   | Guarantor Subsidiaries |   |         | Non-Guarantor Subsidiaries |  |   | Eliminations |   | Total |  
|Operating Activities:                                |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Net cash provided by (used in) operating activities  |  | $                                    | (36,007  | ) |                        | $ | 79,342  |                            |  | $ | 7,237        |   |       | $ |  |  | $ | 50,572   |  
|                                                     |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Investing Activities:                                |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Purchases of property, equipment and other assets    |  |                                      |         |   |                        |   | (20,990 | )                          |  |   | (114         | ) |       |   |  |  |   | (21,104  | )
|Acquisitions, net of cash acquired                   |  |                                      |         |   |                        |   | (5,094  | )                          |  |   |             |   |       |   |  |  |   | (5,094   | )
|                                                     |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Net cash used in investing activities                |  |                                      |         |   |                        |   | (26,084 | )                          |  |   | (114         | ) |       |   |  |  |   | (26,198  | )
|                                                     |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Financing Activities:                                |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Proceeds from the issuance of debt                   |  |                                      | 485,000  |   |                        |   | 1,500   |                            |  |   |             |   |       |   |  |  |   | 486,500  |  
|Repayments of debt                                   |  |                                      | (337,777 | ) |                        |   | (1,791  | )                          |  |   |             |   |       |   |  |  |   | (339,568 | )
|Payment to terminate hedging arrangements            |  |                                      | (23,603  | ) |                        |   |        |                            |  |   |             |   |       |   |  |  |   | (23,603  | )
|Payment of deferred financing costs                  |  |                                      | (11,135  | ) |                        |   |        |                            |  |   |             |   |       |   |  |  |   | (11,135  | )
|Distributions to minority interests                  |  |                                      |         |   |                        |   | (2,316  | )                          |  |   |             |   |       |   |  |  |   | (2,316   | )
|Contribution to parent                               |  |                                      | (141,152 | ) |                        |   |        |                            |  |   |             |   |       |   |  |  |   | (141,152 | )
|Contribution from issuance of common stock by parent |  |                                      | 242      |   |                        |   |        |                            |  |   |             |   |       |   |  |  |   | 242      |  
|Other                                                |  |                                      | (100     | ) |                        |   |        |                            |  |   |             |   |       |   |  |  |   | (100     | )
|Intercompany, net                                    |  |                                      | 64,532   |   |                        |   | (65,910 | )                          |  |   | 1,378        |   |       |   |  |  |   |         |  
|Receipt (payment) of equity distributions            |  |                                      |         |   |                        |   | 7,809   |                            |  |   | (7,809       | ) |       |   |  |  |   |         |  
|                                                     |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Net cash provided by (used in) financing activities  |  |                                      | 36,007   |   |                        |   | (60,708 | )                          |  |   | (6,431       | ) |       |   |  |  |   | (31,132  | )
|                                                     |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Net Increase (Decrease) in Cash and Cash Equivalents |  |                                      |         |   |                        |   | (7,450  | )                          |  |   | 692          |   |       |   |  |  |   | (6,758   | )
|Cash and Cash Equivalents, beginning of period       |  |                                      |         |   |                        |   | 13,060  |                            |  |   | 5,942        |   |       |   |  |  |   | 19,002   |  
|                                                     |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  
|Cash and Cash Equivalents, end of period             |  | $                                    |         |   |                        | $ | 5,610   |                            |  | $ | 6,634        |   |       | $ |  |  | $ | 12,244   |  
|                                                     |  |                                      |          |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |          |  



20



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##### Table of Contents

CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



|                                                          |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------------------ | ------- | - | ---------------------- | - | ------- | -------------------------- |  | - | ------------ | - | ----- | - | - |  | - | ------- | -
|                                                          |  | Nine Months Ended September 30, 2002 |        
|                                                          |  | Parent                               |         |   | Guarantor Subsidiaries |   |         | Non-Guarantor Subsidiaries |  |   | Eliminations |   | Total |  
|Operating Activities:                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Net cash provided by (used in) operating activities       |  | $                                    | (48,997 | ) |                        | $ | 68,655  |                            |  | $ | 6,710        |   |       | $ |  |  | $ | 26,368  |  
|                                                          |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Investing Activities:                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Purchases of property, equipment and other assets         |  |                                      |        |   |                        |   | (26,454 | )                          |  |   | (673         | ) |       |   |  |  |   | (27,127 | )
|Acquisitions, net of cash acquired                        |  |                                      |        |   |                        |   | (1,829  | )                          |  |   |             |   |       |   |  |  |   | (1,829  | )
|Proceeds from licensing of internally- developed software |  |                                      |        |   |                        |   | 515     |                            |  |   |             |   |       |   |  |  |   | 515     |  
|                                                          |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Net cash used in investing activities                     |  |                                      |        |   |                        |   | (27,768 | )                          |  |   | (673         | ) |       |   |  |  |   | (28,441 | )
|                                                          |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Financing Activities:                                     |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Proceeds from the issuance of debt                        |  |                                      |        |   |                        |   | 3,450   |                            |  |   |             |   |       |   |  |  |   | 3,450   |  
|Repayments of debt                                        |  |                                      | (50,312 | ) |                        |   | (377    | )                          |  |   |             |   |       |   |  |  |   | (50,689 | )
|Payment of deferred financing costs                       |  |                                      | (1,135  | ) |                        |   |        |                            |  |   |             |   |       |   |  |  |   | (1,135  | )
|Distributions to minority interest                        |  |                                      |        |   |                        |   | (1,194  | )                          |  |   |             |   |       |   |  |  |   | (1,194  | )
|Contribution from issuance of common stock by parent      |  |                                      | 355     |   |                        |   |        |                            |  |   |             |   |       |   |  |  |   | 355     |  
|Proceeds from issuance of common stock to parent          |  |                                      | 52,970  |   |                        |   |        |                            |  |   |             |   |       |   |  |  |   | 52,970  |  
|Other                                                     |  |                                      | (43     | ) |                        |   |        |                            |  |   |             |   |       |   |  |  |   | (43     | )
|Intercompany, net                                         |  |                                      | 47,162  |   |                        |   | (49,830 | )                          |  |   | 2,668        |   |       |   |  |  |   |        |  
|Receipt (payment) of equity distributions                 |  |                                      |        |   |                        |   | 4,521   |                            |  |   | (4,521       | ) |       |   |  |  |   |        |  
|                                                          |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Net cash provided by (used in) financing activities       |  |                                      | 48,997  |   |                        |   | (43,430 | )                          |  |   | (1,853       | ) |       |   |  |  |   | 3,714   |  
|                                                          |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents      |  |                                      |        |   |                        |   | (2,543  | )                          |  |   | 4,184        |   |       |   |  |  |   | 1,641   |  
|Cash and Cash Equivalents, beginning of period            |  |                                      |        |   |                        |   | 5,722   |                            |  |   | 3,228        |   |       |   |  |  |   | 8,950   |  
|                                                          |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  
|Cash and Cash Equivalents, end of period                  |  | $                                    |        |   |                        | $ | 3,179   |                            |  | $ | 7,412        |   |       | $ |  |  | $ | 10,591  |  
|                                                          |  |                                      |         |   |                        |   |         |                            |  |   |              |   |       |   |   |  |   |         |  



21



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CONCENTRA OPERATING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Unaudited)



(11) Restatement of Financial Statements



In connection with the preparation of its 2003 financial statements, the Company determined that, due to its 2002 adoption
of SFAS 142, the deferred income tax liabilities related to goodwill amortization expense will no longer reverse on a scheduled basis and can no longer be utilized to support the realization of deferred income tax assets. Accordingly, the Company
determined that an adjustment to record additional income tax expense was necessary in order to increase its deferred income tax asset valuation allowance. The implementation of these adjustments resulted in increases in the Companys deferred
income tax asset valuation allowance and its provision for income taxes by $3.6 million and $4.5 million, respectively, for the three months and six months ended September 30, 2003. This non-cash adjustment did not affect revenue, operating income,
taxes payable or net operating loss carry-forwards.



22



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Our disclosure and analysis in this report contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts
of future events. All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of
management for future operations, are forward-looking statements. The words anticipate, believe, continue, estimate, expect, intend, may, plan,
will, and similar expressions, as they relate to us, are intended to identify forward-looking statements.



We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we
believe may affect our financial condition, results of operations, business strategy and financial needs. They can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks,
uncertainties and assumptions described in our Form 10-K/A for the year ended December 31, 2002. In light of these risks, uncertainties and assumptions, the forward-looking statements in this report may not occur and actual results could differ
materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report.



Our forward-looking statements speak only as of the date made. We undertake
no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This discussion and analysis should be read in conjunction with our consolidated financial statements.



Overview



Concentra Operating Corporation (the Company) is a leading
provider of workers compensation and other occupational healthcare services in the United States. We offer our customers a broad range of services designed to improve patient recovery and to reduce the total costs of healthcare. The knowledge
we have developed in improving workers compensation results for our customers has enabled us to expand successfully into other industries, such as group health and auto insurance, where payors of healthcare and insurance benefits are also
seeking to reduce costs. We provide our services through three operating segments: Health Services, Network Services and Care Management Services.



Through our Health Services segment we treat workplace injuries and perform other occupational healthcare services to employers through our health
centers. Our services at these centers are performed by affiliated primary care physicians, as well as affiliated physical therapists, nurses and other healthcare providers. Health Services delivers primary and rehabilitative care, including the
diagnosis, treatment and management of work-related injuries and illnesses. Health Services also provides non-injury, employment-related health services, including physical examinations, pre-placement substance abuse testing, job-specific return to
work evaluations and other related programs. To meet the requirements of large employers whose workforce extends beyond the geographic coverage available to our centers, we have also developed a network of select occupational healthcare providers
that use our proprietary technology to benchmark treatment methodologies and outcomes achieved.



Our Network Services segment offers services designed to assist insurance companies and other payors in the review and reduction of the bills they receive
from medical providers. For these services, we are primarily compensated based on the degree to which we achieve savings for our clients, as well as on a fee per bill or claims basis. This segment includes our specialized preferred provider
organization, provider bill repricing and review, out-of-network bill review and first report of injury services.



Our Care Management Services segment offers services designed to monitor cases and facilitate the return to work of injured employees who have been out of
work for an extended period of time due to a work-related illness or injury. We provide these services through field case management, telephonic case management, independent medical examinations and utilization management. These services also
concentrate on monitoring the timing and appropriateness of medical care.



23



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##### Table of Contents

The following table provides certain information concerning our occupational healthcare centers:



|                                      |  |                                      |      |                         |      |    
|------------------------------------- |  | ------------------------------------ | ---- | ----------------------- | ---- | ---
|                                      |  | Nine Months Ended September 30, 2003 |      | Year Ended December 31,
|                                      |  |                                      | 2002 |                         | 2001
|Centers at the end of the period(1)   |  | 247                                  |      | 244                     |      | 244
|Centers acquired during the period(2) |  | 2                                    |      | 3                       |      | 15 
|Centers developed during the period   |  | 1                                    |      | 1                       |      | 12 

---

|(1) | Does not include the assets of the centers that were acquired and subsequently divested or consolidated into existing
centers within the same market during the period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents centers that were acquired during each period presented and not subsequently divested or consolidated into
existing centers within the same market during the period. We acquired four centers and twelve centers that were subsequently consolidated into existing centers during the years ended December 31, 2002 and 2001, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations for the Three and Nine Months
Ended September 30, 2003 and 2002



The following table
provides the results of operations for three and nine months ended September 30, 2003 and 2002 ($ in millions):



|                          |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | ----------------- |  | - | ------ | - |  | ------------------ | -- |  | ------------------ | ----- | - | - | - | ----- | - |  | - | ----- | - |  | ---- | --
|                          |  | Three Months Ended |       |   | Change             |   |       | Nine Months Ended |  |   | Change |  
|                          |  | September 30, 2003 |       |   | September 30, 2002 |   |       | $                 |  |   | %      |   |  | September 30, 2003 |    |  | September 30, 2002 |       |   | $ |   |       | % | 
|Revenue:                  |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Health Services           |  | $                  | 135.0 |   |                    | $ | 128.0 |                   |  | $ | 7.0    |   |  | 5.4                | %  |  | $                  | 379.9 |   |   | $ | 354.7 |   |  | $ | 25.2  |   |  | 7.1  | % 
|Network Services          |  |                    | 65.4  |   |                    |   | 55.2  |                   |  |   | 10.2   |   |  | 18.5               | %  |  |                    | 188.9 |   |   |   | 168.7 |   |  |   | 20.2  |   |  | 12.0 | % 
|Care Management Services  |  |                    | 68.5  |   |                    |   | 71.6  |                   |  |   | (3.1   | ) |  | (4.3               | )% |  |                    | 212.5 |   |   |   | 225.6 |   |  |   | (13.1 | ) |  | (5.8 | )%
|                          |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Total revenue             |  | $                  | 268.9 |   |                    | $ | 254.8 |                   |  | $ | 14.1   |   |  | 5.5                | %  |  | $                  | 781.3 |   |   | $ | 749.0 |   |  | $ | 32.3  |   |  | 4.3  | % 
|Cost of services:         |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Health Services           |  | $                  | 108.3 |   |                    | $ | 104.0 |                   |  | $ | 4.3    |   |  | 4.1                | %  |  | $                  | 310.7 |   |   | $ | 302.2 |   |  | $ | 8.5   |   |  | 2.8  | % 
|Network Services          |  |                    | 35.3  |   |                    |   | 34.8  |                   |  |   | 0.5    |   |  | 1.5                | %  |  |                    | 106.3 |   |   |   | 103.8 |   |  |   | 2.5   |   |  | 2.5  | % 
|Care Management Services  |  |                    | 61.3  |   |                    |   | 67.5  |                   |  |   | (6.2   | ) |  | (9.2               | )% |  |                    | 188.5 |   |   |   | 201.5 |   |  |   | (13.0 | ) |  | (6.5 | )%
|                          |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Total cost of services    |  | $                  | 204.9 |   |                    | $ | 206.3 |                   |  | $ | (1.4   | ) |  | (0.7               | )% |  | $                  | 605.5 |   |   | $ | 607.5 |   |  | $ | (2.0  | ) |  | (0.3 | )%
|Gross profit:             |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Health Services           |  | $                  | 26.7  |   |                    | $ | 24.0  |                   |  | $ | 2.7    |   |  | 11.1               | %  |  | $                  | 69.2  |   |   | $ | 52.5  |   |  | $ | 16.7  |   |  | 31.7 | % 
|Network Services          |  |                    | 30.1  |   |                    |   | 20.4  |                   |  |   | 9.7    |   |  | 47.5               | %  |  |                    | 82.6  |   |   |   | 64.9  |   |  |   | 17.7  |   |  | 27.2 | % 
|Care Management Services  |  |                    | 7.2   |   |                    |   | 4.1   |                   |  |   | 3.1    |   |  | 75.9               | %  |  |                    | 24.0  |   |   |   | 24.1  |   |  |   | (0.1  | ) |  | (0.2 | )%
|                          |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Total gross profit        |  | $                  | 64.0  |   |                    | $ | 48.5  |                   |  | $ | 15.5   |   |  | 31.9               | %  |  | $                  | 175.8 |   |   | $ | 141.5 |   |  | $ | 34.3  |   |  | 24.2 | % 
|                          |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Gross profit margin:      |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Health Services           |  |                    | 19.7  | % |                    |   | 18.7  | %                 |  |   |        |   |  | 1.0                | %  |  |                    | 18.2  | % |   |   | 14.8  | % |  |   |       |   |  | 3.4  | % 
|Network Services          |  |                    | 46.0  | % |                    |   | 37.0  | %                 |  |   |        |   |  | 9.0                | %  |  |                    | 43.7  | % |   |   | 38.5  | % |  |   |       |   |  | 5.2  | % 
|Care Management Services  |  |                    | 10.6  | % |                    |   | 5.8   | %                 |  |   |        |   |  | 4.8                | %  |  |                    | 11.3  | % |   |   | 10.7  | % |  |   |       |   |  | 0.6  | % 
|                          |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   
|Total gross profit margin |  |                    | 23.8  | % |                    |   | 19.0  | %                 |  |   |        |   |  | 4.8                | %  |  |                    | 22.5  | % |   |   | 18.9  | % |  |   |       |   |  | 3.6  | % 
|                          |  |                    |       |   |                    |   |       |                   |  |   |        |   |  |                    |    |  |                    |       |   |   |   |       |   |  |   |       |   |  |      |   



Revenue



The increase in revenue in 2003 was primarily due to
growth in our Health Services and Network Services businesses, partially offset by decreased volumes in our Care Management Services business. Also, the revenue increase for the first nine months of 2003 from the first nine months of 2002 was
partially due to a change in accounting estimate for accounts receivable reserves in the first quarter of 2002 whereby we increased contractual allowances and correspondingly reduced revenue by $5.4 million in that quarter. Following an extensive
review of our accounts



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receivable history and collection experience using new data provided by recently implemented information systems, we
determined that additional contractual allowances were required as of March 31, 2002. This increase in accounts receivable reserves related primarily to Health Services, which reduced its revenue by $7.9 million, and was partially offset by
receivables reserve decreases of $1.3 million in Network Services and $1.2 million in Care Management Services.



Health Services. Health Services revenue increased in 2003 from 2002 primarily due to growth in average revenue per visit. Increases in
ancillary services also contributed significantly to this segments revenue growth as compared to the prior year. The first quarter 2002 revenue reduction of $7.9 million for the accounts receivable reserve increase also contributed to the
revenue increase for the first nine months of 2003 from the first nine months of 2002. The number of total patient visits per day to our centers in the third quarter and first nine months of 2003 increased 1.6% and 0.4% compared to the third quarter
and first nine months of 2002, respectively, and increased 0.7% and decreased 0.3%, respectively, on a same-center basis. Our same-center comparisons represent all centers that Health Services has operated for the previous two full years
and includes the effects of any centers acquired and subsequently consolidated into existing centers. The increase in same-center visits for the third quarter of 2003 from the same quarter in 2002 relates to increases in non-injury and non-illness
related visits, partially offset by a slight decrease in work-related injuries and illnesses visits. This third quarter 2003 increase in same-center non-injury and non-illness related visits partially offset the same-center visit decrease we
experienced in the first half of 2003 from the first half of 2002. We believe the increase in same-store non-injury and non-illness related visits in the third quarter of 2003 from the same quarter of 2003 primarily relates to stabilization in
nationwide employment trends during the third quarter of 2003, partially offsetting decreases in nationwide employment in jobs that are more prone to workplace injuries and illnesses. We have experienced some improvement in these growth trends as
compared to the same-center decline of 3.0% we reported for the first nine months of last year and anticipate that these rates of growth will generally improve further once job growth rates resume to more traditional levels. For the three months
ended September 30, 2003 and 2002, Health Services derived 72.3% and 71.8% of its comparable same-center net revenue from the treatment of work-related injuries and illnesses, respectively, and 27.7% and 28.2% of its net revenue from non-injury and
non-illness related medical services, respectively. For the nine months ended September 30, 2003 and 2002, Health Services derived 72.3% and 71.2% of its comparable same-center net revenue from the treatment of work-related injuries and illnesses,
respectively, and 27.7% and 28.8% of its net revenue from non-injury and non-illness related medical services, respectively. Excluding on-site and ancillary services, injury-related visits constituted 49.3% and 50.0% of same-center visits in the
third quarter of 2003 and 2002, respectively, and 50.0% of same-center visits in the first nine months of 2003 and 2002. On a same-center basis, average revenue per visit increased 1.8% and 2.9% for the first three months and nine months of 2003 as
compared to the same period in the prior year, respectively, primarily due to increases in the average prices charged for our services. We currently anticipate further price increases in our Health Services segment due to increases in the fee
schedules that apply to our services in key states in which we do business. Same-center revenue was $118.5 million and $115.7 million for the third quarter of 2003 and 2002, respectively, while revenue from acquired and developed centers and
ancillary services was $16.4 million and $12.4 for the same respective periods. For the first nine months of 2003 and 2002, same-center revenue was $336.4 million and $328.0 million, respectively, while revenue from acquired and developed centers
and ancillary services was $43.5 million and $34.6 for the same respective periods.



Network Services. This segments revenue increased $10.2 million, or 18.5%, for the third quarter of 2003 and $20.2 million, or 12.0%, for the first nine months of 2003 from the same respective periods of
2002 due to growth in billings. The increase for the first nine months of 2003 was partially offset by the $1.3 million revenue increase due to the first quarter of 2002 accounts receivable reserve decrease. Our non-network medical providers
bill review services provided the majority of the revenue increase due to an increase in the amount of gross charges reviewed as compared to the prior year and the amount of savings achieved through our review of medical charges. Increases in our
workers compensation-based preferred provider organization and provider bill repricing and review services also contributed to the revenue increases. These increases related primarily to the addition of new customer accounts and business
volumes in these lines of business. While we currently believe this segment will provide comparatively higher rates of growth during coming periods than our other two segments, these rates of growth could be moderated depending on our ability to
maintain new customer and volume additions at current levels and on the nature of jurisdictional reimbursement trends for workers compensation injuries.



Care Management Services. Revenue for our Care Management Services segment decreased by $3.1 million, or 4.3%, for the third quarter of 2003 and
$13.1 million, or 5.8%, for the first nine months of 2003 from the same respective periods of 2002 due to lower billings. The $1.2 million revenue increase in the first quarter of 2002 for the accounts receivable reserve decrease also contributed to
the 2003 year-to-date revenue decline. The billing decrease was due to declines in our case management and independent medical exams services.



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Like our other business segments, we provide a majority of our Care Management Services to clients in the
workers compensation market. In a manner similar to our other business segments, we have experienced declines in referral trends, which we believe primarily relate to the overall drop in nationwide employment and related rates of workplace
injuries. Generally, Health Services is the first segment to be affected by economic downturns and upturns since it sees patients at the time of initial injury. Network Services is the second segment to be affected since it involves the review of
bills generated from injury-related visits. Care Management Services is the final segment to experience the effects of changing injury trends since it generally receives referrals for service a number of months after the initial injury occurs.
Accordingly, we believe a primary cause of the decline in revenue experienced in Care Management Services in 2003 is related to the effects of declines in workplace injuries that we experienced in our Health Services business during 2002. As we are
currently seeing gradual improvements in the relative visit amounts in our Health Services segment, we anticipate that we could experience a similar future recovery in the rates of referrals in Case Management Services based on the degree to which
employment trends stabilize and return to historical rates of growth.



In addition to the economic effects described above, we have also encountered revenue declines in our independent medical exams and case management services associated with client referral volume decreases due to integration of acquired
operations with our own, increased regional competition, and potentially due to a trend by certain insurance company clients to lengthen the amount of time prior to referring cases for case management services and independent medical exams.



Cost of Services



Total cost of services decreased $1.4 million, or 0.7%, in the third quarter
of 2003 from the same period in the prior year due to decreased expenses in Care Management Services, partially offset by increased costs in Health Services and Network Services. These decreases in expenses relate primarily to a year-over-year
reduction in staffing levels, which primarily affected the Care Management Services business segment. During the third quarter of 2002, we had total personnel headcounts of approximately 10,450. Due to cost reduction initiatives and other factors,
our total personnel headcounts were decreased to approximately 10,000 during the third quarter of this year. For the first nine months of 2003, the decrease in total cost of services as compared to the first nine months of 2002 was also due to
adjustments to the accounts receivable reserves in the first quarter of 2002. As part of the review of our accounts receivable history and collection experience, Health Services recorded an adjustment of $1.7 million to bad debt expense in the first
quarter of 2002 to increase its bad debt reserves. The remaining $0.3 million decrease in total cost of services in the first nine months of 2003 from the same period in 2002 was due to increased costs in Health Services and Network Services,
partially offset by decreased expenses in Care Management Services.



Gross
Profit



The increase in the third quarter 2003 gross
profit and gross profit margin from the third quarter of 2002 was due to increases for all segments. The increases in the gross profit and gross profit margin for the first nine months of 2003 from the first nine months of 2002 were due to increases
for Health Services and Network Services. Our overall gross and operating margins also improved during 2003 due to the reduction in total personnel described above. These reductions were primarily made in our Care Management Services segment and in
certain information technology and administrative functions.



Health Services. Health Services gross profit and gross profit margin increase for the third quarter of 2003 from the same quarter of 2002 was primarily due to pricing increases and increases in the volume of higher-margin
ancillary services, including on-site and managed pharmacy programs. The primary factor in Health Services gross profit increase in the first nine months of 2003 as compared to the first nine months of 2002 was a $9.6 million increase in
accounts receivable reserves related to the change in accounting estimate in the first quarter of 2002, consisting of a $7.9 million reduction in revenue and a $1.7 million increase in cost of services. Health Services remaining gross profit
increase of $7.1 million was primarily due to improved revenue, increases in ancillary services and our corresponding utilization of the fixed nature of our existing center facilities.



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Network Services. Network Services gross profit and gross profit margin increases in 2003
from 2002 were primarily due to revenue growth in 2003 and the relatively fixed nature of this segments expenses. This segments gross profit increase for the first nine months of 2003 compared to the first nine months of 2002 was
partially offset by the $1.3 million accounts receivable adjustment in the first quarter of 2002.



Care Management Services. This segments gross profit and gross profit margin increases for the third quarter of 2003 from the same prior year
period were primarily due to reductions of costs in excess of the declines in revenue. The slight decreases in year-to-date gross profit and gross profit margin were due to the $1.2 million accounts receivable reserve adjustment in the first quarter
of 2002, partially offset by year-to-date reductions in costs in excess of the declines in revenue.



General and Administrative Expenses



General and administrative expenses increased 14.4% in the third quarter of 2003 to $31.9 million from $27.9 million in the third quarter of 2002, or
11.9% and 10.9% as a percentage of revenue for the third quarters of 2003 and 2002, respectively. For the first nine months of 2003, general and administrative expenses increased 16.0% to $89.9 million from $77.5 million in the first nine months of
2002, or 11.5% and 10.3% as a percentage of revenue for the first nine months of 2003 and 2002, respectively. The increase in general and administrative expenses during 2003 was primarily due to increased compensation and benefits costs, as well as
higher costs associated with depreciation and property and casualty insurance. Additionally, the increase for the first nine months of 2003 from the same period in 2002 was affected by a $3.9 million reduction in employee benefits in the first
quarter of 2002 associated with a reduction in the amount of employee contributions we matched in our defined contribution plan as compared to prior years.



Interest Expense, Net



Interest expense decreased $1.7 million in the third quarter of 2003 to $13.8 million from $15.5 million in the third quarter of 2002. For the first nine
months of 2003 and 2002, interest expense was $42.9 million and $48.6 million, respectively. These decreases were primarily due to the termination of our interest rate collars in August 2003, the redemption of $47.5 million of our 13.0% senior
subordinated notes in July 2002 and the prepayment of $25.0 million of our previous credit facility in November 2002. As of September 30, 2003, approximately 53.2% of our debt contained floating rates. Rising interest rates would negatively impact
our results. See Liquidity and Capital Resources and Item 3, Quantitative and Qualitative Disclosures About Market Risk.



Interest Rate Hedging Arrangements



In 2003 and 2002, we used interest rate collars to reduce our exposure to variable interest rates and because our previous credit agreement required them.
These collars generally provided for certain ceilings and floors on interest payments as the three-month LIBOR rate increased and decreased, respectively. The changes in fair value of this combination of ceilings and floors were recognized each
period in earnings. We recorded gains of $5.5 million and $9.9 million in the third quarter and first nine months of 2003, respectively, as compared to losses of $7.7 million and $8.9 million for the same respective periods of the prior year. The
computation of these gains and losses was based upon the change in the fair value of our interest rate collar agreements. The earnings impact from these gains and losses resulted in non-cash charges or credits and did not impact cash flows from
operations or operating income. There had been periods with significant non-cash increases or decreases to our earnings relating to the change in the fair value of the interest rate collars. In August 2003, we completed a series of refinancing
transactions, which included terminating our hedging arrangements. The costs related to recognizing changes in their fair value were changed to expense in the third quarter of 2003. For a further discussion of the refinancing transactions, see
Liquidity and Capital Resources.



Provision for
Income Taxes



We recorded tax provisions of $3.7 million
and $10.0 million in the third quarter and first nine months of 2003, respectively, which reflected effective tax rates of 25.8% and 25.2%, respectively. For the third quarter and first nine months of 2002, we recorded a tax benefit of $3.5 million
and a tax provision of $1.4 million, which reflected effective tax rates of 33.1% and (68.6)%, respectively. The effective rate differed from the statutory rate primarily due to the impact of state income taxes and the deferred income tax valuation
allowance. Due to our current relationship of taxable



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income as compared to net income, our effective tax rate can vary significantly from one period to the next depending on
relative changes in net income. As such, we currently expect further variation in our effective tax rate in the last quarter of 2003. Due to our recent operating history and other factors, we have established a valuation allowance for certain of our
deferred income tax assets. To the extent that we achieve consistent levels of profitability in future periods, we may receive benefits in our income tax provision associated with the reduction of the deferred income tax valuation allowance.



Acquisitions and Divestitures



Periodically, we evaluate opportunities to acquire or divest of businesses
when we believe those actions will enhance our future growth and financial performance. Currently, to the extent we consider acquisitions, they are typically businesses that operate in the same markets or along the same service lines as those in
which we currently operate. Our evaluations are subject to our availability of capital, our debt covenant requirements and a number of other financial and operating considerations. The process involved in evaluating, negotiating, gaining required
approvals and other necessary activities associated with individual acquisition or divestiture opportunities can be extensive and involve a significant passage of time. It is also not uncommon for discussions to be called off and anticipated
acquisitions or divestitures to be terminated shortly in advance of the date upon which they were to have been consummated. As such, we generally endeavor to announce material acquisitions and divestitures based on their relative size and
anticipated effect on our company once we believe they have reached a state in the acquisition or divestiture process where we believe that their consummation is reasonably certain and with consideration of other legal and general business
practices.



We completed three acquisitions in the first nine
months of 2003. We currently believe we will consummate some acquisitions of centers in transactions that are small in size in our Health Services segment during the remainder of 2003.



Recent Accounting Pronouncements



In July 2001, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. (SFAS)
143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement
costs. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. We adopted SFAS 143 on
January 1, 2003. The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.



In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities(SFAS 146). SFAS 146 addresses
the accounting for costs to terminate a contract that is not a capital lease, costs to consolidate facilities and relocate employees, and involuntary termination benefits under one-time benefit arrangements that are not an ongoing benefit program or
an individual deferred compensation contract. A liability for contract termination costs should be recognized and measured at fair value when either the contract is terminated or when the entity ceases to use the right conveyed by the contract. A
liability for one-time termination benefits should be recognized and measured at fair value at the communication date if the employee would not be retained beyond a minimum retention period (i.e., either a legal notification period or 60 days, if no
legal requirement exists). For employees who will be retained beyond the minimum retention period, a liability should be accrued ratably over the future service period. We adopted SFAS 146 on January 1, 2003. The adoption did not have a material
impact on our consolidated financial position, results of operations or cash flows.



In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS 148). SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation
(SFAS 123) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of
SFAS 148 are effective for fiscal years ending after December 15, 2002. We have elected to continue to follow the intrinsic value method of accounting, as prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, to account for employee stock options. See Note 6, Stock Based Compensation Plans in our consolidated financial statements for the disclosures required by SFAS 148.



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In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable
interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January
31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company does not have any variable interest entities.



In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS
149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 was generally effective for contracts entered into or modified after June 30, 2003 and did have an impact on our financial statements.



In May 2003, the FASB issued SFAS 150, Accounting for Certain Instruments with Characteristics of Both Liability and Equity (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope,
which may have previously been reported as equity, as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS 150 did not have any financial impact on our financial statements.



Liquidity and Capital Resources



On August 13, 2003, we completed a series of refinancing transactions (the Refinancing Transactions) that included issuing $150.0 million aggregate principal amount of 9.5% senior subordinated notes (the 9.5% Subordinated
Notes) and entering into a new $435.0 million senior secured term credit facility (the New Credit Facility). The New Credit Facility consists of a $335.0 million term loan facility (the New Term Loan) and a $100.0
million revolving loan facility (the New Revolving Credit Facility). We used the proceeds from the 9.5% Senior Subordinated Notes offering and the New Credit Facility together with cash on hand to: (1) repay the $335.2 million of
outstanding indebtedness under our previous credit facility (the Previous Credit Facility), (2) terminate previously existing interest rate hedging arrangements valued at $23.6 million, (3) transfer $141.2 million of cash proceeds to our
parent, Concentra Inc., to enable it to redeem a portion of its 14.0% senior discount debentures, (4) pay $4.6 million of accrued interest on the previous credit facility and hedging arrangements and (5) pay approximately $11.3 million of related
fees and expenses. In connection with the termination of the Previous Credit Facility, we recorded approximately $7.8 million of debt extinguishment costs in the third quarter of 2003 for the write-off of related deferred financing fees and other
expenses. On October 14, 2003, we completed an exchange offer in which we exchanged the 9.5% Subordinated Notes for notes that were registered under the Securities Act of 1933.



In November 2003, we announced that we were considering the commencement of a series of refinancing transactions that would
include issuing an additional $30.0 million of our 9.5% Subordinated Notes. Subject to acceptable market and interest rate conditions, we anticipate completing this offering during the fourth quarter of 2003. We intend to distribute the net proceeds
from the additional 9.5% Subordinated Notes along with approximately $25.0 million of cash to our parent, Concentra Holding, to enable it to redeem all of its outstanding 14.0% senior discount debentures and pay related fees and expenses. In
conjunction with this offering, we anticipate extending the maturity of Concentra Holdings $55.0 million bridge loan agreement from June 2004 to early 2005.



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Cash Flows from Operating Activities. Cash flows from operating activities provided $50.6 million
and $26.4 million for the nine months ended September 30, 2003 and 2002, respectively. The increase in cash flows from operating activities in the first nine months of 2003 as compared to the first nine months of 2002 was primarily a result of
increased operating income and an increase in prepaid expenses and other assets, partially offset by an increase in accounts receivable and a decrease in accounts payable and accrued liabilities. During the first nine months of 2003, $14.4 million
of cash was used by changes in working capital, related to increased accounts receivable of $17.9 million and increased prepaid expenses and other assets of $0.9 million, partially offset by increased accounts payable and accrued expenses of $4.4
million. Prepaid expenses and other assets increased primarily due to the timing of payments, and accounts receivable increased primarily due to continued and seasonal revenue growth. Accounts payable and accrued expenses increased due to the timing
of certain payments. During the first nine months of 2002, $15.2 million of cash was used by changes in working capital, primarily related to a decrease in accounts payable and accrued expenses of $11.4 million and an increase in prepaid expenses
and other assets of $6.7 million, partially offset by a decrease in accounts receivable of $2.9 million. Prepaid expenses and other assets increased primarily due to the timing of payments. Accounts payable and accrued expenses decreased primarily
due to the timing of certain payments. The decrease in net accounts receivable in 2002 primarily relates to a $7.1 million net adjustment to increase contractual and bad debt allowances in the first quarter of 2002, partially offset by increases in
accounts receivable due to revenue growth. The 2002 adjustment was a result of the change in accounting estimate for accounts receivable discussed earlier.



Our days sales outstanding on accounts receivable, or DSO, was 64 days at September 30, 2003 and September 30, 2002. We
calculated DSO based on accounts receivable, net of allowances, divided by the average revenue per day for the prior three months.



In the first nine months of 2003, we paid approximately $1.2 million related to unusual charges that occurred in the first quarter of 1998, fourth quarter
of 1998, third quarter of 1999, fourth quarter of 2001 and fourth quarter of 2002. At September 30, 2002, approximately $1.1 million of the accrual for these unusual charges remained for facility lease obligations, personnel reduction costs and
other payments. We anticipate that the majority of this liability will be paid over the next 24 months.



Cash Flows from Investing Activities.In the first nine months of 2003, we used net cash of $5.1 million in connection with acquisitions and $21.1
million to purchase property, equipment and other assets, the majority of which was spent on new computer hardware and software technology, including $1.5 million of software acquired under a capital lease. In the first nine months of 2002, we used
net cash of $1.8 million in connection with acquisitions and $27.1 million of cash to purchase property, equipment and other assets, the majority of which was spent on new computer hardware and software technology, and leasehold improvements. Cash
flows from investing activities in the first nine months of 2002 also included $0.5 million of cash received from the sale of internally-developed software. As required by relevant accounting literature, the proceeds from this sale were offset
against the amount capitalized on the consolidated balance sheet and were not recognized as revenue.



Cash Flows from Financing Activities. Cash flows used in financing activities in the first nine months of 2003 of $31.1 million were primarily due
to payments on debt of $339.6 million, transfer of $141.2 million to Concentra Inc., $23.6 million in payments to terminate hedging arrangements and $11.1 million of payments of deferred financing costs, partially offset by $486.5 million in
proceeds from the issuance of debt. These activities primarily related to the Refinancing Transactions in August 2003. Included in the $486.5 million in proceeds from the issuance of debt was $1.5 million in proceeds from a capital lease. In
February 2003, we entered into a five-year capital lease for software. We paid $1.5 million at the lease execution, with the remaining payment due in one year. Additionally, we paid $2.3 million in distributions to minority interests in the first
nine months of 2003. Cash flows provided by financing activities in the first nine months of 2002 of $3.7 million were primarily due to $53.0 million of proceeds from the issuance of 54 shares of common stock to Concentra Inc. and $3.5 million in
proceeds from the issuance of short-term debt, partially offset by $50.7 million of payments of debt, $1.1 million of payments of deferred financing fees and $1.2 million in distributions to minority interests.



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As necessary, we make short-term borrowings under our New Credit Facility and have made short-term
borrowings under our Previous Credit Facility for working capital and other purposes. Given the timing of our expenditures for payroll, interest payments, acquisitions and other significant outlays, our level of borrowing under our revolving credit
facility can vary substantially throughout the course of an operating period. During the past year, the level of our borrowings under our revolving credit facilities have varied in the following manner (in thousands):



|                   |  |                 |       |         |   |         |  |        |        |  |   |       
|------------------ |  | --------------- | ----- | ------- | - | ------- |  | ------ | ------ |  | - | ------
|Quarters Ending    |  | Borrowing Level
|                   |  | Minimum         |       | Maximum |   | Average |  | Ending
|March 31, 2002     |  | $               | 6,000 |         | $ | 35,000  |  | $      | 22,389 |  | $ | 21,500
|June 30, 2002      |  |                 |      |         |   | 29,000  |  |        | 19,082 |  |   |      
|September 30, 2002 |  |                 |      |         |   | 28,500  |  |        | 12,821 |  |   | 6,000 
|December 31, 2002  |  |                 |      |         |   | 12,500  |  |        | 1,957  |  |   |      
|March 31, 2003     |  |                 |      |         |   | 9,500   |  |        | 1,961  |  |   |      
|June 30, 2003      |  |                 |      |         |   |        |  |        |       |  |   |      
|September 30, 2003 |  |                 |      |         |   |        |  |        |       |  |   |      



Our New Credit
Facility requires us to satisfy certain financial covenant ratio requirements including leverage ratios, interest coverage ratios and fixed charge coverage ratios. Our Previous Credit Facility also contained similar financial covenant ratio
requirements. In the first nine months of 2003, we were in compliance with our covenants, including our financial covenant ratio tests. The leverage ratio and interest coverage ratio requirements for the quarter ended September 30, 2003, were 5.00
to 1.00 and 2.25 to 1.00, respectively. While less restrictive than the requirements under the Previous Credit Facility, the ratio tests under the New Credit Facility become more restrictive in future quarters through the fourth quarter of 2008.
Although we currently anticipate achieving these required covenant levels, our ability to be in compliance with these more restrictive ratios will be dependent on our ability to increase cash flows over current levels. At September 30, 2003, we had
no borrowings outstanding under our $100 million revolving credit facility and $334.2 million in term loans outstanding under our credit agreement. Our total indebtedness outstanding was $628.2 million at September 30, 2003.



Our New Credit Facility also contains prepayment requirements that occur
based on certain net asset sales outside the ordinary course of business by the Company, from the proceeds of specified debt and equity issuances by the Company and if the Company has excess cash flow, as defined in the agreement. Our Previous
Credit Facility also contained prepayment requirements that occurred if our financial performance exceeded certain prescribed levels. We were not required to make any prepayments under the respective provisions in the first nine months of 2003 or
2002. However, management anticipates that we may meet these requirements in future periods.



We currently believe that our cash balances, the expected cash flow generated from operations and our borrowing capacity under our revolving credit facility will be sufficient to fund our working capital, occupational
healthcare center acquisitions and capital expenditure requirements for the immediately foreseeable future. Our long-term liquidity needs will consist of working capital and capital expenditure requirements, the funding of any future acquisitions,
and repayment of borrowings under our revolving credit facility and the repayment of outstanding indebtedness. We intend to fund these long-term liquidity needs from the cash generated from operations, available borrowings under our revolving credit
facility and future debt or equity financing. However, our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors. Many of these factors are beyond our control or our ability to
currently anticipate. Therefore, it is possible that our business will not generate sufficient cash flow from operations. Additionally, we cannot be certain that any future debt or equity financing will be available on terms favorable to us, or that
our long-term cash generated from operations will be sufficient to meet our long-term obligations.



Other Considerations



Goodwill and Other Intangible Assets.SFAS 142, Goodwill and Other Intangible Assets (SFAS 142), requires us to perform an annual goodwill impairment test, on a reporting unit basis. A reporting unit is the
operating segment unless, at businesses one level below that operating segment (the component level), discrete financial information is prepared and regularly reviewed by management, and the businesses are not otherwise aggregated due to having
certain common characteristics, in which case such component is the reporting unit. A fair value approach using projected cash flows and comparative market multiples is used to test goodwill for impairment. An impairment charge is recognized for the
amount, if any, by which the carrying amount of goodwill exceeds its fair value.



We completed our 2003 annual impairment test of goodwill and determined that no impairment existed at July 1, 2003. However, the fair value of Care Management Services goodwill exceeded its carrying amount by a
relatively modest amount, due primarily to this reporting units recent performance trends. Although Care Management Services earnings have improved during the last twelve months, a non-cash goodwill impairment charge to income may be
incurred for this reporting unit in a future period, depending on the prospective growth of earnings.



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Industry Developments. Recent litigation between healthcare providers and insurers has challenged
the insurers claims adjudication practices and reimbursement decisions. Although we are not a party to any of these lawsuits, nor do they involve any of the services we provide, these types of challenges could affect insurers use of cost
containment services.



Healthcare providers often designate an
independent third party to handle communications with healthcare payors regarding provider contracts, commonly referred to as a messenger model. Inappropriate uses of the messenger model have recently been the subject of
increased antitrust enforcement activity by the Federal Trade Commission and the Department of Justice. We are not involved in any enforcement or other actions regarding our use of the messenger model, and we believe that our use of the messenger
model complies with applicable law.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We have fixed rate and variable rate debt instruments. Our variable rate debt instruments are subject to market risk from changes in the level or
volatility of interest rates. We have performed sensitivity analyses to assess the impact of changes in the interest rates on the value of our market-risk sensitive financial instruments. A hypothetical 10% movement in interest rates would not have
a material impact on our future earnings, fair value or cash flow relative to our debt instruments. Market rate volatility is dependent on many factors that are impossible to forecast and actual interest rate increases could be more or less severe
than this 10% increase.



ITEM 4. CONTROLS AND PROCEDURES



Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q/A, the Companys principal executive officer and principal financial officer have concluded that the Companys disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) are effective in timely providing them with material information required to be disclosed by the Company in its
filings under the Exchange Act. There have been no significant changes in the Companys internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, its internal controls during our most
recent fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.



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PART II. OTHER INFORMATION



Item 6. Exhibits and reports on Form 8-K



(a) Exhibits:



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                
|4.1*        |  | Supplemental Indenture dated as of July 28, 2003 among Concentra Holding, The Bank of New York as Trustee and the Holders of Concentra Holdings 14% Senior Discount
Debentures.                                                                                                                                                                                                                                           
|            | 
|10.1*       |  | Indemnification Agreement dated as of June 26, 2003 between Concentra Holding and Daniel J. Thomas (identical agreements were executed as of June 26, 2003 between Concentra Holding and each
of the following: John K. Carlyle, Frederick C. Dunlap, Carlos A. Ferrer, James M. Greenwood, James T. Kelly, Thomas E. Kiraly, D. Scott Mackesy, Steven E. Nelson, Richard A. Parr, Paul B. Queally and Richard J. Sabolik).
|            | 
|10.2*       |  | Amended and Restated Occupational Medicine Center Management and Consulting Agreement dated as of July 30, 2003 between Concentra Health Services, Inc. and Occupational Health Centers of the
Southwest, P.A.                                                                                                                                                                                                             
|            | 
|31.1**      |  | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-15(e) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                                                                                                                                          
|            | 
|31.2**      |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-15(e) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                                                                                                                                          
|            | 
|32.1**      |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                         
|            | 
|32.2**      |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                         

---

|* | Incorporated by reference to Exhibit 4.1, Exhibit 10.1 and Exhibit 10.2, respectively, of the registrants quarterly report on Form 10-Q for the quarterly period ended June 30,
2003.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Filed herewith
|-- | --------------



(b) Reports on Form 8-K during the quarter ended September 30, 2003:



Form 8-K filed July 17, 2003 reporting under Item 7 and Item 9 the Companys press release announcing the
Companys consideration of the commencement of a Rule 144A offering of $150 million principal amount of senior subordinated notes due 2010 and the refinancing of its senior credit facility.



Form 8-K filed July 23, 2003 reporting under Item 7 and Item 9 the
Companys press release announcing the Companys earnings for the quarter ended June 30, 2003, as required by Item 12.



Form 8-K filed August 6, 2003 reporting under Item 7 and Item 9 the Companys press release announcing the Companys pricing of a Rule 144A
offering of $150 million principal amount of 9.5% senior subordinated notes due 2010.



Form 8-K filed August 13, 2003 reporting under Item 7 and Item 9 the Companys press release announcing the Companys completion of a Rule 144A offering of $150 million aggregate principal amount of 9.5%
senior subordinated notes due 2010 and the closing of a new $435 million senior credit facility.



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SIGNATURE



Pursuant to the requirements 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.



|               |  |  |  |                                 |  |                                                                                                            |  | 
|-------------- |  |  |  | ------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | 
|               |  |  |  | CONCENTRA OPERATING CORPORATION
|               |  |  | 
|March 25, 2004 |  |  |  | By:                             |  | /s/ Thomas E. Kiraly                                                                                      
|               |  |  |  |                                 |  | Thomas E. Kiraly                                                                                          
|               |  |  |  |                                 |  | Executive Vice President,Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                
|4.1*        |  | Supplemental Indenture dated as of July 28, 2003 among Concentra Holding, The Bank of New York as Trustee and the Holders of Concentra Holdings 14% Senior Discount
Debentures.                                                                                                                                                                                                                                           
|            | 
|10.1*       |  | Indemnification Agreement dated as of June 26, 2003 between Concentra Holding and Daniel J. Thomas (identical agreements were executed as of June 26, 2003 between Concentra Holding and each
of the following: John K. Carlyle, Frederick C. Dunlap, Carlos A. Ferrer, James M. Greenwood, James T. Kelly, Thomas E. Kiraly, D. Scott Mackesy, Steven E. Nelson, Richard A. Parr, Paul B. Queally and Richard J. Sabolik).
|            | 
|10.2*       |  | Amended and Restated Occupational Medicine Center Management and Consulting Agreement dated as of July 30, 2003 between Concentra Health Services, Inc. and Occupational Health Centers of the
Southwest, P.A.                                                                                                                                                                                                             
|            | 
|31.1**      |  | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-15(e) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                                                                                                                                          
|            | 
|31.2**      |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-15(e) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                                                                                                                                          
|            | 
|32.1**      |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                         
|            | 
|32.2**      |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                         

---

|* | Incorporated by reference to Exhibit 4.1, Exhibit 10.1 and Exhibit 10.2, respectively, of the registrants quarterly report on Form 10-Q for the quarterly period ended June 30,
2003.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Filed herewith
|-- | --------------



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