Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions; interest rate trends; cost of capital and capital requirements; competition from other managed care companies; customer contract cancellations; the ability to expand certain areas of the Company's business; shifts in customer demands; changes in operating expenses, including employee wages, benefits and medical inflation; governmental and public policy changes and the continued availability of financing in the amounts and on the terms necessary to support the Company's future business. In addition, if the Company does not continue to successfully implement new contracts and programs and control health care benefit expenses, or if the Company does not successfully integrate its recent acquisitions; then the Company may not achieve its anticipated 2004 financial results.

The adjustment resulted primarily from factors that the Company has historically used in its internal claims reconciliation process. The internal reconciliation process involves reconciling fees and savings associated with each medical claim, the eligibility of each Plan member, the allowability of each claim in relation to the Plan definition and the coordination of benefits with other insurers. This completes the 2003 reconciliation process. In addition, the MHBP may include an audit performed by a governmental agency within a three to five year period after a fiscal year end. This retrospective review of claims data may result in changes to previous estimates made for eligibility, coordination of benefits and other Plan provisions. See the "Critical Accounting Policies" section for a further description of revenue adjustments.

The provisions of the contract with the Plan's sponsor, the National Postal Mail Handlers Union, require that the Company fund any deficits in the Plan after the Plan's reserves have been fully utilized. As of June 30, 2004, the Plan has approximately $385 million in reserves to cover Plan expenses that may exceed the premiums charged and collected from the Plan participants by the Plan sponsor. The Plan had approximately $359 million and $346 million in such reserves as of June 30, 2003 and December 31, 2003, respectively. There are no known Plan deficits as of June 30, 2004.

On October 31, 2003, the Company also completed the acquisition of PPO Oklahoma for a purchase price of approximately $10 million, subject to certain purchase price considerations. PPO Oklahoma operates almost exclusively in the state of Oklahoma. The acquisition was financed with borrowings under the Company's credit facility.

On April 7, 2004, the Company completed the acquisition of COMP Medical, a workers' compensation company headquartered in Woodland Hills, California that specializes in appointment setting for chronic pain management, diagnostic imaging and electrodiagnostic procedures, as well as Medicare set-aside allocations. The purchase price was approximately $6 million, subject to additional purchase price considerations depending on future performance, and was paid with cash from operating activities. COMP Medical has been renamed First Health Priority Services, Inc. ("FHPS").

The following table sets forth information with respect to the sources of the Company's revenues for the three and six months ended June 30, 2004 and 2003, respectively:

   Sources of Revenue
                                              ($ in millions)
                                        Three Months Ended June 30,
                                       ------------------------------
                                        2004      %      2003      %
                                       ------   ----    ------   ----
      Commercial Revenue:
        Group Health:
          PPO plus Administration
            Services                  $  80.2    37%   $  91.1    41%
          PPO                            33.1    15       38.9    18
          Premiums                        9.4     4        4.2     2
                                       ------   ----    ------   ----
           Total Group Health           122.7    56      134.2    61
                                       ------   ----    ------   ----
        Workers' Compensation:
          PPO plus Administration
            Services                     31.6    14       25.1    12
          PPO                            23.9    11       15.1     7
                                       ------   ----    ------   ----
           Total Workers' Compensation   55.5    25       40.2    19
                                       ------   ----    ------   ----
      Total Commercial Revenue          178.2    81      174.4    80
                                       ------   ----    ------   ----
      Public Sector Revenue              42.6    19       44.2    20
                                       ------   ----    ------   ----
      Total Revenue                   $ 220.8   100%   $ 218.6   100%
                                       ======   ====    ======   ====

                                              ($ in millions)
                                          Six Months Ended June 30,
                                       ------------------------------
                                        2004      %      2003      %
                                       ------   ----    ------   ----
      Commercial Revenue:
        Group Health:
          PPO plus Administration
            Services                   $164.2    38%   $ 180.0    42%
          PPO                            67.8    15       79.8    18
          Premiums                       18.5     4        8.4     2
                                       ------   ----    ------   ----
           Total Group Health           250.5    57      268.2    62
                                       ------   ----    ------   ----
        Workers' Compensation:
          PPO plus Administration
            Services                     63.8    14       50.1    12
          PPO                            42.7    10       30.3     7
                                       ------   ----    ------   ----
           Total Workers' Compensation  106.5    24       80.4    19
                                       ------   ----    ------   ----
      Total Commercial Revenue          357.0    81      348.6    81
                                       ------   ----    ------   ----
      Public Sector Revenue              81.9    19       83.8    19
                                       ------   ----    ------   ----
      Total Revenue                   $ 438.9   100%   $ 432.4   100%
                                       ======   ====    ======   ====

   Supplemental Revenue Information

   The following table sets forth supplemental information by revenue sector:

                                              ($ in millions)
                                        Three Months Ended June 30,
                                       ------------------------------
                                        2004      %      2003      %
                                       ------   ----    ------   ----
      Commercial Revenue:
        Group Health:
          FEHBP                       $  57.2    26%   $  62.4    28%
          Corporate                      40.4    18       50.9    23
          Insurers/TPA                   25.1    12       20.9    10
                                       ------   ----    ------   ----
        Total Group Health              122.7    56      134.2    61
                                       ------   ----    ------   ----
        Workers' Compensation            55.5    25       40.2    19
                                       ------   ----    ------   ----
        Total Commercial                178.2    81      174.4    80
                                       ------   ----    ------   ----
        Public Sector                    42.6    19       44.2    20
                                       ------   ----    ------   ----
        Total Revenue                 $ 220.8   100%   $ 218.6   100%
                                       ======   ====    ======   ====

                                              ($ in millions)
                                          Six Months Ended June 30,
                                       ------------------------------
                                        2004      %      2003      %
                                       ------   ----    ------   ----
      Commercial Revenue:
        Group Health:
          FEHBP                       $ 115.9    26%   $ 121.8    28%
          Corporate                      84.4    19      103.1    24
          Insurers/TPA                   50.2    12       43.3    10
                                       ------   ----    ------   ----
        Total Group Health              250.5    57      268.2    62
                                       ------   ----    ------   ----
        Workers' Compensation           106.5    24       80.4    19
                                       ------   ----    ------   ----
        Total Commercial                357.0    81      348.6    81
                                       ------   ----    ------   ----
        Public Sector                    81.9    19       83.8    19
                                       ------   ----    ------   ----
        Total Revenue                 $ 438.9   100%   $ 432.4   100%
                                       ======   ====    ======   ====

This supplemental revenue data provides information about the mix of clients within the Company's revenue sectors. In addition to the supplemental information above, the Company has generated approximately 40% of total Company revenues on a percentage-of-savings basis for the three and six months ended June 30, 2004 compared to 38% and 39% for the comparable periods of 2003.

Total revenue for the three and six months ended June 30, increased $2.1 million (1.0%) and $6.5 million (1.5%) from the comparable periods of 2003. The components of the Company's quarterly revenue are as follows:

Group Health revenue of $122.7 million and $250.5 million for the three and six months ended June 30, 2004 decreased $11.5 million (8.6%) and $17.7 million (6.6%) from the comparable periods of 2003. Group Health revenue represents revenue from the corporate, FEHBP, small group carrier and third party administrator payors. Group Health PPO plus Administration Services revenue for the three and six months ended June 30, 2004 decreased $11.0 million (12.1%) and $15.9 million (8.8%) from the comparable periods of 2003 due in part to increased price competition, less new business and higher client attrition than expected. Group Health PPO revenue for the three and six months ended June 30, 2004 decreased $5.9 million (15.1%) and $12.0 million (15.0%) from the comparable periods of 2003 due primarily to clients taking advantage of a wider array of the Company's services (which is reported under PPO plus Administration Services). Premium revenue for the three and six months ended June 30, 2004 increased $5.3 million (129.0%) and $10.2 million (121.5%) from the comparable periods of 2003 as a result of new client activity, particularly due to the New England Financial ("NEF") block of small group, multi-sited business the Company signed in the fourth quarter of 2003. The Company ceded 80% of the premiums and related policy benefits to a highly-rated insurance carrier.

Group Health revenue is further broken down into the FEHBP, Corporate and Insurers/TPA sectors. FEHBP sector revenue for the three and six months ended June 30, 2004 decreased $5.2 million (8.4%) and $5.9 million (4.8%) from the comparable periods of 2003. This decrease is due primarily to the MHBP which experienced an approximate 10% decrease in enrollment, lower participant utilization and a change in the mix of plan options. The revenue decrease was partially offset by $3 million the Company recorded in the second quarter of 2004 as part of its retrospective review of claims data related to 2003 MHBP business. Corporate sector revenue for the three and six months ended June 30, 2004 decreased $10.5 million (20.6%) and $18.7 million (18.2%) from the comparable periods of 2003. This decrease is due to client attrition, less new business than anticipated and increased price competition in the sector. Insurers/TPA sector revenue for the three and six months ended June 30, 2004 increased $4.2 million (19.8%) and $6.9 million (16.0%) from the comparable periods of 2003 due primarily to new business with insurers, principally the NEF business discussed earlier.

Workers' Compensation revenue of $55.5 million and $106.5 million for the three and six months ended June 30, 2004 increased $15.2 million (37.7%) and $26.1 million (32.4%) from the comparable periods of 2003. This increase is due primarily to $13.0 million and $28.7 million in revenues earned as a result of the Employer Services acquisition for the three and six months ended June 30, 2004. Workers' Compensation revenue increased $4.5 million (8.8%) from the first quarter of 2004 due primarily to $2.3 million in revenues earned from the FHPS acquisition. Absent these acquisitions Workers' Compensation revenue decreased slightly from 2003.

Public Sector revenue of $42.6 million and $81.9 million for the three and six months ended June 30, 2004 decreased $1.6 million (3.5%) and $1.9 million (2.2%) from the comparable periods of 2003. Public Sector revenue represents fees associated with pharmacy benefit management, fiscal agent services and health care management from clients within the public sector. This decrease in revenue is due primarily to less revenue from non-recurring HIPAA support and pharmacy program implementations. Public Sector revenue in the second quarter of 2003 was favorably impacted by $11.5 million of such non-recurring implementations compared to $0.8 million of such revenue in the second quarter of 2004. On a continuing revenue basis, the 2004 quarterly revenue would have increased $9.1 million or 28% from the comparable quarter of 2003. Public Sector revenue increased $3.4 million (8.5%) from the first quarter of 2004 due to new pharmacy contracts.

Cost of services increased $4.7 million (4.7%) and $15.0 million (7.6%) for the three and six months ended June 30, 2004 from the comparable periods in 2003 due primarily to costs associated with the Employer Services, PPO Oklahoma and FHPS acquisitions and, to a lesser extent costs associated with the Company's termination plan. Cost of services decreased $1.5 million (1.4%) from the first quarter of 2004 as the Company cost reduction programs have begun to take effect. Cost of services consists primarily of salaries and related costs for personnel involved in claims administration, PPO administration, development and expansion, utilization management programs, fee schedule and other cost management and administrative services offered by the Company. To a lesser extent, cost of services includes telephone expenses, facility expenses and information processing costs. As a percentage of revenue, cost of services increased to 47.5% and 48.1% for the three and six months ended June 30, 2004, respectively, from 45.8% and 45.4% in the comparable periods of 2003, but decreased from 48.8% in the first quarter of 2004. The increase as a percentage of revenue from 2003 is due primarily to the costs associated with the various acquisitions as well as a trend toward providing more administrative services which are more cost- intensive.

Selling and marketing costs for the three and six months ended June 30, 2004 decreased $0.6 million (2.6%) and $0.7 million (1.6%) from the comparable periods in 2003 primarily due to a decrease in costs associated with the Company's ad campaign. Selling and marketing costs were essentially flat compared to the first quarter of 2004.

General and administrative costs for the three and six months ended June 30, 2004 increased $3.8 million (24.5%) and $8.2 million (26.6%) from the comparable periods in 2003 due primarily to increases in professional liability insurance and other professional fees associated with cost savings initiatives designed to improve efficiencies and profitability. General and administrative costs decreased slightly from the first quarter of 2004.

Health care benefits represent medical losses incurred by insureds of the Company's insurance entities. Health care benefits increased $2.9 million (65.7%) and $4.0 million (42.2%) for the three and six months ended June 30, 2004 from the comparable periods of 2003. This increase was due primarily to new business, particularly the NEF business discussed above. Health care benefits increased $1.0 million (15.2%) from the first quarter of 2004 also due to the NEF business. The loss ratio (health care benefits as a percent of premium revenue) was 77% and 73% for the three and six months ended June 30, 2004 compared to 106% and 114% for the comparable periods of 2003. The decrease in the loss ratio from 2003 is due primarily to improved experience in the Company's stop loss business and the NEF small group business. Management reviews the book of business in detail on a monthly basis to minimize the loss ratio. Stop-loss insurance is related to the PPO and claims administration businesses and is used as a way to attract additional PPO business, which is the Company's most profitable product.

Depreciation and amortization expenses increased $4.0 million (25.6%) and $7.2 million (23.6%) for the three and six months ended June 30, 2004 from the comparable periods in 2003 due primarily to increased software investments made over the course of the past few years, and, to a lesser extent, amortization of intangible assets related to the various acquisitions the Company has made. Depreciation expense will continue to grow primarily as a result of continuing investments the Company is making in its infrastructure.

Income from operations of $49.0 million and $95.5 million for the three and six months ended June 30, 2004 decreased $12.7 million (20.6%) and $27.3 million (22.2%) from the comparable periods of 2003. Income from operations increased $2.5 million (5.4%) from the first quarter of 2004. Operating margin (income from operations as a percentage of revenue) was 22.2% in the second quarter of 2004, 28.2% in the second quarter of 2003 and 21.3% in the first quarter of 2004. The decrease in income from operations and operating margins from 2003 is due to a change in the mix of revenue to lower-margin administrative services business as well as expenses the Company incurred associated with cost savings initiatives. These initiatives had a positive effect beginning in the second quarter of 2004.

Interest income for the three and six months ended June 30, 2004 is comparable to prior periods. The Company has used $60 million of its available cash in 2004 to repay debt.

Interest expense for the three and six months ended June 30, 2004 increased $0.3 million (21.6%) and $0.8 million (30.6%) from the comparable periods in 2003. Interest expense has increased as the outstanding debt increased from $150 million at June 30, 2003 to $210 million at June 30, 2004. The effective marginal interest rate on June 30, 2004 was approximately 2.2% per annum.

Diluted net income per common share for the three and six months ended June 30, 2004 decreased 15.8% to $.32 per share and 16.0% to $.63 per share from the comparable periods of 2003. The decrease in net income per common share was due primarily to the change in revenue mix and the expenses associated with cost savings initiatives discussed above. For the three and six months ended June 30, 2004, diluted common shares outstanding decreased
4.9% and 5.9% from the comparable periods of 2003.

        Commercial       Three months ended June 30,  Six months ended June 30,
     ($ in millions)           2004       2003             2004        2003
  ----------------------      ------     ------           ------      ------
 Revenues                    $ 178.2    $ 174.4          $ 357.0     $ 348.6
 Operating expenses            130.5      115.7            262.5       231.3
                              ------     ------           ------      ------
 Income from operations         47.7       58.7             94.5       117.3
                              ------     ------           ------      ------
    Operating margin            26.8%      33.6%            26.5%       33.6%

 Interest income                (1.2)      (1.4)            (2.9)       (2.7)
 Interest expense                1.7        1.4              3.5         2.7
                              ------     ------           ------      ------
 Income before income taxes     47.2       58.7             93.9       117.3
 Income taxes                  (17.9)     (23.3)           (35.6)      (46.6)
                              ------     ------           ------      ------
 Net income                  $  29.3    $  35.4          $  58.3     $  70.7
                              ======     ======           ======      ======

The decline in income from operations and net income for the Commercial segment is due to a number of factors including: increased price competition (particularly in the Corporate sector); new business in the lower margin third party administrator/insurance sector; lower PPO savings in the FEHBP sector; and the costs incurred associated with savings initiatives. The Company's termination plan, discussed above, is designed to improve the profitability of the Commercial segment beginning in the second half of 2004.

       Public Sector     Three months ended June 30,  Six months ended June 30,
      ($ in millions)          2004       2003             2004        2003
  ----------------------      ------     ------           ------      ------
  Revenues                   $  42.6      $44.2          $  81.9     $  83.8
  Operating expenses            41.3       41.2             80.9        78.3
. . .