This report may include certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and "should", and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance.
The Company disclaims any obligations to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. 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 including decreasing number of national claims due to decreasing number of injured workers; cost of capital and capital requirements; possible litigation and legal liability in the course of operations; competition from other managed care companies; the ability to expand certain areas of the Company's business; shifts in customer demands; the ability of the Company to produce market-competitive software; changes in operating expenses including employee wages, benefits and medical inflation; governmental and public policy changes; dependence on key personnel; and the continued availability of financing in the amounts and at the terms necessary to support the Company's future business.
Overview
CorVel Corporation is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers' compensation and auto policies. The Company's services are provided to insurance companies, third-party administrators ("TPA's"), and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims. Network Solutions Services
The Company's network solutions services are designed to reduce the price paid by its customers for medical services rendered in workers' compensation cases, auto policies and, to a lesser extent, group health policies. The network solutions offered by the Company include automated medical fee auditing, preferred provider services, retrospective utilization review, independent medical examinations, MRI examinations, and inpatient bill review. Patient Management Services
In addition to its network solutions services, the Company offers a range of patient management services, which involve working on a one-on-one basis with injured employees and their various healthcare professionals, employers and insurance company adjusters. The services are designed to monitor the medical necessity and appropriateness of healthcare services provided to workers' compensation and other healthcare claimants and to expedite return to work. The Company offers these services on a stand-alone basis, or as an integrated component of its medical cost containment services. The Company expanded its patient management services to include the processing of claims for self-insured payors to property and casualty insurance with the January 2007 acquisition of the assets of Hazelrigg Risk Management Services, the June 2007 acquisition of the outstanding capital stock of The Schaffer Companies, Ltd. and the February 2009 acquisition of the outstanding capital stock of Eagle Claim Services, Inc

Organizational Structure
The Company's management is structured geographically with regional vice-presidents who report to the President of the Company. Each of these regional vice-presidents is responsible for all services provided by the Company in his or her particular region and for the operating results of the Company in multiple states. These regional vice presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district.
Business Enterprise Segments
We operate in one reportable operating segment, managed care. The Company's services are delivered to its customers through its local offices in each region and financial information for the Company's operations follows this service delivery model. All regions provide the Company's patient management and network solutions services. Statement of Financial Accounting Standards, or SFAS, No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for the way that public business enterprises report information about operating segments in annual and interim consolidated financial statements. The Company's internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company's operating revenue generated within the United States.
Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: 1) the nature of products and services, 2) the nature of the production processes; 3) the type or class of customer for their products and services; and 4) the methods used to distribute their products or provide their services. We believe each of the Company's regions meet these criteria as they provide similar services to similar customers using similar methods of productions and similar methods to distribute their services. Summary of Quarterly Results
The Company generated revenues of $81.3 million for the quarter ended June 30, 2009, an increase of $3.1 million or 3.8%, compared to revenues of $78.2 million for the quarter ended June 30, 2008. The increase in total revenues was primarily due to an increase in network solutions. Bill volume increased on large dollar out-of-network bills, which generate higher savings for the Company's customers and higher revenues for the Company. Patient management revenue also increased, by a nominal amount.
The continued decrease in the number of jobs in the manufacturing sector and its corresponding effect on the number of workplace injuries that have become longer-term disability cases, the considerable price competition given the flat-to-declining overall workers compensation market, the increase in competition from local and regional companies, changes and the potential changes in state workers' compensation and auto managed care laws, which can reduce demand for the Company's services, have created an environment where revenue and margin growth is more difficult to attain and where revenue growth is uncertain. Additionally, the Company's technology and preferred provider network competes against other companies, some of which have greater resources available. Also, some customers may handle their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel. These factors are expected to continue to limit our revenue growth in the near future.
The Company's cost of revenues increased by $1.9 million, from $58.3 million in the June 2008 quarter to $60.2 million in the June 2009 quarter, an increase of 3.3%. This increase was primarily due to labor-intensive products increased revenue and the cost associated with those revenues. Cost of services related to directed care services increased by $1.0 million, while pharmacy services increased by $0.4 million, due to an increase in revenue from these services and $0.5 million from several other items.

The Company's general and administrative expenses decreased by $0.3 million, from $10.8 million in the June 2008 quarter to $10.5 million in the June 2009 quarter, a decrease of 3.3%. This decrease is primarily due to a decrease in the Company's systems and data interface costs that were offset by an increase in the Company's marketing, product management and administrative costs. Systems cost decreased from $6.7 million to $5.9 million as the Company reduced system costs and IT infrastructure costs through a reduction in headcount and consulting costs. Marketing, product management and administrative costs increased by $0.7 million due to staffing requirements.
The Company's income tax expense increased by $0.7 million, from $3.6 million, or 20.5%, in the June 2008 quarter to $4.3 million in the June 2009 quarter. The increase in income before income taxes was primarily due to the aforementioned increase in operating income which resulted in an increase in income before income taxes. The effective income tax rate was 39% in the June 2008 quarter and 40.1% in the June 2009 quarter. This increase was due to an increase in state tax rates.
Weighted diluted shares decreased from 14.0 million shares in the June 2008 quarter to 13.1 million shares in the June 2009 quarter, a decrease of 989,000 shares, or 7.0%. This decrease was primarily due to the repurchase of 925,000 shares of common stock during the September 2008, December 2008, March 2009 and June 2009 quarters. The decrease was partially offset by the exercise of stock options during each of the corresponding quarters.
Diluted earnings per share increased from $0.40 in the June 2008 quarter to $0.49 in the June 2009 quarter, an increase of $0.09 per share, or 22.5%. The increase in diluted earnings per share was primarily due to the increase in operating income combined with a decrease in shares outstanding. Results of Operations
The Company derives its revenues from providing patient management and network solutions services to payors of workers' compensation benefits, auto insurance claims and health insurance benefits. Patient management services include utilization review, medical case management, and vocational rehabilitation. Network solutions revenues include fee schedule auditing, hospital bill auditing, independent medical examinations, diagnostic imaging review services and preferred provider referral services. The percentages of total revenues attributable to patient management and network solutions services for the quarters ended June 30, 2008 and June 30, 2009 are as follows:

                                           June 30, 2008     June 30, 2009
            Patient management services            42.7 %            42.1 %
            Network solutions services             57.3 %            57.9 %

The following table sets forth, for the periods indicated, the dollars and the percentage of revenues represented by certain items reflected in the Company's consolidated income statements for the quarters ended June 30, 2008 and June 30, 2009. The Company's past operating results are not necessarily indicative of future operating results.

                                                Three Months Ended         Three Months Ended                              Percentage
                                                   June 30, 2008              June 30, 2009              Change              Change

Revenue                                         $      78,201,000          $      81,312,000          $ 3,111,000               4.0 %
Cost of revenues                                       58,268,000                 60,170,000            1,902,000               3.3 %

Gross profit                                           19,933,000                 21,142,000            1,209,000               6.1 %

Gross profit as percentage of revenue                        25.5 %                     26.0 %

General and administrative                             10,807,000                 10,450,000             (357,000 )            (3.3 %)
General and administrative as percentage
of revenue                                                   13.8 %                     12.9 %

Income before income tax provision                      9,126,000                 10,692,000            1,566,000              17.2 %

Income before income tax provision as
percentage of revenue                                        11.7 %                     13.1 %

Income tax provision                                    3,559,000                  4,288,000              729,000              20.5 %

Net income                                      $       5,567,000          $       6,404,000          $   837,000              15.0 %


Weighted Shares
Basic                                                  13,816,000                 12,925,000             (891,000 )            (6.4 %)
Diluted                                                14,045,000                 13,056,000             (989,000 )            (7.0 %)

Earnings Per Share
Basic                                           $            0.40          $            0.50          $      0.10              25.0 %
Diluted                                         $            0.40          $            0.49          $      0.09              22.5 %

Revenues
Change in revenue from the quarter ended June 2008 to the quarter ended June 2009
Revenues increased from $78.2 million for the three months ended June 30, 2008 to $81.3 million for the three months ended June 30, 2009, an increase of $3.1 million or 4.0%. The Company's patient management revenues increased $0.9 million or 2.7% from $33.3 million in the June 2008 quarter to $34.2 million in the June 2009 quarter. This increase was primarily due to growth in the Company's claims administration business, offset by slowing in the Company's case management services. The Company's network solutions revenues increased from $44.8 million in the June 2008 quarter to $47.1 million in the June 2009 quarter, an increase of $2.3 million or 5.1%. This increase was primarily due an increase in the Company's bill volume on large dollar out of network bills, which generate higher savings and therefore higher revenues for the Company.
The decrease in the nation's manufacturing employment levels, which has helped lead to a decline in national workers' compensation claims, considerable price competition in a flat-to-declining overall market, an increase in competition from both larger and smaller competitors, changes and the potential changes in state workers' compensation and auto managed care laws which can reduce demand for the Company's services, have

created an environment where revenue and margin growth is more difficult to attain and where revenue growth is uncertain. Additionally, the Company's technology and preferred provider network competes against other companies, some of which have greater resources available. Also, some customers may handle their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel.
The Company believes that referral volume in patient management services and bill review volume in network solutions services will either decrease or reflect nominal growth until there is growth in the number of work related injuries and workers' compensation related claims. Cost of Revenues
The Company's cost of revenues consist of direct expenses, costs directly attributable to the generation of revenue, and field indirect costs which are incurred in the field offices of the Company. Direct costs are primarily case manager salaries, bill review analysts, related payroll taxes and fringe benefits, and costs for independent medical examination (IME) and MRI providers. Most of the Company's revenues are generated in offices which provide both patient management services and network solutions services. The largest of the field indirect costs are manager salaries and bonus, account executive base pay and commissions, administrative and clerical support, field systems personnel, PPO network developers, related payroll taxes and fringe benefits, office rent, and telephone expense. Approximately 37% of the costs incurred in the field are costs which support both the patient management services and network solutions operations of the Company's field operations, such as district managers, account executives, rent, and telephone.
Change in cost of revenue from the quarter ended June 2008 to the quarter ended June 2009
The Company's costs of revenues increased from $58.3 million in the quarter ended June 30, 2008 to $60.2 million in the quarter ended June 30, 2009, an increase of $1.9 million or 3.3%. This increase was primarily due to labor intensive products increased revenue and the cost associated with those revenues. Cost of services related to directed care services increased by $1.0 million, while pharmacy services increased by $0.4 million, due to an increase in revenue from these services and $0.5 million from several other items.
General and Administrative Expenses
Change in cost of general and administrative expense from the quarter ended June 2008 to the quarter ended June 2009 For the quarter ended June 30, 2009, general and administrative expenses consisted of approximately 56% of corporate systems costs which include the corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company's national systems, the Company's national wide area network and other systems related costs. The remaining 44% of the general and administrative expenses consisted of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development and other general corporate matters. The largest portion of the non-systems portion of general and administrative expenses during the June 2009 quarter pertained to accounting, financial reporting and corporate governance.
General and administrative expense decreased from $10.8 million in the quarter ended June 30, 2008 to $10.5 million in the quarter ended June 30, 2009, a decrease of $0.3 million, or 3.3%. This decrease is primarily due to a decrease in the Company's systems and data interface costs. Systems cost decreased from $6.7 million to $5.9 million primarily through a reduction in headcount and the reduction in the use of consultants.

Income Tax Provision
The Company's income tax expense increased by $0.7 million, or 20.5%, from $3.6 million for the three months ended June 30, 2008 to $4.3 million for the three months ended June 30, 2009 due to the increase in income before income taxes from $9.1 million to $10.7 million. The income tax expense as a percentage of income before income taxes was 39.0% for the three months ended June 30, 2008 and 40.1% for the three months ended June 30, 2009. This increase was due to an increase in state tax rates. The income tax provision rates were based upon management's review of the Company's estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses.
Liquidity and Capital Resources
The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, stock option exercises. Net working capital increased $7.9 million, or 28%, from $28.1 million as of March 31, 2009 to $36.0 million as of June 30, 2009, primarily due to an increase in cash from $15 million as of March 31, 2009 to $20 million as of June 30, 2009.
The Company believes that cash from operations, available funds under its line of credit, and funds from exercise of stock options granted to employees are adequate to fund existing obligations, repurchase shares of the Company's common stock under its current share repurchase program, introduce new services, and continue to develop healthcare related businesses for at least the next twelve months. The Company regularly evaluates cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. The Company may elect to raise additional funds for these purposes, through debt or equity, the sale of investment securities or otherwise, as appropriate. Additional equity or debt financing may not be available on terms favorable to us or at all.
As of June 30, 2009, excluding $1.7 million of customer deposits held in bank checking accounts, the Company had $18 million in cash and cash equivalents, invested primarily in short-term, interest-bearing, highly liquid investment-grade securities with maturities of 90 days or less in a federally regulated bank.
In May 2009, the Company entered its credit agreement with a financial institution to provide a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this agreement bear interest, at the Company's option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate determined by the financial institution to be 1.50% above the daily one-month LIBOR rate. The loan covenants require the Company to maintain the current assets to liabilities ratio of at least 1.25:1, debt to tangible net worth not greater than 1:1 and have positive net income. The Company is not authorized to use this line for stock repurchases. There are no outstanding revolving loans as of the date hereof, but letters of credit in the aggregate amount of $6.3 million have been issued under a letter of credit sub-limit that does not reduce the amount of borrowings available under the revolving credit facility. The credit agreement expires in May 2010.
The Company has historically required substantial capital to fund the growth of its operations, particularly working capital to fund growth in accounts receivable and capital expenditures. The Company believes, however, that the cash balance at June 30, 2009, along with anticipated internally generated funds and the credit facility, will be sufficient to meet the Company's expected cash requirements for at least the next twelve months.

Operating Cash Flows
Three months ended June 30, 2008 compared to three months ended June 30, 2009 Net cash provided by operating activities was $8.4 million in the three months ended June 30, 2008 compared to $7.8 million, a decrease of $0.6 million or 7.1%, in the three months ended June 30, 2009. The decrease in the cash flow from operating activities was primarily due to an increase in accounts and taxes payable and an increase in accounts receivable for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Investing Activities
Three months ended June 30, 2008 compared to three months ended June 30, 2009 Net cash flow used in investing activities decreased from $2.6 million in the three months ended June 30, 2008 to $1.9 million in the three months ended June 30, 2009 a decrease of $0.7 million or 26.9%. The decrease in net cash used in investing activities is primarily due to a reduction in the amount spent on IT hardware during three months ended June 30, 2009. Financing Activities
Three months ended June 30, 2008 compared to three months ended June 30, 2009 Net cash flow used in financing activities decreased from $1.9 million for the three months ended June 30, 2008 to $0.4 million for the three months ended June 30, 2009, a decrease of $1.5 million or 78.9%. The decrease in cash flow used in financing activities was primarily due to a decrease in purchases under the Company's share repurchase program. The Company has historically used cash provided by operating activities and from the exercise of stock options to repurchase stock. The Company expects it may use some of the $20.2 million of cash on its balance sheet at June 30, 2009 to repurchase additional shares of stock.
The following table summarizes the Company's contractual obligations outstanding as of June 30, 2009.

                                                                                  Payments Due by Period
                                                               Within One           Between Two and          Between Four and           More than
                                           Total                  Year                Three Years               Five Years             Five Years

Operating leases                       $ 51,838,852          $ 14,459,005          $    20,395,260          $     11,231,074          $ 5,753,513

Total                                  $ 51,838,852          $ 14,459,005          $    20,395,260          $     11,231,074          $ 5,753,513

Inflation. The Company experiences pricing pressures in the form of competitive prices. The Company is also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits, and facility leases. However, the Company generally does not believe these impacts are material to its revenues or net income. Litigation
In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case seeks unspecified damages based on the Company's alleged failure to direct patients to medical providers who are members of the CorVel CorCare PPO network and also alleges that the Company used biased and arbitrary computer software to review medical providers' bills. In December 2007, the trial court certified a class in this case of all Illinois health care providers with CorVel PPO agreements, excluding hospitals. In January 2008, CorVel filed with the Illinois Appellate Court a petition for interlocutory appeal of the trial court's class certification order which was denied in April 2008. In

May 2008, the Company appealed the appellate court's denial of its petition for interlocutory appeal which appeal was also denied by the Illinois Supreme Court in September 2008. The Company intends to pursue all available legal remedies including vigorously defending this case. The Company is not able to estimate the amount of possible loss, if any, at this time.
The Company is involved in other litigation arising in the normal course of business. Management believes that resolution of these matters will not result in any payment that, in the aggregate, would be material to the financial position or results of the operations of the Company. Off-Balance Sheet Arrangements
The Company is not a party to off-balance sheet arrangements as defined by the rules of the Securities and Exchange Commission. However, from time to time . . .