---

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|                                   
|-----------------------------------
|UNITED
 STATES                     
|SECURITIES
 AND EXCHANGE COMMISSION
|Washington, D.C. 20549             
|                                   
|FORM
 10-KSB                       

|  |                                                                                    
|- | -----------------------------------------------------------------------------------
|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934    
|  |                                                                                    
|  | For the fiscal year ended  December 31, 2007                                      
|  |                                                                                    
|  | OR                                                                                 
|o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
|  |                                                                                    
|  | For the transition period from: ___/___ to ___/___                                 

|                                               
|-----------------------------------------------
|Commission file number: 0-52197                
|HC
 Innovations, Inc.                          
|(Name
 of Small Business Issuer in its charter)

|                                                                 |  |                                         
|---------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                         |  | 04-3570877                              
|(State
 or other jurisdiction of
 incorporation or organization) |  | (I.R.S.
 Employer Identification Number)

|                                                                   
|-------------------------------------------------------------------
|10
 Progress Drive, Suite 200 Shelton, CT 06484                    
|(Address
 of principal executive offices)                          
|                                                                   
|Issuers telephone number: (203) 925-9600                          
|                                                                   
|Securities registered under Section 12(b) of the Exchange Act: NONE
|                                                                   
|Securities registered under Section 12(g) of the Exchange Act:     
|                                                                   
|Common Stock, $0.001 Par Value per Share                           

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

Check
if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K x

Indicate
by check mark whether registrant is a shell company (as defined by Rule 12b-2 of
the Exchange Act) YES o NO x

State
issuers revenues for its most recent fiscal year. $12,880,723

---



State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of March 28, 2008: $29,817,930.

State
the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date: 38,615,363 as of March 28, 2008.

If
the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-K (e.g., Part I, Part II, etc.) into which
the document is incorporated: (1) any annual report to security holders; (2)
any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424 (b) or (c) of the Securities Act of 1933 (Securities Act). The
listed documents should be clearly described for identification purposes.

Transitional
Small Business Disclosure Format (Check one): Yes o; No x

---

---



TABLE OF CONTENTS

|                                                                                                                                                      |                                                                                                 |    |      | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -- | ---- | 
|                                                                                                                                                      |                                                                                                 |    | Page
|                                                                                                                                                      |                                                                                                 |    |      | 
|PART I                                                                                                                                                |                                                                                                 |    |      | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 1.                                                                                                                                               | Description of Business                                                                         |    | 4    | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 2.                                                                                                                                               | Description of Property                                                                         |    | 30   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 3.                                                                                                                                               | Legal Proceedings                                                                               |    | 30   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 4.                                                                                                                                               | Submission of Matters to a Vote of Security Holders                                             |    | 30   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|PART II                                                                                                                                               |                                                                                                 |    |      | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 5.                                                                                                                                               | Market for Common Equity and Related Stockholder Matters                                        |    | 31   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 6.                                                                                                                                               | Management Discussion and Analysis or Plan of Operations                                        |    | 35   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 7.                                                                                                                                               | Financial Statements                                                                            |    | 49   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 8.                                                                                                                                               | Changes In and Disagreements with Accountants on Accounting and
 Financial Disclosure           |    | 49   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 8A.                                                                                                                                              | (T) Controls and Procedures                                                                     |    | 49   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 8B.                                                                                                                                              | Other Information                                                                               |    | 52   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|PART III                                                                                                                                              |                                                                                                 |    |      | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 9.       Directors, Executive Officers, Promoters, Control Persons and
 Corporate Governances; Compliance with Section 16(A) of the Exchange Act |                                                                                                 | 53 |     
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 10.                                                                                                                                              | Executive Compensation                                                                          |    | 55   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 11.                                                                                                                                              | Security Ownership of Certain Beneficial Owners and Management and
 Related Stockholder Matters |    | 57   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 12.                                                                                                                                              | Certain Relationships and Related Transactions, and Director
 Independence                      |    | 58   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 13.                                                                                                                                              | Exhibits                                                                                        |    | 60   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 14.                                                                                                                                              | Principal Accountant Fees and Services                                                          |    | 62   | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|PART F/S                                                                                                                                              |                                                                                                 |    |      | 
|Financial
 Statements                                                                                                                                 |                                                                                                 |    |     
|                                                                                                                                                      |                                                                                                 |    |      | 
|PART III                                                                                                                                              |                                                                                                 |    |      | 
|                                                                                                                                                      |                                                                                                 |    |      | 
|Item 1.                                                                                                                                               | Index to
 Exhibits                                                                              |    |      | 

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Unless the
context suggests otherwise, references in this report to HC Innovations, Inc.
(HCI) the Company, we, us, or our refer to HC Innovations, Inc. and
its subsidiaries.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

HC
Innovations, Inc. is a holding company incorporated in Delaware in December
2004 that, through its subsidiaries, provides specialty care management
products and services. Our specialty care management approach is predicated on
caring for small populations of medically unstable and frail people.

Our
wholly-owned subsidiary, Enhanced Care Initiatives, Inc., (ECI), was founded
in 2002 by David Chess MD, our President and Chief Executive Officer. ECI is
the management company for all of our operating entities and provides specialty
disease and care management services for small, costly subpopulations. ECI
markets its proprietary specialty care management programs for the medically
frail and other costly sub-populations to Health Maintenance Organizations
(HMOs), Managed Care Organizations (MCOs), disease management companies,
large physician groups, nursing/assisted living homes as well as state Medicaid
departments.

REVERSE MERGER
TRANSACTION

Pursuant
to a Stock Acquisition Agreement dated May 11, 2006, Ayre Holdings, Inc., a
Delaware corporation (Ayre), acquired 100% of the issued and outstanding
shares of HCI, in exchange for 24,368,323 shares of common stock of Ayre,
representing approximately 99% of the total issued and outstanding shares of Ayre
at the time. Prior to the consummation of the acquisition, Ayre, a
non-reporting pink sheet company and public shell, effectuated a reverse stock
split whereby the then current 793,000 issued and outstanding shares of common
stock were reverse split into 328,637 shares of common stock at the rate of
..41442:1.

The
post-acquisition entity is accounted for as a recapitalization of HCI using
accounting principles applicable to reverse acquisitions with HCI, being
treated as the accounting parent (acquirer) and Ayre, the legal parent, being
treated as the accounting subsidiary (acquiree). HCI is regarded as the
predecessor entity.

In
accordance with the provisions governing the accounting for reverse
acquisitions, the historical figures presented are those of HCI. Upon
consummation of the acquisition on June 9, 2006, Ayre changed its name to HC
Innovations, Inc. The Companys common stock is quoted on the over the counter
bulletin board under the symbol HCNV.OB.

On
February 13, 2007, the Companys Form 10-SB was declared effective by the
United States Securities and Exchange Commission. As a result, the Company
became a fully reporting company pursuant to the Securities Exchange Act of
1934, as amended.

4

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OUR BUSINESS

We
are a specialty disease and care Management Company focused on the medically
unstable and frail population. As a specialty disease and care Management
Company, we attempt to utilize preventative health care to save money by
attempting to keep patients with chronic conditions out of the hospital,
helping patients and states save on health care costs. We are comprised of
separate divisions each with a specific focus and intervention to service this
segment of our population. We seek to bring to HMOs, MCOs and state Medicaid
departments the ability to positively impact the health and cost of their
sickest, costliest subsets of patients. To do this, we combine our proprietary
information systems with specially trained nurses and nurse practitioners. As of
December 31, 2007, we were operating in nine states, having commenced
operations in three businesses during 2007. As of March 30, 2008, we were
operating in ten states, having commenced operations in one business during the
first quarter of 2008. Specifically, we integrate the following services:

| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Hands-on
  involvement seeing patients in a community setting, in their homes and/or in
  nursing homes;                                                                                                                                      
| |                                                                                                                                                                                                                                                   
| | (b) Call
  center backup consisting of nurses, social workers and case managers who work
  specifically with one or two nurses and their patients via the telephone to
  assist with coordination of services and monitoring of health status; and
| |                                                                                                                                                                                                                                                   
| | (c)
  Biometric monitoring through the use of devices that allow us to monitor
  patients in the home such as scales, medication reminder systems and blood
  pressure machines, to name a few.                                                   

Our
services extend to having our nurses accompany the patient to the doctor and
providing them with our availability on a twenty-four hour a day, seven days a
week basis. In the event that the patient requires admission to a hospital or
nursing home, we also provide case management.

Our
principal office is located at 10 Progress Drive, Suite 200, Shelton, CT 06484.
Our telephone number is (203) 925-9600. Our website address is
www.hcinnovationsinc.com.

CORPORATE
STRATEGY

As
a specialty disease and care Management Company, our corporate strategy is to
care for the most costly and needy patients in an effort to reduce
hospitalizations and, at the same time, create cost savings. We also seek to be
able to facilitate care delivery support services in the community, in nursing
homes, throughout the United States. We seek to sell our products and services
directly to HMOs, MCOs and State Medicaid departments, as well as to
subcontract with other disease management companies and private insurance
carriers.

To
implement our corporate strategy, we have created software algorithms that help
us define the most needy and costly populations. We have connected this to a
nurse-patient centric Electronic Health Record (EHR), to assist our staff in
the management of our enrollees.

Our
clinical strategy is to identify subgroups of people with common needs and
create programs to fill the gaps in care, stabilizing the health of the
individual. These are highly complex populations consisting of patients with

5

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over seven (7)
active diagnosis, average of three (3) hospitalizations per year that require
complex solutions.

CORE STRENGTHS

STAFFING

We have developed our internal recruitment department which has a multifaceted approach to messaging and recruiting health care personnel in highly competitive markets.

TRAINING

We have developed and implemented sophisticated interactive learning systems in all of our programs. The programs are classroom and web based framed with pre and post test tools. As well as field
based competencies assuring quality care. Our educational programs start with weeks of training and then continue on a weekly to monthly basis

TECHNOLOGY

Our software is a key deliverable and critical to the efficient delivery of care. We are on our 2nd and 3rd generation programs. It is fundamental in our ability to deliver reproducible outcomes and have a scalable
model. The system is robust web based with the care guidance and rules built into the system.

PRODUCTS AND
SERVICES

As
of December 31, 3007, we offered our products and services through two business
segments: Disease Management which consisted of our Easy Care business and our
Quality of Life business, Professional Services which consisted of our NP Care
business. In 2008 we will be offering additional services in our DOQ Care
(DOQ). DOQ Care is based on the patient centered medical home model where the
personal physician provides and coordinates care which is organized so as to
achieve quality, efficiency, and patient-centeredness (through: enhanced access
through appointment systems and telephonic and e-mail communication, clinical
decision support tools that guide evidence-based practice, use of health
information technology, support for patient involvement in informed
decision-making and self-care, performance measurement and continuous quality
improvement.

Easy Care: THE
SOLUTION FOR THE COMMUNITY DWELLING MEDICALLY COMPLEX AND FRAIL

The
Easy Care program focuses on the medically complex and fragile costly
community-based patients. Easy Care is a program built to support the medically
complex frail patient, creating a safety net woven from a combination of
services which together seek to support the patient and improve their health,
while lowering their cost of care by reducing hospitalizations.

Under
the Easy Care Program each patient is individually evaluated to determine which
approach is necessary for that individual. A feature of the Easy Care Program
is that we work closely with the patient, their family and their physician. The
Easy Care tools and approach include:

o
Hands-on nurse and nurse practitioner care in the home. The nurse does a
comprehensive evaluation which includes physical, cognitive and social
situation evaluation. We review medications, diet and exercise. We put in place
disease specific exercises, review advance directives and connect patient to
community resources to assure that the patient is getting what they need to
stay well.

o
Physician integration. Our nurses accompany the patient on physician visits.

o
Call center support. Each patient has a support person in the call center who
works with their nurse to help coordinate the patients care. This support
person calls the patient periodically and at the direction of their nurse
partner assists in the follow up of medical issues. The support person also
assists in setting up appointments and transportation.

o
Community-based weekly meetings to monitor, exercise and address depression and
isolation in our patients. These weekly meetings are attended by our nurses,
recreation aide, athletic trainers, dietician and pharmacist (on a rotating
basis).

o
24/7 Caregiver Support Program; This program consists of a survey at the
initiation of the program to assess caregiver needs and stress then helping the
caregiver create a sustainable support solution for the patient. This

6

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includes a
24/7 emotional support hotline, referral services, and legal hotline, to name a
few.

o
Pharmacist, medical director, nutritionist and athletic trainer monitoring,

o
Biometrics, such as scales, medication monitoring devices, blood pressure
machines wirelessly connected to phone lines are channeled directly to our
computer system, oxymeters, glucosometers, cell phones and video phones.

o
Pharmaceutical Management. Web-based medication monitoring by our pharmacist
with direct feedback to our nurses tablet PCs.

o
Case Management. Our nurses continue to monitor the patient if hospitalized or
in a nursing home.

o
IT infrastructure. All of our nurses are equipped with tablet PC, point, click
and handwriting recognition. This allows us to efficiently gather and maintain
large amounts of actionable data; it also prompts the nurse to consider
specific interventions driving best practices.

o
The computer as the communication channel. Our Web-based IT system allows for
faxing, e-mailing and integrated report generation.

Easy
Care Pricing

Easy
Care pricing is based on a per enrolled member, per month (PMPM) basis. We can
enroll up to 1,000 patients per four months per market. We are currently able
to implement two markets per 120 days. Our program works best in population
centers of 50,000 or more. However, with use of our biometric monitoring
system, we can extend our reach to more rural patients.

Our
financial impact for the health plans derives from our consistent ability to
decrease costs in this unstable population by up to 25% or approximately
$10,000 per enrolled member per year.

The
Company has experienced tremendous growth in members under care within its Easy
Care operations. During the second half of 2007, members under care increased
by approximately 2,000 representing a 186% growth rate when compared to members
under care at June 30, 2007.

ECI,
our wholly owned subsidiary, has secured Easy Care contracts with:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Health
  Spring: a regional Medicare HMO in Tennessee, Texas and Alabama. The
  Tennessee contract began in October 2005 with approximately 300 enrollees and
  as of December 31, 2007, had approximately 1,000 enrollees. We enrolled our
  first member in Texas during November 2007 and as of December 31, 2007 had
  approximately 40 enrollees. As of February 29, 2008 the combined enrollment
  for Tennessee and Texas was approximately 1,050 members. During the first
  quarter of 2008 we entered into a contract with Health Spring of Alabama and
  enrolled our first two members on March 11, 2008.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 2.
  AmeriGroup: a national MCO, to care for its Medicare/Medicaid enrollees in
  Houston, Texas. The initial term of this contract runs from                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

7

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | June 1, 2006
  through November 30, 2007, and was extended through December 31, 2008. As of
  February 29, 2008 enrollment was approximately 270 members.                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 3. Alere
  Medical, Inc.: In October 2006, we entered into a Disease Management Services
  Agreement with Alere Medical, Inc. (Alere). Alere provides disease
  management tools, services and systems to payers which are designed to assist
  with and improve management of health care outcomes for patients. As of
  February 29, 2008, enrollment was approximately 620 members.                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 4. Health
  Insurance Plan of Greater New York (HIP): a regional managed care company
  to care for its members in the New York Metropolitan area. In May 2007, we
  entered into a Care Management Services Agreement with HIP to provide
  services for both its general medical and oncology members. We enrolled our
  first member in July 2007 and as of December 31, 2007 had approximately 1,200
  enrollees. As of February 29, 2008 enrollment was approximately 1,280
  members.

THE MARKET FOR
EASY CARE

People
with chronic conditions44 percent of non-institutionalized Americansaccount for
a 78% share of health care expenditures in the United States. It is
increasingly clear that sustained control of healthcare costs must address the
impact of an aging population and the rising prevalence of one or more chronic
conditions.

An
Emory University study published in August 2004 found that 15 medical
conditions led to about half of the $200 billion rise in U.S. health spending
from 1987 to 2000.Five of those conditionsheart disease, trauma,
cancer, pulmonary conditions, and mental disordersaccounted for 31 percent of
the growth in health care spending over that period.

|                                         |  |                                                |  |                                              |   |      |  |      |  
|---------------------------------------- |  | ---------------------------------------------- |  | -------------------------------------------- | - | ---- |  | ---- | -
|Prevalence and Cost of Disease in the US
|                                         |  |                                                |  |                                              |   |      |  |      |  
|Disease                                  |  | Approximate
  Annual
  Prevalence
  (Millions) |  | Approximate
  Economic
  Cost
  ($ Billions) |   | Year
|                                         |  |                                                |  |                                              |   |     
|Cardiovascular                           |  | 61                                             |  |                                              | $ | 368  |  | 2004 | 
|Cancer                                   |  | 10                                             |  |                                              |   | 175  |  | 2002 |  
|Diabetes                                 |  | 18                                             |  |                                              |   | 132  |  | 2002 |  
|Alzheimers                              |  | 5                                              |  |                                              |   | 100  |  | 1994 |  
|Arthritis                                |  | 70                                             |  |                                              |   | 82   |  | 1995 |  
|Stroke                                   |  | 5                                              |  |                                              |   | 54   |  | 2004 | 
|Depression                               |  | 19                                             |  |                                              |   | 53   |  | 1999 |  
|Osteoporosis*                            |  | 10                                             |  |                                              |   | 17   |  | 2001 |  

* Sums for osteoporosis include
only direct expenditures such as hospital Includes direct cost of caring for
individuals, such as expenditures for These figures are estimates.

Source: American Heart
Assocation; Centers for Disease Control and

Proportion of the Population with 1 + Chronic Conditions and
Their Share of Health Care Expenditures

|                 |  |                                   |   |                                    |    |   | 
|---------------- |  | --------------------------------- | - | ---------------------------------- | -- | - | 
|Health Insurance |  | One or More
  Chronic
  Condition |   | Share of Health
  Care Expenditure |   
|                 |  |                                   |   |                                    |   
|Uninsured        |  | 27                                | % |                                    | 60 | % | 
|Medicaid         |  | 39                                | % |                                    | 77 | % | 
|Medicare         |  | 85                                | % |                                    | 99 | % | 
|Private          |  | 40                                | % |                                    | 68 | % | 

Center on an
Aging Society, Georgetown
University, January 2004

8

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Recognizing
these trends, most employers implemented or plan to implement a disease
management initiative to improve outcomes and reduce costs and complement
traditional utilization review and case management. In addition, Medicare and
several state Medicaid programs also established regional demonstration
projects for patients with chronic illnesses.

As
noted earlier in this memorandum, impact analysis for both commercial and
publicly-financed disease management have recently concluded that the extension
of the call center operations model to the care management of the most costly
patients with chronic medical conditions did not deliver sustainable results.

The
Disease Management Association of America and the leadership of the largest
firms have been extremely critical of the published conclusions and will
undoubtedly argue that the findings are too broad. Billions in capital have
been invested in the traditional disease management model, so it is likely that
further analysis will uncover clear benefit of better care coordination and
protocol compliance.

SALES AND
MARKETING FOR EASY CARE

As
indicated, we will market Easy Care to MCOs, HMOs, state Medicaid departments,
and disease management companies. Our sales strategy establishes a process and
generally reaches a Yes or No response within 3 to 9 months.

The
process:

o
Initial presentations to key leadership;

o
If there is a high level of interest we enter into a Non-Binding Discovery
Process which takes 4 to 6 weeks. During this time period, we do an in depth
analysis of the strategic goals of the organization, the barriers to delivery
and the processes in place to manage the outcome. We meet with, and interview people
at all levels of the organization, developing a deep understanding of their
needs and internal politics while we develop relationships;

o
Presentation of findings and delivery of proposal specific to the companys
needs and their particular gaps;

o
Negotiation and discussion period (3 weeks); and

o
Yes or No decision.

As with any sales cycle certain elements of the decision making process are beyond our control and the cycle may take substantially longer than currently anticipated.

QOLCONCOLOGY CARE MANAGEMENT FOR COMMUNITY-BASED PATIENTS

The goal of
the Quality of Life Care (QOLC) Program is to lend support, guidance and
education to the patient, the primary caregiver, and the family during critical
times throughout the management of the patients cancer. This comprehensive
program is designed to sustain the patient and the patients personal support
system from time of diagnoses through treatment decision, actual treatment, and
after treatment is complete.

9

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The QOLC
Program is with the patient and family every step of the way to answer
questions, alleviate concerns, help communicate with the doctors, track down
research on clinical trials and new treatment options, as well as to introduce
discussions about palliative care and hospice as appropriate.

The QOLC
Program has the opportunity to create a new standard of care for patients with
cancer and this program will allow patients and their families, employers,
payers and providers to do a better job assisting cancer patients during this
critical time in their lives.

QOLC is a
community based, hands on program. Nurses and Nurse Practitioners see patients
in their homes, visit the physician with the patient, and assist caregivers
24/7.

QOLC impacts
patient health outcomes and the cost of care through:

| |   |                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Side-effect
 management that results in a better experience for the patient and avoids
 unnecessary hospitalizations and emergency rooms visits;                                                                                                                    
| |   |                                                                                                                                                                                                                                                                     
| |  | Structured
 dialog that enables cancer patients to understand the goals of treatment
 within the context of the prognosis (i.e. the difficult trade-offs often
 associated between lengths of life versus quality of life);                                         
| |   |                                                                                                                                                                                                                                                                     
| |  | Management
 of other medical problems often present in this population (e.g. most
 patients with cancer are over 65 and have multiple other medical conditions
 which often get lost during their cancer treatment and are often responsible
 for hospitalizations).

NP CARE
PROGRAM - NURSING HOME MEDICAL MANAGEMENT SYSTEMS

NP
Care (NPC) is a physician directed, Nurse Practitioner (NP) driven,
long-term care facility medical management service that integrates the patient
care team. NPs work within the facility with the medical staff to establish
systems of care driving nurse assessments, documentation, and improved care.
The on-site NP is available to see residents with acute medical issues, review
test results, evaluate wounds, start IVs, communicate with families, and
educate the facility staff. This program improves the quality and consistency
of medical care in nursing homes and assisted living facilities, preventing
unnecessary ER and hospital transfers. NP Care nurses are an extension of the
physician; specially selected for their depth of medical knowledge,
communication skills, and ability to effectively collaborate with the nursing
home team. NP Care is delivered within these long-term care facilities either
on a fee-for-service basis or in partnership with managed care organizations on
a captivated (pmpm) basis.

NP Cares
fundamental tools and processes include:

o
Problem-oriented nurse documentation tools that guide the nurse through
appropriate, efficient patient evaluation and interventions.

o
On-site nurse practitioner providing support and care.

o
Integration with the physician, staff and family.

10

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o
Electronic Health Record (ehr) system serving as the Companys backbone as it
allows nurse practitioners to be thorough, efficient and checks to ensure that
documentation matches with charges.

Technology
driven patient risk assessments of adverse events, such as falls, fractures,
dehydration, etc. Our Risk Avoidance Program allows the nursing home to put in
place safeguards to reduce these events, while allowing us to notify the family
of the risks involved, thereby mitigating potential lawsuits.

NP Care has two revenue models

Fee for services is where our Nurse Practitioners
  visit patients for acute care needs and bill the patients insurance company.
Medicare and Medicaid comprise 47.3 percent of our fee for service revenue

Managed Care

| |  | Post
    Acute Care                                                                                                                                                                                                                                           
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                
| |  | Long
    Term Residents in Nursing Homes                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                
| |  | Institutional
        Specialty Needs Programs- Currently Contracted with Health Spring of
        Tennessee and explanation of the Institutional Specialty Needs Program
    is below.                                                                        
| |   |                                                                                                                                                                                                                                                                
| |  | Medicaid
        Managed Care  caring for all residents living in nursing homes
        who have Medicaid as their primary insurance. We have a contract with
        McKesson Health Services to provide this care for residents in the State
    of Illinois

MEDICARE ADVANTAGE SPECIAL NEEDS PLANS (SNPs) MODEL

MEDICARE
ADVANTAGE SPECIAL NEEDS PLANS (SNPs) MODEL is an important new innovation in
the healthcare marketplace. CMS (Centers for Medicare and Medicaid Services) in
an attempt to make sicker patients more attractive to managed care companies
have created this designation. With it comes enhanced patient complexity based
reimbursement (paying more for patients who are sicker and use more resources).
There are 3 types of SNPs. NP Care specializes in the Institutional SNP (#1):

1.
The Institutionalized (~3.5 million): Medicare beneficiaries who reside or are
expected to reside for 90 days or longer in a long-term care facility.

2.
Dually Eligible (~7.5 million): Medicare beneficiaries who are also in Medicaid
for full Medicaid benefits (~6.2 million) and low-income Medicare beneficiaries
who receive subsidies from their state Medicaid program for their Medicare cost
sharing (~1.3 million).

3.
Medicare beneficiaries with Chronic, Severe Conditions (~millions MORE):
Medicare beneficiaries with cardiovascular disease, diabetes, heart failure,
osteoarthritis, mental disorders, end-stage renal disease and/or HIV/AIDS.

(SOURCE OF
ABOVE DATA: HTTP://WWW.CMS.HHS.GOV/ CENTERS FOR MEDICARE & MEDICAID
SERVICES (CMS), U.S. DEPARTMENT OF HEALTH & HUMAN SERVICES)

According
to the US Department of Health & Human Services, these populations have a
disproportionate share of severe chronic health conditions and disabilities.
About one third of the dually eligible population lives in long-term care
facilities. They commonly have multiple morbidities (5-8) and approximately 45%
have severe mental illness.

The
Medicare Advantage Institutional SNP model has very significant financial
implications. CMS is reimbursing the insurance companies almost $20,000
annually per patient for their healthcare costs. This is in contrast to
reimbursement of $8,000 per year for community dwelling seniors. NP Care
charges approximately 10% of the reimbursement and is able to share in the
profit margin of the service. Working in close collaboration with the health
plan and the nursing home, the program has the potential to create a 20% profit
margin (about $4,000 per patient per year). Each nursing home has on average 50
enrollees and our plan is to contract with 30 nursing homes per year in each
location or market. This equates to approximately 1,500 enrollees per year.

NP
Care offers a medical infrastructure to nursing homes that is important to
controlling costs and care. With this in mind, we have begun the process of
partnering with long-term care organizations and Medicare Advantage Specialty
Needs Plans (SNP). Our first such partnership is with HealthSpring of
Tennessee.

11

---



We
believe our planned growth will track with population patterns, as defined by
beds by county, occupancy rates, nurse practitioner scope of practice,
physician collaboration, recruitment of NPs, our competitive advantage, payer
mix, major nursing home chain presence, and Medicare Advantage programs.

SALES AND
MARKETING FOR NP CARE

Our
strategy with NP Care is to be position it to become a national healthcare
company delivering primary care and improving the quality of life for the
elderly living in nursing homes.

We
will accomplish this strategy by:

o
Establishing a partnership with long-term care organizations and Medicare
Advantage SNPs that support and see the value in utilizing Nurse Practitioners
for primary care.

o
Working closely with both long-term care organizations and health plans to
develop and implement systems of care that meet the needs of this special
population. This includes computer driven risk assessments on patients to allow
for a shift to proactive care, implementing programs that assist nursing home
nurses in providing consistent patient care evaluations, implementing programs
which address frequent falls, urinary incontinence, and wound care to name a
few.

o
Design an infrastructure that aligns incentives while accomplishing financial
and health care outcomes. Paying nursing homes for improved medical
infrastructure and allowing them to also benefit from health care savings.

SAM EHR - SAM EHR SOFTWARE

The
SAM ehr (Stratification Analysis and Management) is a unique application that
combines patient demographics, claims and administrative information with HC
Innovations clinical data captured from assessments and care provided and
collected on the patients behalf. This system has resulted in more efficient
use of nursing time and rapid creation of data for tracking and outcome
analysis. This platform is designed for interoperability and systems
integration, and includes the following features:

|  |                                                                                  
|- | ---------------------------------------------------------------------------------
|o | Provides
 on-site and remote user access to patient information and HCI databases
|  |                                                                                  
|o | Creates an ongoing
 nurse activity log to track activity and accountability      
|  |                                                                                  
|o | Integrates
 report writing and Health Risk Assessment (HRA) tool                 
|  |                                                                                  
|o | Scans
 patient charts for omissions in care                                      
|  |                                                                                  
|o | Prompts
 standards of care and clinical guidelines                               
|  |                                                                                  
|o | Monitors
 health and financial outcomes                                          
|  |                                                                                  
|o | Connects
 medication and laboratory data against best care practices             
|  |                                                                                  
|o | Stratifies
 patients by disease intensity and intervention needs                 

12

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DOQ CARE -
DEMONSTRATION PROJECT

The
Company has been selected by one of the nations largest risk bearing
organizations, the HIP/GHI Health Insurance Plan (New York City), to pilot a
physician office integration model. HCI nurses work out of the doctors office
assisting the physician in the care and coordination of services for their
patients with multiple chronic diseases. In addition the Company will assist
the physicians in accepting and integrating an electronic medical record and
making their office into a medical home for patients.

A
grant of $500,000 has been issued by Commonwealth Fund to fund the outcomes
analysis.

Market
Opportunity

|  |                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o | $10 billion
 in annual revenues for a patient subpopulation, approximately 2%-4% of
 Medicare patients, that accounts for $150+ billion in annual health care
 expenditures                                
|  |                                                                                                                                                                                                            
|o | People with
 chronic health conditions, 44% of non-institutionalized Americans, typically
 account for 78% of all medical costs, 76% of all admissions, 88% of
 prescriptions, and 72% of all office visits
|  |                                                                                                                                                                                                            
|o | The U.S.
 spends more per capita for
 health care than any other country                                                                                                                                   
|  |                                                                                                                                                                                                            
|o | While health
 care inflation moderated in 2007, costs still climbed more than two times
 faster than general inflation and workers earnings                                                                
|  |                                                                                                                                                                                                            
|o | National
 health care expenditures are projected to reach $3.6 trillion by 2014                                                                                                                            
|  |                                                                                                                                                                                                            
|o | Average
 annual medical costs for Medicare patients is $40,000                                                                                                                                             
|  |                                                                                                                                                                                                            
|o | Between the
 spring of 2006 and the spring of 2007, health care premiums increased an
 average of 6.1% for employer sponsored health insurance                                                             
|  |                                                                                                                                                                                                            
|o | While
 representing the lowest rate of growth since 1999, health inflation was still
 higher than wages (up 3.7%) and general inflation (2.6%)                                                             
|  |                                                                                                                                                                                                            
|o | Currently
 over 600 Medicare Advantage plans with more than 8.9 million (20%)
 beneficiaries enrolled; 890,000 are within the most costly 1% of the
 population                                            

COMPETITION

The
competitive landscape for what has been called disease management is in
transition. The research has validated the Companys empirical experience that
confirms that telephonic care management alone cannot transform the course of
disease for patients with complex medical needs. The issue of interest to
investors and the payers who buy disease management will come down to an
understanding of the business case for continued investment in traditional call
center care management. HC Innovations knows that the specialized call center
is an important and necessary part of a complete operational capability,
especially as a component of a comprehensive approach to population health
management.

The
prevailing business model for the incumbent disease management firms is built
on certain operational functions that should
be centralized to achieve scale, quality control and continued innovation. The
incumbents have invested heavily in centralized operations for data management,
predictive technologies used in case identification, call center operations,
marketing, sales and distribution. These capabilities will continue to be
essential parts of an enterprise approach to health managementthe leading
firms are already repositioning their market message and value proposition
around population

13

---



health in
place of disease managementwhile the business case for management of
high-cost patients requires HC Innovations capabilities in the community,
close to the patient and coordinated with local health care resources.

There
are few hands on, community-based programs in the disease management, care
management space. After a detailed search, we found no other company that
provides the similar depth of community based hands on care and care
coordination for this subset of medically complex and frail patients.
Proprietary programs and systems, the deep understanding of the cost drivers
for people with multiple conditions, and the documented outcomes have
contributed to build a significant competitive advantage for the Company.

While
the healthcare industry is highly competitive, and additional competitors may
emerge, we have two distinct competitive advantages. First, the Company has
built a strong professional reputation and is the established first mover in
nearly every market in which it competes. Second, we have developed a winning
business strategy with risk bearing health plans that understand the Companys
value and expertise and, furthermore, specifically recognize that HCIs
community-based model is its key to successful cost containment.

The
following companies represent a short list of competitors that we routinely see
in the marketplace and are generally well-respected.

|                                   |  |                         |  |              |  |                             |  |      |  |              |  |          |  |       
|---------------------------------- |  | ----------------------- |  | ------------ |  | --------------------------- |  | ---- |  | ------------ |  | -------- |  | ------
|SELECTED
 COMPETITORS              |  |                         |  |              |  | COMMUNITY ACCESS           
|                                  
|COMPANY                            |  | WEB SITE                |  | OWNERSHIP    |  | PRIMARY MODEL               |  | Home |  | Nursing Home |  | Hospital |  | Office
|                                  
|Paradigm
 Health                   |  | paradigmhealth.com      |  | Public: IMA  |  | Call center                 |  |      |  |              |  | X        |  |       
|Careguide@home                     |  | careguideathome.com     |  | Public: CGDE |  | Call center                 |  | X    |  |              |  |          |  |       
|US Care
 Management                |  | uscaremanagement.com    |  | Private      |  | Community-based+call center |  | X    |  |              |  |          |  |       
|EverCare
 Division of UnitedHealth |  | evercarehealthplans.com |  | Public: UHG  |  | Community-based+call center |  |      |  | X            |  |          |  |       
|Fidelis
 SeniorCare, Inc.          |  | fidelissc.com           |  | Private      |  | Community-based+call center |  |      |  | X            |  |          |  |       
|CareOne                            |  | care-one.com            |  | Private      |  | Assisted Living Facility    |  |      |  | X            |  |          |  |       

Few companies cover
the continuum of coordinated care that is available from the Company. As a
localized service, the competition for the NP Care division will often include
Evercare, a Medicare Advantage program (a division of United Health Group that
does not work with other health plans), Alpha Physician Services (physician
groups specializing in nursing home care), and primary care physicians who
employ nurse practitioners for their nursing home and managed care program
practices. The Company is differentiated by the breadth of its solutions across
the continuum of community-based care, the improved health status and outcomes
for its patients, and the financial results of its programs.

Although the
complex care management may not be their primary focus, three companies have
emerged as major competitors for the Easy Care division:

PARADIGM HEALTH, a
recent acquisition of Inverness Medical Innovations, provides catastrophic care
which is usually focused on hospitalized patients. Paradigm uses a panel of
expert physicians and nurses who provide hands on care, primarily in the
hospital. The company has developed predictive technology algorithms to
identify the most costly and sickest patientsthe 1% that utilize 30% of the
resourcesin a commercial health plan, with a specific focus on late-stage
cancer, end-stage chronic conditions, and patients with multiple
co-morbidities. Programmatically, the company focuses on coordination of care,
and social, financial, and emotional support. Most of the care coordination is
done

14

---



by phone
supported by outsourced visiting nurse services in the community. Paradigm was
recently acquired by Alere who was acquired by Inverness.

CAREGUIDE@HOME is a
service of CareGuide which is the successor organization of Coordinated Care
Solutions and now has merged with Patient InfoSystems. They claim to provide
interactive, personalized services to members with complex health care needs
who require post-acute and continuous care and work with families and
caregivers. Most of this is telephonic but the CareGuide@Home services
encompass a national network of field care managers who provide home-based
assessments and other onsite services for the elderly and their families.

US CARE MANAGEMENT
provides care for a broad scope of chronic diseases and emphasizes coordination
and working with the practitioner. They use a primary care nursing model and
also do in home assessments and coordination of care in the community. They
emphasize, as their core service, highly trained community based nurse care
managers.

COMPETITIVE
STRATEGY AND METHODS OF COMPETITION

o
ECI TARGETS SPECIFIC SUBPOPULATIONS. Unlike other disease management companies,
we are not DISEASE focused. Our services are designed for people who experience
the health care system in a predictable fashion with predictable outcomes. We
define subgroups of people who experience the health care system similarly,
study the gaps in care and create programs to keep them well. This is a
paradigm shift which requires an entirely unique culture and tool set to
achieve success.

o
THE ECI PROGRAMS ARE COMPLICATED INTERVENTIONS combining intense hands-on,
community-based programs involving many layers of care and intervention
including RNs, nurse practitioners, athletic trainers, physical therapists,
dieticians, social workers, informatics specialists, pharmacists, and
physicians in a variety of roles.

Caring
for the medically complex, frail patient requires a complex infrastructure. Our
infrastructure seamlessly connects and drives:

|  |                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------
|o | Patient
  stratification                                                                                            
|  |                                                                                                                     
|o | Assessment
  tools - physical exams, standardized testing, ADLs, IADLs, cognitive testing,
  depression, SF 12, etc.
|  |                                                                                                                     
|o | True
  integration with the Physician                                                                               
|  |                                                                                                                     
|o | Interventions
  in the home and via call center                                                                     
|  |                                                                                                                     
|o | Biometrics                                                                                                          
|  |                                                                                                                     
|o | Community
  based nursing staff                                                                                     
|  |                                                                                                                     
|o | Pharmacists                                                                                                         
|  |                                                                                                                     
|o | Athletic
  trainers                                                                                                 
|  |                                                                                                                     
|o | Nutritionist                                                                                                        
|  |                                                                                                                     
|o | Report
  writing                                                                                                    
|  |                                                                                                                     
|o | Community
  centers                                                                                                 

THE EASY CARE
PROGRAM, A SCALABLE COMPLEX INTERVENTION WILL BE DIFFICULT TO REPRODUCE.

o THE CLINICAL EXPERTISE to both understand the populations cared for and create
cost-effective, rapidly integrateable, scalable models requires a team with
diverse expertise

15

---



o SCALING - We
believe we are now able to operationalize our community based program,
enrolling 1,000 complex members per market in multiple markets over a period of
four to six months. This requires systems which can coordinate multiple complex
interventions

o IT
INFRASTRUCTURE - THIS DIVERSE PLATFORM IS MANAGED AND INTEGRATED WITHIN OUR
PROPRIETARY SOFTWARE. Our web-based information system is proprietary and
operates as both patient chart and communication port, effectively connecting
all parts of our patients health care team. Additionally, patient care
algorithms are embedded in our software and drive standards of care resulting
in a reminder system that drives best practices of care from the level of the
patient and family to the physician. Our patient chart also is an activity
tracker, logging all patient care activity as well as nurse interactions.

DEPENDENCE ON
A LIMITED CUSTOMER BASE

For
the calendar years ending December 31, 2007 and 2006 our revenue was
concentrated in a small number of customers, the loss of any or all of these
customers would have a severe and negative impact on our future results of
operations. Additionally, any reduction in reimbursement from Medicare will
have a severe and negative impact on our future results of operations.

|                      |  |                                 |       |            |  |  |      |   | 
|--------------------- |  | ------------------------------- | ----- | ---------- |  |  | ---- | - | 
|                      |  | Percentage of Service
  Revenue |      
|                      |  |                                 |      
|Provider              |  | 12/31/2007                      |       | 12/31/2006 | 
|                      |  |                                 |       |            |  |  |      |   | 
|Medicare /
  Medicaid |  |                                 | 47.3% |            |  |  | 60.9 | % | 
|HealthSpring          |  |                                 | 19.4% |            |  |  | 19.8 | % | 
|                      |  |                                 |       |            |  |  |      |   | 
|                      |  |                                 |       |            |  |  |      |   | 
|Total                 |  |                                 | 66.7% |            |  |  | 80.7 | % | 

PATENTS
PENDING - ECI has four Applications for Letters Patents pending:

1) Application
for Letters Patent No. 10/745,786 entitled - Method And Criterion For Selecting
Patients For Participation In A Care Management Program  filed December 27,
2003; Docket No. 2003KP343PA

The 786
Applications Abstract reads:

The
method and criterion of the present invention are used to select high risk or
co-morbid patients for participation in a care management program. An acuity
score is determined which stratifies patients by cost, diagnosis and
disability. This allows us to identify those patients which will benefit most
from our Easy Care program. Finding the right patient for the right program is
critical to our success.

2) Application
for Letters Patent No. 10/745,787 entitled - Care Management Method For
Managing The Treatments Of High Risk Medically Unstable Patients - filed
December 27, 2003; Docket No. 2003KP351PA.

16

---



The 787
Applications Abstract reads:

The
present invention is related to methods of managing the care of high risk or
co-morbid patients who have been pre-selected for care management using the
patent identified above. In accordance with the care management entitys
system, care managers and other specialists coordinate and supplement treatment
plans for the high risk patients. After acceptance into the care management
programs, the co-morbid patients are gathered together for group sessions at a
community center. This patent describes our road map for caring for the
medically complex, unstable patient. The complex interplay of services and how
they are applied is original and allows us to further differentiate ourselves
in the managed care market.

3) Application
for Letters Patent No. 11/016,058 entitled  Care Management method For
Managing Treatments Of High Risk Mentally Unstable Patients  filed December
18, 2004; Docket no. 2004KP392PA

The 058
Applications Abstract reads:

The
present invention is related to methods of managing the care of high risk
mentally unstable patients who have been pre-selected for care management. In
accordance with the care management entitys system, care managers and other
specialists coordinate and supplement treatment plans for the high risk
patients. After acceptance into the care management programs, the high risk
mentally unstable patients are gathered together for group sessions at a
community center. Patients are equipped with cellular telephones and electronic
monitoring devices for monitoring the mental and physical capacities of the
high risk mentally unstable patients. This patent codifies our processes for
managing this very mobile, unstable population. It describes the combinations
of interventions we apply and how we apply them to manage the mentally
unstable, costly patient. The value of this patent is to guide our
interventions and clearly define our tools and processes, differentiating us in
the marketplace.

4) Application
For Letters Patent Entitled - METHOD OF GENERATING A HEALTHCARE PLAN OR
WELLNESS PLAN FOR A MEMBER OF A GROUP -; Serial No. 11/504211; Filing Date
August 15, 2006; Chess, D.; Docket No. 2006KP472PA

A
group representative utilizes an administrative entity to generate plans of
care or wellness plans for group beneficiaries or members. The administrative
entitys computer system propounds virtual questionnaires to group
beneficiaries and calculates acuity scores for each group members response.
Combinations of cumulative acuity scores and standards established by the group
representative are used to stratify group members according to diagnosis
burden, projected cost of care burden and disability burden. Plans of care are
customized and automatically generated for group members. This tool is
important to us when health plans enroll new patients and have limited clinical
information on patients. This allows us to identify patients who need our program.
This also allows health plans to easily segregate their members into different
levels of intervention.

EMPLOYEES

As
of December 31, 2007, we had 211 full time employees, of which two (2) are
executive officers, and 51 part time employees.

17

---



EMPLOYMENT
AGREEMENTS

We
currently do not have employment agreements with our executive officers, but
anticipate entering into such agreements in the near future.

18

---



RISK FACTORS

The
discussion in this annual report regarding our business and operations includes
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1996. Such statements consist of any statement other
than a recitation of historical fact and can be identified by the use of
forward-looking terminology such as may, expect, anticipate, intend,
estimate or continue or the negative thereof or other variations thereof or
comparable terminology. The reader is cautioned that all forward-looking
statements are speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ from those referred to in such
forward-looking statements. This disclosure highlights some of the important
risks regarding our business. The number one risk of the Company is its ability
to attract fresh and continued capital to execute its comprehensive business
plan. In addition, the risks included should not be assumed to be the only
things that could affect future performance. Additional risks and uncertainties
include the potential loss of contractual relationships, changes in the
reimbursement rates for those services as well as uncertainty about the ability
to collect the appropriate fees for services provided by us. Also, the Company
faces challenges in technology development, deployment and use, medical
malpractice exposure and the fluctuation of medical costs vs. medical payments.

WE HAVE A
HISTORY OF OPERATING LOSSES, AND SUCH LOSSES MAY CONTINUE IN THE FUTURE IF THE
COMPANY IS UNABLE TO SECURE SUFFICIENT ENOUGH CONTRACTS TO COVER ITS OVERHEAD
AND OPERATING EXPENSES.

The
Company incurred net losses of approximately $10.7 million and $3.3 million for years ended December 31, 2007 and 2006, respectively. The
Company had an accumulated deficit of approximately $16 million and had a working capital deficiency of approximately $2 million at December 31, 2007, and we may never
be profitable.

IF WE CANNOT ACHIEVE
PROFITABILITY FROM OPERATING ACTIVITIES, WE MAY NOT BE ABLE TO MEET OUR WORKING
CAPITAL NEEDS.

Our
10-KSB must be considered in light of the numerous risks, expenses, delays and
difficulties frequently encountered in the healthcare industry, as well as the
risks inherent in the development of new programs and the commercialization of
new services particularly given our failure to date to operate profitably.

OUR AUDITORS
HAVE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

In
their report prepared in conjunction with our 2007 consolidated financial statements, our
auditors included an explanatory paragraph stating that, because we have
incurred net losses,  have a working capital deficiency and have an accumulated deficit as of December 31,
2007, there is substantial doubt about our ability to continue as a going
concern.

19

---



WE WILL NEED
TO RAISE SIGNIFICANT ADDITIONAL CAPITAL TO CONTINUE OUR BUSINESS OPERATIONS.

Our
cash position on a consolidated basis at December 31, 2007 was $3.4 million as
compared to $.2 million at December 31, 2006. We currently anticipate the need
to raise an additional $12.0 million to $15.0 million dollars through the sale
of common stock, debt issuance, or a combination of both during 2008 in order
to fund operations, and complete our plan of expansion. Our ability to raise
such an amount of capital in light of current market uncertainties cannot be
assured.

WE COULD ISSUE
A SIGNIFICANT AMOUNT OF COMMON STOCK, A SERIES OF PREFERRED STOCK THAT MIGHT
ADVERSELY AFFECT OUR EXISTING COMMON STOCKHOLDERS.

Our
articles of incorporation, as amended, authorize the issuance of 100,000,000
shares of common stock and 5,000,000 shares of preferred stock, with
designations, rights and preferences that may be determined from time to time
by our board of directors which may be superior to those attached to the common
stock. Accordingly, the board of directors is empowered, without further stockholder
approval, to issue additional shares of common stock up to the authorized
amount or to establish a series of preferred stock with dividend, liquidation,
conversion, voting or other rights either of which could adversely affect the
voting power or other rights of the holders of the existing common stock.
Issuance of additional common stock at prices below the fair market value per
share would result in dilution to our existing common stockholders. Moreover,
shares of preferred stock could be convertible into shares of common stock in
amounts that would result in similar dilution. In the event of a preferred
stock issuance, the preferred stock could be used, under certain circumstances,
as a method of discouraging, delaying or preventing a change in control of our
company.

INVESTING IN
OUR STOCK IS HIGHLY SPECULATIVE AND YOU COULD LOSE SOME OR ALL OF YOUR
INVESTMENT.

The
value of our common stock may decline and may be affected by numerous market
and internal conditions such as future sales by current shareholders which
could result in the loss of some or the entire amount invested in our stock. We
could also issue shares of preferred stock that have rights senior to the
common stock.

OUR PRINCIPAL
STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR OUTSTANDING
COMMON STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR
OPERATIONS.

Our
executive officers, directors and holders of more than 5% of our outstanding
common stock, together with their respective affiliates, currently own
approximately 37% of our voting stock, including shares subject to outstanding
options and warrants. These stockholders are able to determine the composition
of our board of directors, retain the voting power to approve all matters
requiring stockholder approval and will continue to have significant influence
over our operations. This concentration of ownership could have the effect of
delaying or preventing a change in control of the Company, preventing or
frustrating any attempt by our stockholders to replace or remove the current
management, or otherwise discouraging a potential acquirer from attempting to
obtain control of the company, which in turn could limit the market value of
our common stock.

20

---



WE ARE HIGHLY
DEPENDENT ON OUR MANAGEMENT AND OUR BUSINESS WOULD BE MATERIALLY ADVERSELY
AFFECTED IF ANY OF OUR EXECUTIVES LEAVE.

The
operations and financial success of the Company are significantly dependent on
its Chief Executive Officer who was the sole member of the board of directors
as of December 31, 2007. Although we maintain key man life insurance on Dr.
Chess, our President and Chief Executive Officer, in the event that he or other
executives, become unable or unwilling to continue to direct operations, the
Company lacks the funds and financial resources to replace departing management
and we would be materially adversely affected. Operations could be materially
affected and under certain circumstances, shareholders would lose their entire
investment. Further, Dr. Chess is the sole member of several limited liability
companies that perform non-medical administrative and support services in
certain states where we are prohibited from directly owning a medical operation
due to corporate practice of medicine laws in those states. Accordingly, in the
event that Dr. Chess were to leave our Company, we could lose the financial
benefit derived from those limited liability companies.

WE ARE A
HOLDING COMPANY AND OUR ASSETS CONSIST PRIMARILY OF INVESTMENTS IN OUR SUBSIDIARIES
AND CONSEQUENTLY OUR SHAREHOLDERS MAY NOT RECEIVE ANY DIRECT BENEFIT WHICH MAY
BE DERIVED FROM OUR SUBSDIARIES.

We
are a holding company and our assets consist primarily of investments in our
subsidiaries. Other than providing administrative support, the Company engages
in no business directly. The subsidiaries are distinct legal entities and have
no obligation to pay any dividends or make advances or loans to us.

WE FACE
SIGNIFICANT COMPETITIVE RISKS.

The
healthcare industry is highly competitive. We face competition from many large
and small companies. Many of these companies have financial resources far
greater than ours and have greater leverage in business and personnel. A high
degree of competition is expected to continue and there are no significant
barriers to entry into this business. Our business may be adversely affected by
these factors in a manner that causes our shareholders to lose their entire
investment.

IF WE DO NOT
MANAGE OUR GROWTH SUCCESSFULLY, OUR GROWTH MAY SLOW, DECLINE OR STOP, AND WE
MAY NEVER BECOME PROFITABLE.

If
we do not manage our growth successfully, our growth may slow, decline or stop,
and we may never become profitable. We have expanded our operations rapidly and
plan to continue to expand. This expansion has created significant demands on
our administrative, operational and financial personnel and other resources.
Additional expansion in existing or new markets could strain resources and
increase the need for capital. Our personnel, systems, procedures, controls and
existing space may not be adequate to support further expansion. In addition,
because our business strategy emphasizes growth, the failure to achieve our
stated growth objectives or the growth expectations of investors could cause
our stock price to decline.

OUR PRODUCTS
AND SERVICES MAY NOT BE ACCEPTED IN THE MARKETPLACE.

In
connection with the commercialization of our health information system, we are
marketing services designed to link patients, health care providers and payers
in order to provide specialized management services for targeted patient

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populations.
However, at this time, services of this type have not gained wide spread
acceptance from our customers. This is still perceived to be a new business
concept in an industry characterized by an increasing number of market entrants
who have introduced or are developing an array of new services. As is typical
in the case of a new business concept, demand and market acceptance for newly
introduced services are subject to a high level of uncertainty, and there can
be no assurance as to the ultimate level of market acceptance for our system,
especially in the health care industry, in which the containment of costs is
emphasized. Because of the subjective nature of patient compliance, we may be
unable, for an extensive period of time, to develop a significant amount of
data to demonstrate to potential customers the effectiveness of our services.
Even after such time, no assurance can be given that our data and results will
be convincing or determinative as to the success of our system. There can be no
assurance that increased marketing efforts and the implementation of our
strategies will result in market acceptance for our services or that a market
for our services will develop or not be limited.

OUR AGREEMENTS
WITH OUR CUSTOMERS MAY BE TERMINATED BY OUR CUSTOMERS ON RELATIVELY SHORT
NOTICE.

Our
current services agreements with our customers generally automatically renew
but may be terminated by those customers without cause upon short notice. In
general, customer contracts may include significant performance criteria and
implementation schedules for us. Failure to satisfy such criteria or meet such
schedules could also result in termination of the agreements.

THE SUCCESS OF
OUR PROGRAMS IS HIGHLY DEPENDENT ON THE ACCURACY OF INFORMATION PROVIDED BY
PATIENTS.

Our
ability to monitor and modify patient behavior and to provide information to
health care providers and payers, and consequently the success of our care
management system, is dependent upon the accuracy of information received from
patients. We have not taken and do not expect to take, specific measures to
determine the accuracy of information provided to us by patients regarding
their medical histories. No assurance can be given that the information our
patients provide us will be accurate. To the extent that patients have chosen
not to comply with prescribed treatments, such patients might provide
inaccurate information to avoid detection. Because of the subjective nature of
medical treatment, it will be difficult for us to validate or confirm any such
information. In the event that patients enrolled in our programs provide
inaccurate information to a significant degree, we would be materially and
adversely affected. Furthermore, there can be no assurance that our patient
interventions will be successful in modifying patient behavior, improving
patient health or reducing costs in any given case. Many potential customers
may seek data from us with respect to the results of its programs prior to
retaining us to develop new care management or other health information
programs. Our ability to market our system to new customers may be limited if
we are unable to demonstrate successful results for our programs.

OUR OPERATING
RESULTS HAVE FLUCTUATED IN THE PAST AND COULD FLUCTUATE IN THE FUTURE.

Our
operating results have varied in the past and may fluctuate significantly in
the future due to a variety of factors, many of which are outside of our control.

22

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OUR BUSINESS
IS DEPENDENT ON DATA PROCESSING AND TRANSMISSION CAPABILITIES.

Our
business is dependent upon its ability to store, retrieve, process and manage
data and to maintain and upgrade our data processing capabilities. Interruption
of data processing capabilities for any extended length of time, loss of stored
data, programming errors, other computer problems or interruptions of telephone
service could have a material adverse effect on our business.

ANY INABILITY
TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR COMPETITIVE
POSITION.

We
consider our methodologies, processes and intellectual property to be
proprietary. We seek to protect our proprietary information through
confidentiality agreements with our employees. Our policy is to have employees
enter into confidentiality agreements that contain provisions prohibiting the
disclosure of confidential information to anyone outside of the company. There
can be no assurance that the steps we take to protect our intellectual property
will be successful. If we do not adequately protect our intellectual property,
competitors may be able to use our technologies and erode or negate our
competitive advantage.

IF OUR ACTUAL
FINANCIAL RESULTS VARY FROM ANY PUBLICLY DISCLOSED FORECASTS, OUR STOCK PRICE
COULD DECLINE MATERIALLY.

Our
actual financial results might vary from those that we anticipate, and these
variations could be material. Publicly disclosed forecasts reflect numerous
assumptions concerning expected performance, as well as other factors, which
are beyond our control, and which might not turn out to have been correct.
Although we believe that the assumptions underlying the projections are
reasonable, actual results could be materially different, and to the extent
actual results are materially different, our stock price could be materially
adversely impacted.

CHANGES IN
MARKET COULD ADVERSELY AFFECT OUR CONTRACTS WHICH COULD HAVE THE EFFECT OF
DECREASING OUR REVENUES

The
healthcare industry in which the Company operates currently faces significant
cost reduction pressures as a result of constrained revenues from governmental
and private revenue sources and increasing underlying medical care costs. We
believe that these pressures will continue and possibly intensify.

The Companys services are geared
specifically to assist its customers in controlling the high costs associated
with the treatment of complex patients; however, the pressures to reduce costs
in the short term may negatively affect its ability to sign and/or retain
contracts. In addition, this focus on cost reduction may cause its customers to
focus on contract restructurings that reduce the fees for services rendered by
the Company. These financial pressures could have a negative impact on our
operations.

THE COMPANYS
COMMON STOCK IS TRADED ON AN EXTREMELY ILLIQUID MARKET, MAKING IT DIFFICULT FOR
INVESTORS TO SELL THEIR SHARES.

There
is an extremely limited and illiquid public market for the Companys common
stock. The common stock is currently quoted on the Over the Counter Bulletin
Board (HCNV.OB), but trading has historically been minimal. Therefore,

23

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the
market for the common stock is limited. The trading price of the Companys
common stock could be subject to wide fluctuations in response to variations in
quarterly results of operations, the gain or loss of significant customers,
announcements of new products by the Company or its competitors, general
conditions in our industry, and large shareholders selling or purchasing
shares. There is no assurance that investors will be able to purchase additional
shares or sell their shares within the time frame or at a price they desire.

OUR FAILURE TO
MAINTAIN ADEQUATE PRICE LEVELS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.

In
recent years, the healthcare industry has undergone significant change driven
by various efforts to reduce costs, including potential national healthcare
reform, trends toward managed care, cuts in Medicare reimbursements, and
horizontal and vertical consolidation within the healthcare industry. Our
inability to react effectively to these and other changes in the healthcare
industry could adversely affect our operating results. We cannot predict
whether any healthcare reform efforts will be enacted and what effect any such
reforms may have on us or our customers. Our inability to react effectively to
changes in the healthcare industry could result in a material adverse effect on
our business.

THE
ESTABLISHED RELATIONS WITH THE KEY LONG TERM CARE FACILITIES MAY BE TERMINATED
BY THEM, WHICH WILL RESULT IN A MATERIAL REDUCTION IN REVENUES.

Our
ability to generate revenue from our affiliate, NP Care, LLC is dependent upon
securing and maintaining contracts with both individual and corporately owned
long term care facilities, such as nursing homes and assisted living
facilities. The nature of our contractual relationships with these facilities
is such that they may be terminated by either party without cause and with
typically a thirty to ninety day written notice of the intent to terminate. Our
gross charges are concentrated with one customer in our NP Care business. Gross
charges to Medicare during 2007 represented approximately 80% of all gross
charges for our fee for service billings. Additionally, Medicare payments
during 2007 represented approximately 89% of all cash received for fee for
service charges. Reductions in Medicare reimbursement rates would have a severe
negative effect on our future results of operations.

RECONCILIATIONS
UNDER THE COMPANYS CONTRACT WITH HEALTH PLANS COULD RESULT IN ADDITIONAL CASH
TO BE PAID BY IT OR RESULT IN LESS CASH TO BE PAID TO THE COMPANY BY HEALTH
PLANS THAN ORIGINALLY ESTIMATED.

Our
contracts with health plans are based upon a set fee charged by us on a per
member per month (PMPM) basis. These contracts typically require a minimum
enrollment of the health plans members who qualify for our programs. We are
reimbursed monthly based upon the actual census of enrolled members. Our
estimated future revenues are based upon achieving high levels of enrollment.

WE ARE SUBJECT
TO EXTENSIVE CHANGES IN THE HEALTHCARE INDUSTRY.

The
healthcare industry is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operations of
healthcare industry participants. Several lawmakers have announced that they
intend to propose programs to reform the U.S. health care system. These
programs may contain proposals to increase governmental involvement in health
care, lower reimbursement rates and otherwise change our operating environment
and our targeted customers. Healthcare industry participants may react to these

24

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proposals and
the uncertainty surrounding such proposals by curtailing or deferring certain
expenditures, including those for our programs. We cannot predict what impact,
if any, such changes in the healthcare industry might have on our business,
financial condition and results of operations. In addition, many healthcare
providers are consolidating to create larger healthcare delivery enterprises
with greater regional market power. As a result, the remaining enterprises
could have greater bargaining power, which may lead to price erosion of our
programs.

OUR BUSINESS
IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.

The
healthcare industry, including our current business, is subject to extensive
regulation by both the Federal and State governments. A number of states have
extensive licensing and other regulatory requirements applicable to companies
that provide healthcare services. Additionally, services provided to health
benefit plans in certain cases are subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA), as amended, and may be affected
by other State and Federal statutes. Generally, State laws prohibit the practice
of medicine and nursing without a license. Many states interpret the practice
of nursing to include health teaching, health counseling, the provision of care
supportive to, or restorative of, life and well being and the execution of
medical regimens prescribed by a physician. Accordingly, to the extent that we
assist providers in improving patient compliance by publishing educational
materials or providing behavior modification training to patients, such
activities could be deemed by a state to be the practice of medicine or
nursing. Although we have not conducted a survey of the applicable law in all
50 states, we believe that we are not engaged in the practice of medicine or
nursing. There can be no assurance, however, that our operations will not be challenged
as constituting the unlicensed practice of medicine or nursing. If such a
challenge were made successfully in any state, we could be subject to civil and
criminal penalties under such states law and could be required to restructure
its contractual arrangements in that state. Such results, or the inability to
successfully restructure our contractual arrangements, could have a material
adverse effect on our operations.

We
and our customers may also be subject to Federal and state laws and regulations
that govern financial and other arrangements among healthcare providers. These
laws prohibit certain fee splitting arrangements among healthcare providers, as
well as direct and indirect payments, referrals or other financial arrangements
that are designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products and services.
Possible sanctions for violation of these restrictions include civil and
criminal penalties. Criminal penalties range from misdemeanors, which carry
fines of not more than $10,000 or imprisonment for not more than one year, or
both, to felonies, which carry fines of not more than $25,000 or imprisonment
for not more than five years, or both. Further, criminal violations may result
in permanent mandatory exclusions and additional permissive exclusions from
participation in Medicare and Medicaid programs.

Regulation
in the health care field is constantly evolving. We are unable to predict what
government regulations, if any; affecting our business may be promulgated in
the future. Our business could be materially adversely affected by the failure
to obtain required licenses and governmental approvals, comply with applicable
regulations or comply with existing or future laws, rules or regulations or
their interpretations.

25

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COMPLIANCE
WITH NEW FEDERAL AND STATE LEGISLATIVE AND REGULATORY INITIATIVES COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS OR MAY REQUIRE US TO SPEND
SUBSTANTIAL AMOUNTS ACQUIRING AND IMPLEMENTING NEW INFORMATION SYSTEMS OR
MODIFYING EXISTING SYSTEMS.

We
and our customers are subject to considerable state and federal government
regulation. Many of these regulations are vaguely written and subject to
differing interpretations that may, in certain cases, result in unintended
consequences that could impact our ability to effectively deliver services. The
current focus on regulatory and legislative efforts to protect the
confidentiality and security of individually-identifiable health information,
as evidenced by the Health Insurance Portability and Accountability Act of
1996, (HIPAA), is one such example.

We
believe that federal regulations governing the confidentiality of
individually-identifiable health information permit us to obtain
individually-identifiable health information for health and care support
purposes from a health plan customer; however, state legislation or regulation
could preempt federal legislation if it is more restrictive. Federal
regulations governing the security of electronic individually-identifiable
health information became mandatory for customers in April 2005. We are
contractually required to comply with certain aspects of these confidentiality
and security regulations.

Although
we continually monitor the extent to which specific state legislation or
regulations may govern our operations, new federal or state legislation or
regulation in this area that restricts our ability to obtain
individually-identifiable health information would have a material negative
impact on our operations.

GOVERNMENT
REGULATORS MAY INTERPRET CURRENT REGULATIONS GOVERNING OUR OPERATIONS IN A
MANNER THAT NEGATIVELY IMPACTS OUR ABILITY TO PROVIDE SERVICES.

Broadly
written Medicare fraud and abuse laws and regulations that are subject to
varying interpretations may expose us to potential civil and criminal
litigation regarding the structure of current and past contracts entered into
with our customers. We believe that our operations have not violated and do not
violate the provisions of the fraud and abuse statutes and regulations;
however, private individuals acting on behalf of the United States government,
or government enforcement agencies themselves, could pursue a claim against us
under a new or differing interpretation of these statutes and regulations.

Our
participation in federal programs may result in our being subject directly to
various federal laws and regulations, including provisions related to fraud and
abuse, false claims and billing and reimbursement for services, and the False
Claims Act. Violations of the False Claims Act are punishable by treble damages
and penalties of up to $11,000 per false claim. Actions may be brought under
the False Claims Act by the government as well as by private individuals, known
as whistleblowers, who are permitted to share in any settlement or judgment.
Also, federal law contains various prohibitions related to false statements and
false claims, some of which apply to private payers as well as federal
programs.

WE FACE
COMPETITION FOR STAFFING, WHICH MAY INCREASE OUR LABOR COSTS AND REDUCE
PROFITABILITY.

We compete with other healthcare and services
providers in recruiting qualified management and staff personnel for the
day-to-day operations of our

26

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business,
including nurses and other healthcare professionals. In some markets, the
scarcity of nurses and other medical support personnel has become a significant
operating issue to healthcare businesses. This shortage may require us to enhance
wages and benefits to recruit and retain qualified nurses and other healthcare
professionals. A failure to recruit and retain qualified management, nurses and
other healthcare professionals, or to control labor costs, could have a
material adverse effect on our profitability.

WE MAY FACE
COSTLY LITIGATION THAT COULD FORCE US TO PAY DAMAGES AND HARM OUR REPUTATION.

Like
other participants in the healthcare market, we are subject to lawsuits
alleging negligence, product liability or other similar legal theories, many of
which involve large claims and significant defense costs. Any of these claims,
whether with or without merit, could result in costly litigation, and divert
the time, attention, and resources of management. Although we currently maintain
liability insurance intended to cover such claims, there can be no assurance
that the coverage limits of such insurance policies will be adequate or that
all such claims will be covered by the insurance. In addition, these insurance
policies must be renewed annually. Although we have been able to obtain
liability insurance, such insurance may not be available in the future on
acceptable terms, or at all. A successful claim in excess of the insurance
coverage could have a material adverse effect on our results of operations or
financial condition.

WE COULD SHARE
IN POTENTIAL LIABILITY RESULTING FROM ADVERSE MEDICAL CONSEQUENCES OF PATIENTS.

We
provide information to healthcare providers and managed care organizations upon
which determinations affecting medical care are made. As a result, we could
share in potential liabilities for resulting adverse medical consequences to
patients. In addition, we could have potential legal liability in the event we
fail to correctly record or disseminate patient information. Although we do not
believe that we will directly engage in the practice of medicine or direct
delivery of medical services and have not been a party to any such litigation,
we maintain a professional liability policy with coverage of $3 million in the
aggregate and $1 million per occurrence. There can be no assurance that our
procedures for limiting liability have been or will be effective, that we will
not be subject to litigation that may adversely affect our results of
operations, that appropriate insurance will be available to us in the future at
acceptable cost or at all, or that any insurance we maintain will cover, as to
scope or amount, any claims that may be made against us.

AN INABILITY
TO ACCESS FINANCIAL MARKETS COULD ADVERSELY AFFECT THE EXECUTION OF THE
COMPANYS BUSINESS PLAN.

The
Company cannot give assurance that additional capital will not be needed,
either through issuing more common stock, other equity securities or debt. Any
additional debt or preferred equity securities would be senior to common equity
holders in bankruptcy. Any additional common stock issued by the Company would
dilute existing shareholder interests. Further, no assurance can be given as to
how much additional working capital will be required or that additional
financing can be obtained on terms that will allow the Company to execute its
business plans or meet its financial obligations as they become due.

The
Company relies on access to both short-term money markets and longer-term capital
markets as a significant source of liquidity for capital

27

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requirements
not satisfied by cash flow from operations. Management cannot assure that the
Company and its subsidiaries will maintain sufficient access to these financial
markets based upon the Companys current financial position. Moreover, certain
developments outside of the Companys control may increase the cost of
borrowing or restrict its ability to access one or more financial markets. Such
developments could include, but are not limited to, an economic downturn, an
increase in interest rates or a weakening of the Companys financial position.

THE COST TO
THE COMPANY TO COMPLY WITH SEC RULES AND REGULATIONS MAY BE OVERLY BURDENSOME.

Upon
effectiveness of our Form 10-SB, the Company became subject to the filing
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Pursuant to the Exchange Act, the Company will be
required to file quarterly and annual reports and reports regarding certain
interim current activities. The inability to timely file the necessary SEC
reports could cause the public to lose confidence in the Company and materially
adversely affect the Companys stock price and ability to raise capital.

IF WE ARE UNABLE
TO CERTIFY THE EFFECTIVENESS OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING,
WE COULD SUFFER A LOSS OF PUBLIC CONFIDENCE IN OUR INTERNAL CONTROLS, WHICH
COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL PERFORMANCE AND THE MARKET VALUE
OF OUR COMMON STOCK.

Item
308 of SEC Regulation S-K, which was promulgated pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, we are required to provide an annual report on our
internal control over financial reporting, including an assessment as to whether
or not our internal control over financial reporting is effective beginning
with our Annual Report on Form 10-KSB or Form 10-K for the fiscal year ended
December 31, 2007. We are also required to have our auditors attest to our
assessment and our CEO and CFO to individually opine on the effectiveness of
our internal controls over financial reporting for the fiscal year ended
December 31, 2008. We have completed an initial assessment of our internal
control environment. We did identify material weaknesses which will
be addressed during the year ended December 31, 2008. If we are unable to
complete this testing by the end of the year we would be deficient in our reporting
obligations under the Exchange Act, which may restrict our access to capital
markets. Under any of these circumstances, we could be subjected to additional
regulatory scrutiny and suffer a loss of public confidence in our internal
control, which could have a negative impact on our financial performance and
the market value of our common stock.

OUR COMMON
STOCK COULD BE CONSIDERED A PENNY STOCK WHICH COULD MAKE IT DIFFICULT FOR
INVESTORS TO PURCHASE AND DISPOSE OF OUR SHARES

The
Securities Enforcement and Penny Stock Reform Act of 1990 require additional
disclosure related to the market for penny stocks and for trades in any stock
defined as a penny stock. The SEC has adopted regulations under this statute
that defines a penny stock generally to be any non-NASDAQ equity security that
has a market price of less than $5.00 per share. The SECs definition of a
penny stock is likely to apply to the Companys common stock. As such, the
common stock would be subject to certain risks associated with trading in penny
stocks. These risks include, but are not limited to, difficulty for investors
in purchasing or disposing of shares, obtaining

28

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accurate bid
and ask quotations, establishing the market value of the shares, and a lack of
securities analyst coverage.

Unless
exempt, for any transaction in a penny stock, the rules require the delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the SEC explaining important concepts involving the penny stock market, the
nature of such market, terms used in such market, the broker/dealers duties to
the customer, a toll-free telephone number for inquiries about the
broker/dealers disciplinary history and the customers rights and remedies in
case of fraud or abuse in the sale. Disclosure is also required with respect to
commissions payable to both the broker/dealer and the registered representative
and current quotations of securities. Also, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.

BECAUSE WE DO
NOT INTEND TO PAY ANY DIVIDENDS, STOCKHOLDERS MUST RELY ON STOCK APPRECIATION
FOR ANY RETURN ON THEIR INVESTMENT IN OUR COMMON STOCK.

We
have not paid any dividends on our common stock and we do not intend to declare
and pay any dividends on our common stock. Earnings, if any, are expected to be
retained by us to finance and expand our business.

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ITEM
2. DESCRIPTION OF PROPERTY.

We
entered in to a new sublease for our corporate offices at Ten Progress Drive
Shelton, CT, effective October 1, 2007, which renews automatically in one year
increments. Our new corporate offices consist of 12,920 square feet of space
with a gross annual rental of $125,970.

We
lease approximately 12,500 square feet of office space in nine other states for
our operating units. The lease expirations range from March 2009 to October
2011.

We
believe that the condition of our leased facilities is excellent and that the
provided space is sufficient for our use and operation at the present time. In
the opinion of management, these properties are adequately insured and suitable
for our anticipated future use.

Our
property is not leased from an affiliate.

ITEM
3. LEGAL PROCEEDINGS.

The
Company is
involved in certain legal proceedings and is subject to certain lawsuits and
compliance regulations in the ordinary course of its business. Although the
ultimate effect of these matters is often difficult to predict, management
believes that the resolution will not have a material adverse effect on the
Companys consolidated financial statements.

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

During the
period ending December 31, 2007, there has not been any matter which was
submitted to a vote of the Companys shareholders through the solicitation of
proxies or otherwise.

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PART II

ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market
Information

Our common
stock was initially traded on the Pink Sheets in March 2005 under the symbol
AYHG.PK. In June 2005, as a result of our reverse merger transaction, we
changed our symbol to HCNV.PK. Our stock currently trades on the over the
counter bulletin board under the symbol HCNV.OB The table below sets forth
the high and low sales prices of our common stock during the last two years.

|                 |  |      |      |     |   |      | 
|---------------- |  | ---- | ---- | --- | - | ---- | 
|                 |  | 2007 |     
|                 |  | High |      | Low |  
|                 |  |      |      |     |  
|                 |  |      |      |     |   |      | 
|First
  Quarter  |  | $    | 5.00 |     | $ | 1.40 | 
|Second
  Quarter |  | $    | 7.00 |     | $ | 2.50 | 
|Third
  Quarter  |  | $    | 3.50 |     | $ | 2.05 | 
|Fourth
  Quarter |  | $    | 3.50 |     | $ | 1.05 | 

Holders

As of March
28, 2008, 38,615,363 shares of our common stock are issued and outstanding and
there are approximately 128 shareholders of record.

Dividends

The
Company has never paid dividends and does not expect to pay dividends for the
foreseeable future.

There
is an extremely limited and illiquid public market for the Companys common
stock. The common stock is currently quoted on the over the counter bulletin
board (HCNV.OB), but trading has historically been minimal. As of December 31,
2007, 38,600,407 shares of our common stock are issued and outstanding. This
number does not include beneficial owners of common stock whose shares are held
in the names of various dealers, clearing agencies, banks brokers and other
fiduciaries.

We
became a reporting company under the Exchange Act upon the effectiveness of our
Form 10-SB registration statement. The effective date for Form 10-SB was
February 13, 2007.

The
SEC has recently adopted amendments to Rule 144 which became effective on
February 15, 2008. Under these amendments, a person who has beneficially
owned restricted shares of our common stock for at least six months would be
entitled to sell their securities provided that (i) such person is not
deemed to have been one of our affiliates at the time of, or at any time during
the three months preceding, a sale and (ii) we are subject to the Exchange
Act periodic reporting requirements for at least three months before the sale.

Persons
who have beneficially owned restricted shares of our common stock for at least
six months but who are our affiliates at the time of, or at any

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time during
the three months preceding, a sale, would be subject to additional
restrictions, by which such person would be entitled to sell within any
three-month period only a number of securities that does not exceed the greater
of either of the following:

| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 
  1% of the total number of securities of the same class then outstanding,
  which will equal 313,664 shares (assuming the underwriters do not exercise
  their over-allotment option) immediately after this offering; or
| |                                                                                                                                                                                                                             
| | 
  the average weekly trading volume of such securities during the four calendar
  weeks preceding the filing of a notice on Form 144 with respect to the sale;                                                            
| |                                                                                                                                                                                                                             
| | 
  provided, in each case, that we are subject to the Exchange Act periodic
  reporting requirements for at least three months before the sale.                                                                            

Such
sales by affiliates must also comply with the manner of sale, current public
information and notice provisions of Rule 144.

TRANSFER AGENT

Our
transfer agent is American Stock Transfer and Trust Company. Their address is
6201 15th Avenue Brooklyn, New York, 11219.

(d) Recent
Sales of Unregistered Securities

The
following is a list of our securities that have been sold or issued by us
during the past three years. These securities were sold without registration
under the Securities Act in reliance on Section 4(2) of the Securities Act.
There were no underwriting discounts or commissions paid in connection with the
sale of these securities.

During
2004, the Company entered into a subscription agreement with an investor
whereby the investor purchased 2,748,897 shares of common stock at an aggregate
purchase price of $500,000.

In
June 2005 through April, 2006, we sold approximately $1,257,985 in principal
amount of convertible debentures to 18 investors (June Offering). In addition
to the convertible debentures, we issued 1,257,985 shares of our common stock
to these investors. The holders of such notes and common stock represented in
writing that they were accredited investors and acquired the securities for
their own accounts. A legend was placed on the securities stating that such
securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration statement covering
such shares or an the availability of an exemption from the registration
requirements of the Securities Act.

In
connection with the June Offering, we issued, in March 2007, approximately
1,708,000 shares of our common stock as a result of the conversion of the June
Offering Convertible Debentures. As provided in those Debentures, the holders
were entitled to convert the principal amount of the Debenture in the event
that we became a fully reporting company. As indicated in this Form 10-KSB, we
became a fully reporting company on February 13, 2007 and, accordingly, the
June Offering investors converted their Debentures. A legend was placed on the
securities stating that such securities have not been registered under the Securities
Act and cannot be sold or otherwise

32

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transferred
without an effective registration statement covering such shares or an the
availability of an exemption from the registration requirements of the
Securities Act.

In
June 2006, the Company sold a total of 142,669 shares of restricted common stock
to several of its key managers for aggregate net proceeds of approximately
$107,000 and warrants were exercised by a shareholder with the Company
realizing $500,000 in net proceeds. These proceeds were applied to an
outstanding note payable to the same shareholder in the amount of $500,000.

On
July 11, 2006, we issued a convertible promissory note to the Rubin Family
Irrevocable Stock Trust in the principal face amount of $200,000, to be funded
$100,000 upon issuance of the note and $100,000 on August 11, 2006. The
convertible debentures are convertible only if the amount owing there under are
not repaid. The holder of such note represented in writing that it was an
accredited investor and acquired the securities for its own account. On October
10, 2006, the Company paid the Rubin Family Irrevocable Stock Trust $203,812 in
full satisfaction of the principal and accrued interest on the note. A legend
was placed on the securities stating that such securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration statement covering such shares or an the
availability of an exemption from the registration requirements of the Securities
Act.

In September 2006, through March 2007, we sold 3,256,400 shares of our common
stock for $3,256,400 to 15 investors (September Offering). In addition
to the shares of our common stock, we issued warrants to purchase 3,256,400 shares
of our common stock at $1.25 per share to these investors. The investors
represented in writing that they were accredited investors and acquired the
securities for their own accounts. A legend was placed on the securities
stating that such securities have not been registered under the Securities Act
and cannot be sold or otherwise transferred without an effective registration
statement covering such shares or an the availability of an exemption from the
registration requirements of the Securities Act.

In March 2007, in connection with the September Offering, we requested that the
investors exercise their respective warrants issued in the September Offering
and in return receive an additional 2007 warrant at an exercise price of $3.00
for every two warrants exercised from the September Offering. During March and
April 2007, we received approximately $1,187,500 from the exercise of the
September Offering warrants and have issued 2007 warrants for an additional
475,000 shares of our common stock to five (5) September Offering investors.
The investors represented in writing that they were accredited investors and
acquired the securities for their own accounts. A legend was placed on the
securities stating that such securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration statement covering such shares or an the availability of an
exemption from the registration requirements of the Securities Act.

During
the second quarter of 2007, the Company sold to four (4) private investors a
total of 1,666,667 shares of restricted common stock for aggregate net proceeds
of $5,000,000. Additionally, the Company issued warrants to purchase 833,333
shares of common stock at a strike price of $4.00 to these same investors, the
warrants are exercisable for a period of four (4) years. The investors
represented in writing that they were accredited investors and acquired the
securities for their own accounts. A legend was placed on the

33

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securities
stating that such securities have not been registered under the Securities Act
and cannot be sold or otherwise transferred without an effective registration
statement covering such shares or the availability of an exemption from the
registration requirements of the Securities Act.

In
October 2007, the Company sold to one (1) private investor a total of 250,000
shares of restricted common stock for aggregate net proceeds of $500,000. The
investor represented in writing that it was an accredited investor and acquired
the securities for its own accounts. A legend was placed on the securities
stating that such securities have not been registered under the Securities Act
and cannot be sold or otherwise transferred without an effective registration
statement covering such shares or the availability of an exemption from the
registration requirements of the Securities Act.

In
addition to the sale of restricted stock to the above mentioned investor, the
Company entered into a one-year consulting agreement with this investor. As
compensation for the services to be rendered the Company agreed to, and has,
issued 133,000 shares of restricted common stock.

During the fourth quarter of 2007, the Company issued to five (5)
private investors approximately $6.4 million of twelve month, 10% interest,
senior secured convertible debentures. Of this amount, approximately $1.4
million of the convertible debentures were issued as a result of four of the
investors converting previously issued promissory notes. The investors
represented in writing that they were accredited investors and acquired the
securities for their own accounts. The notes are convertible into common stock
at any time prior to maturity at an amount equal to 70% (75% for $3 million of
the notes) of the average low bid price for the twenty day period prior to the
conversion date subject to a floor price of $1.00. Additionally, if there is a
Qualified Financing, the note holders are entitled to, but not required to,
convert at a rate equal to a 30% discount of the price paid per share in the
Qualified Financing with the same limitation of a floor of $1.00. Additionally,
and in connection with the issuance of these convertible debentures, the Company
issued 636,477 warrants to the five private investors which are exercisable at
any time prior to expiry at a strike price equal to the strike price for
warrants granted under a Qualified Financing or if no Qualified Financing takes
place at the average of the lowest bid price for the 20 trading days prior to
the expire date per share. The Warrants have a five year maturity date from the
date of the note issuance. The term Qualified Financing is defined as the sale
for cash by the Company in a transaction or series of related transactions of
debt, equity, equity-linked securities or any combination thereof generating
gross proceeds to the Company (excluding the principal amount of any notes
tendered in connection therewith) of at least $10,000,000.

In addition to the sale of $6.4 million worth of convertible debentures
mentioned above the Company issued a $150,000 twelve month, 10% interest, senior
secured convertible debenture on November 26, 2007 in satisfaction of a
placement fee with one of its investors. The debenture is convertible into
common stock at any time prior to maturity at an amount equal to 75% of the
average low bid price for the twenty day period prior to the conversion date
subject to a floor price of $1.00. Additionally, if there is a Qualified
Financing, the debenture holders are entitled to, but not required to, convert
at a rate equal to a 25% discount of the price paid per share in the Qualified
Financing with the same limitation of a floor of $1.00. This convertible
debenture had a beneficial conversion discount because the conversion price of
the debenture was less than the fair value of the Companys common stock. The
value of the beneficial conversion discount was dependent upon the conversion
ratio of existing shares of the Companys common stock to shares of the
Companys common stock. The total value of the beneficial conversion discount of
$27,000 is being amortized over the life of the debenture through a charge to
interest expense. The convertible debenture of $150,000 is reflected on the
consolidated balance sheets net of the unamortized portion of beneficial
conversion discount of $24,750. For the year ended December 31, 2007, the
Company recorded interest expense of $2,250 related to the beneficial conversion
discount. In connection with the previously mentioned financing, the Company
also paid $240,000 in cash and issued 192,000 warrants in the fourth quarter of
2007 to purchase its common stock to a financial advisor. The warrants had a
fair value of $281,278 on the commitment date. The fair value of the warrants
was determined by using the Black-Scholes model assuming an exercise price of
$0.85, a risk free interest rate of 5%, volatility of 152% and an expected life
equal to the contractual life of the warrants.

On December 21, 2007, the Company satisfied $500,000 of accrued
expenses due to a vendor by issuing $500,000 of twelve month, 10% interest,
senior secured convertible debentures. The debenture is convertible into common
stock at any time prior to maturity at an amount equal to 70% of the average low
bid price for the twenty day period prior to the conversion date subject to a
floor price of $1.00.

Additionally, if there is a Qualified Financing, the debenture holders
are entitled to, but not required to, convert at a rate equal to a 30% discount
of the price paid per share in the Qualified Financing with the same limitation
of a floor of $1.00. This convertible debenture had a beneficial conversion
discount because the conversion price of the debenture was less than the fair
value of the Companys common stock. The value of the beneficial conversion
discount was dependent upon the conversion ratio of existing shares of the
Companys common stock to shares of the Companys common stock. The total value
of the beneficial conversion discount of $360,000 will be amortized over the
life of the debenture through a charge to interest expense.

During the first quarter of 2008, the Company sold an additional $425,000, of
which $250,000 was sold to the Chairman of the Company, under terms identical to
those outlined above relating to the $6.4 million convertible debentures sold
during the fourth quarter of 2007.

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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.

This
managements discussion and analysis of results of operations and financial
condition contains forward-looking statements that involve risks and
uncertainties. In some cases, you can identify these statements by
forward-looking words such as may, might, will, should, expect(s),
plan(s), anticipate(s), believe(s), estimate(s), predict(s),
intend(s), potential and similar expressions. All of the forward-looking
statements contained in this registration statement are based on estimates and
assumptions made by our management. These estimates and assumptions reflect our
best judgment based on currently known market and other factors. Although we
believe such estimates and assumptions are reasonable, they are inherently
uncertain and involve risks and uncertainties. In addition, managements
assumptions about future events may prove to be inaccurate. We caution you that
the forward-looking statements contained in this registration statement are not
guarantees of future performance and we cannot assure you that such statements
will be realized. In all likelihood, actual results will differ from those
contemplated by such forward-looking statements as a result of a variety of
factors. Except as required by law, we undertake no obligation to update any of
these forward-looking statements.

The
discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The following discussion of our financial condition and results of
operations should be read in conjunction with (1) our audited financial
statements for the years ended December 31, 2007 and 2006, contained elsewhere
in this Annual Report on Form 10KSB.

OVERVIEW

HC
Innovations, Inc. (the Company, We, Us, or Our) is a holding company
incorporated in Delaware that, through its subsidiaries, provides specialty
care management products and services.

Our
wholly owned subsidiary and operating company is Enhanced Care Initiatives,
Inc. (ECI). ECI is a specialty disease and care Management Company comprised
of several divisions each with a specific focus and intervention. Our mission
is to identify subgroups of people with high costs and disability and to create
and implement systems that improve their health, resulting in dramatic
reductions in the cost of their care. As a specialty disease and care
Management Company, we bring to our clients the ability to impact the health
and cost of their sickest, costliest subsets of patients. We combine our
proprietary state of the art information systems with highly trained nurses and
nurse practitioners. We provide intense, hands-on involvement with call center
backup and biometric monitoring. We connect care around the patient and around
the clock, providing case management if the patient requires hospitalization or
rehabilitation in a nursing home  always working to bring the patient safely
home. We connect directly with the patients physician by going with the
patient to doctor visits. The applications for our unique systems are numerous.

CLINICAL
STRATEGY

Identify
subgroups of people with common needs and create programs to fill the gaps in
care, stabilizing the health of the individual. These are highly

35

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complex
populations that require complex solutions. We combine best practices, state of
the art Electronic Health Record (EHR), communication tools, calls center
support and biometrics, with community-based, hands-on, high-touch care.

CORPORATE
STRATEGY

Create
scalable interventions which result in significant healthcare cost savings
which drive our growth visibility and profitability.

Management
has retained an investment advisory firm for the purpose of developing a
strategy to secure additional capital for working capital, continued investment
in information systems and the ongoing execution of our growth plans. As is
typical with early stage, growth companies, 2005, 2006 and 2007 losses are
largely a result of business development expenses as well as significant
investment in building infrastructure for growing the Companys divisions,
business and clinical systems and programs. During 2007, the Company opened NP
Care operations in the states of Illinois and Massachusetts bringing the total
number of NP Care operations to seven at December 31, 2007. During 2007 the
Company opened Easy Care operations in the state of New York under a contract
with Health Insurance Plan of New York (HIP) bringing the total number of
Easy Care operations to four at December 31, 2007. During the first quarter of
2008 the Company opened Easy Care operations in the state of Alabama bringing
the total number of Easy Care operations to five at March 30, 2008. The Company
enrolled the first two members in Alabama on March 11, 2008.

In
addition to the new operations opened during 2007, the Company has experienced
 growth in members under care within its Easy Care Operations. During
the second half of 2007, members under care increased by approximately 2,000
representing a 186% growth rate when compared to members under care at June 30,
2007.

RESULTS OF
OPERATIONS

The
Companys focus for the past five years was to invest in the areas of
IT/Systems building, clinical protocol training and development, human resource
recruiting, training and development as well as marketing and business
development expense. The Company has invested heavily in the development of its
proprietary software systems for fully integrated electronic health records for
its principal divisions: Easy Care and NP Care. During the past three years the
Company has also invested in additions to its management and systems
infrastructure in anticipation of rapid growth of its programs.

Management
believes that these investments in building the management infrastructure and
systems is critical, both to ensure effective execution of its business
model(s) in each market area, and to sustain high levels of revenue growth and
margin enhancement over time. Management believes its models are highly
scalable however there are significant start-up costs associated with scaling
to new markets and there can be no assurance that the Company will be
successful in securing new contracts and growing these new markets profitably.

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TWELVE-MONTHS ENDED DECEMBER 31, 2007 AND 2006 Revenues.

For
the twelve months ended December 31, 2007, net revenue was $12,880,723,
representing an increase of $6,714,631 or 109% as compared to the net revenue
of $6,166,092 for the twelve months ended December 31, 2006. The increase is a
result of growth from existing operations in the amount of $1,307,809 or 21% as
compared to the twelve months of 2006 as well as $5,406,822 of revenue from new
operations in the twelve months of 2007. During the twelve months of 2007, new
NP Care operations generated $2,762,028 in revenue and new Easy Care operations
generated $2,644,794 in revenue.

Cost of Net
Revenue and Gross Profit.

For
the twelve-months ended December 31, 2007 cost of net services was $12,480,408
which represents an increase of $7,447,272 or 148% as compared to the cost of
net services of $5,033,136 for the twelve months ended December 31, 2006. For
the twelve months ended December 31, 2007 gross profit was $400,315, 3% of net
revenues, which represents a decrease of $732,641 (65%) as compared to the
gross profit of $1,132,956, 18% of net revenue, for the twelve-months ended
December 31, 2006.

Selling,
General and Administrative Expense (SG&A expenses).

SG&A
expenses include the wages and salaries of administrative and business
development personnel, as well as other general and corporate overhead costs
not directly related to generation of net revenue. For the twelve-months ended
December 31, 2007 total SG&A Expenses were $10,169,374 representing an
increase of $6,204,837 (157%) as compared to the total SG&A Expenses of
$3,964,537 for the twelve-months ended December 31, 2006.

Depreciation and Amortization

Depreciation
and amortization expense are calculated using the straight line method over the
estimated useful lives of the assets, or, in the case of leasehold improvements
over the remaining term of the related lease, whichever is shorter. For the
twelve months ended December 31, 2007 depreciation and amortization expense
included in operating expenses was $460,888 representing an increase of
$191,248 (71%) as compared to the total depreciation and amortization expense
of $269,640 for the twelve-months ended December 31, 2006.

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Income (Loss)
from operations.

For
the twelve-months ended December 31, 2007 we incurred a loss from operations
    of $(10,229,947) representing an increase of $7,128,726 (230%) compared to
($3,101,221) for the twelve-months ended December 31, 2006. These changes are
    a result of factors mentioned above as well as the costs associated with
    the stock acquisition agreement. We expect improvement to our results of
    operations as revenues increase and we begin to absorb the incremental fixed
    costs associated with our expansion. Revenues and operating results are expected
    to fluctuate from period to period as a result of the timing of new contracts
and additional start-up costs associated with additional planned new markets.

INCOME
TAX EXPENSE.

The Company
has incurred net operating losses (NOLs) since inception. At December 31, 2007,
the Company had net operating loss carry forwards for federal and state income tax
purposes of approximately $9.3 million, which is available to offset future
federal taxable income, if any, ratably through 2027. These NOLs are subject
to review by federal and state tax authorities. Any significant change in ownership, as defined in Section 382 of the Internal
Revenue Code, may result in limitation on the amount of net operating loss which
could be utilized in a single year.

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PLAN OF
OPERATIONS - EASY CARE

Primary
Strategy.

Our primary strategy consists of the
following:

1.
MANAGED MEDICARE MARKET - Currently over five million enrolled  150,000 Easy
Care(SM) eligible. We are focusing on small to medium sized Medicare Advantage
programs with Medicare enrollment between 10,000 and 60,000. These plans are
independent and not part of large networks; they are growing their Medicare
membership, and are less likely to have their own disease management programs.
Most of these plans are well established, though some are relatively new to
Medicare. We believe we are well positioned to grow with the enrollment of
these companies.

(SOURCE OF
ABOVE DATA: http://www.cms.hhs.gov/ CENTERS FOR MEDICARE & MEDICAID
SERVICES (CMS), U.S. DEPARTMENT OF HEALTH & HUMAN SERVICES)

MANAGED CARE
DIRECT CONTRACTS
CURRENT CONTRACT

|                   |          |                   
|------------------ | -------- | ------------------
|HEALTH PLAN        | LOCATION | ENROLLED
EASY CARE
|                   |          |                   
|HealthSpring       | TN       | 998 at 12/31/07   
|                   |          |                   
|HealthSpring       | TX       | 39 at 12/31/07    
|                   |          |                   
|HealthSpring       | AL       | -0- at 12/31/07   
|                   |          |                   
|Health
  Insurance | NY       | 1,200 at 12/31/07 
|Plan of New
  York |          |                   
|                   |          |                   
|Amerigroup         | TX       | 252 at 12/31/07   

2.
SUBCONTRACTING WITH POPULATION BASED-SINGLE DISEASE ORIENTED DISEASE MANAGEMENT
COMPANIES  many of these companies either have large Medicare populations,
are partnering with an HMO in a CCI (Medicare demonstration project), or
seeking contracts with the states for Medicaid populations which include the
disabled. In these cases we are subcontracting with the company and enabling
them to provide a complete spectrum of care which includes hands-on and
presence in the community for the medically complex and frail; a capability
which none of these companies has developed: Alere, Health Dialog, Health
Management Corp/Wellpoint and McKesson.

|             |          |                
|------------ | -------- | ---------------
|DSM COMPANY  | LOCATION | COMMENT        
|             |          |                
|McKesson     | IL       | 621 at 12/31/07
|             |          |                
|HealthSpring | TN       | 50 at 12/31/07 
|             |          |                
|Aetna        | NJ       | 21 at 12/31/07 

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3.
MEDICAID CONTRACTS  although this is a population which could benefit from our
programs, the sales cycle is very long (up to two years) and the RFP (Request
for Proposal) process is too distracting for EASY CARE(SM) at this time. Our
approach in this context is to partner with other Disease Management and
Managed Care Organizations as part of their Request for Proposal responses.

4.
MCKESSON  we have a partnership agreement in place and are working with their
Disease Management Division on specific opportunities. A Contract was signed in
March 2007 for State of Illinois Medicaid patients in long term care
facilities.

PLAN OF
OPERATIONS - NP CARE

We
hope to achieve growth at a rate of nine facilities per quarter over a period
of four years in targeted markets. We anticipate growth will then slow down
secondary to saturation of prime facilities, decreased availability of nurse
practitioners and potential competition.

We
have established relationships with the key nursing home chains (for example
Harborside, Genoa, Sava, CareOne, THI, NHC); and have aggressively and
successfully competed with Evercare in the Connecticut and New Jersey markets.
We are confident that our continued focus on excellence in customer service and
delivering health outcomes will continue to position NP Care as the provider of
choice.

Financial Engine

NP Cares
revenue streams include four channels:

o Fee-for-Service  our nurse practitioners are paid on an event basis in all of our current
nursing homes.

o Special
Services  Resident Risk Assessments, Employee Physicals, Nursing Home-based
Educational programs are available on a service-based fee schedule.

o Medicare
Advantage SNPs  we have entered into a relationship with Aetna to be the
nurse practitioner source of care for their managed care nursing home patients
in select homes in New Jersey. We have also entered into a contractual
relationship with HealthSpring in Nashville, Tennessee.

o MCKESSON
- we have a partnership agreement in place and are working with their Disease
Management Division on specific opportunities. A Contract was signed in March,
2007 for State of Illinois Medicaid patients in long term care facilities.

LIQUIDITY AND
CAPITAL RESOURCES

We have historically financed our liquidity needs through a variety of
sources including proceeds from the sale of common stock, borrowing from banks,
loans from our stockholders, issuance of convertible debentures and cash flows
from operations. At December 31, 2007 and 2006, we had approximately $3.4
million and $150,000, respectively, in cash and cash equivalents. Operating
activities for the twelve-months ended December 31, 2007 used $9.6 million,
representing an

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increase of $7.8 million (419%) when compared to the cash used
in operating activities of $1.8 million for the twelve-months ended December 31,
2006. This change is primarily due to the increased investment in building
corporate infrastructure; start-up costs associated new contracts and increased
spending with respect to business development.

During
2004, the Company entered into a subscription agreement with an investor
whereby the investor purchased 2,748,897 shares of common stock at an aggregate
purchase price of $500,000.

During
2004, the Company entered into agreements with banks to establish line of
credit facilities to finance the on-going operations of the Company. As of
December 2007 and 2006, the total amounts outstanding on the lines of credit
were $200,000 and $200,000, respectively.

During
2004, the Company (Borrower) entered into a loan agreement with The Rubin
Family Irrevocable Stock Trust (Lender), a shareholder of HCI, whereby the
Lender extended a line of credit facility in the original principal amount not
to exceed $500,000 to the Borrower for general Corporate purposes. On December
31, 2007 and 2006, there was $-0- and $-0- outstanding on the line of credit,
respectively.

In
June 2005 through April, 2006, we sold approximately $1,257,985 in principal
amount of convertible debentures to 18 investors (June Offering). In addition
to the convertible debentures, we issued 1,257,985 shares of our common stock
to these investors. The holders of such notes and common stock represented in
writing that they were accredited investors and acquired the securities for
their own accounts. A legend was placed on the securities stating that such
securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration statement covering
such shares or an the availability of an exemption from the registration
requirements of the Securities Act.

In
connection with the June Offering, we issued, in March 2007, approximately
1,708,000 shares of our common stock as a result of the conversion of the June
Offering Convertible Debentures. As provided in those Debentures, the holders
were entitled to convert the principal amount of the Debenture in the event
that we became a fully reporting company. As indicated in this Form 10-KSB, we
became a fully reporting company on February 13, 2007 and, accordingly, the
June Offering investors converted their Debentures. A legend was placed on the
securities stating that such securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration statement covering such shares or an the availability of an
exemption from the registration requirements of the Securities Act.

In
June, 2006 the Company sold a total of 142,669 shares of restricted common
stock to several of its key managers for aggregate net proceeds of
approximately $107,000 and warrants were exercised by a shareholder with the
Company realizing $500,000 in net proceeds. These proceeds were applied to an
outstanding note payable to the same shareholder in the amount of $500,000.

On
July 11, 2006, we issued a convertible promissory note to the Rubin Family
Irrevocable Stock Trust in the principal face amount of $200,000, to be funded
$100,000 upon issuance of the note and $100,000 on August 11, 2006. The
convertible debentures are convertible only if the amounts owing thereunder are
not repaid. The holder of such note represented in writing that it was an

41

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accredited
investor and acquired the securities for its own account. On October 10, 2006,
the Company paid the Rubin Family Irrevocable Stock Trust $203,812 in full
satisfaction of the principal and accrued interest on the note. A legend was
placed on the securities stating that such securities have not been registered
under the Securities Act and cannot be sold or otherwise transferred without an
effective registration statement covering such shares or an the availability of
an exemption from the registration requirements of the Securities Act.

In
September 2006 through March 2007, we sold 3,256,400 shares of our common stock
for $3,256,400 to 15 investors (September Offering). In addition to the
shares of our common stock, we issued warrants to purchase 3,256,400 shares of
our common stock at $1.25 per share to these investors. The investors
represented in writing that they were accredited investors and acquired the
securities for their own accounts. A legend was placed on the securities
stating that such securities have not been registered under the Securities Act
and cannot be sold or otherwise transferred without an effective registration
statement covering such shares or an the availability of an exemption from the
registration requirements of the Securities
Act.

In
March 2007, in connection with the September Offering, we requested that the
investors exercise their respective warrants issued in the September Offering
and in return receive an additional warrant at an exercise price of $3.00 for
every two warrants exercised from the September Offering. During March and
April 2007, we received approximately $1,187,500 from the exercise of the
September Offering warrants and have issued 2007 warrants for an additional 475,000
shares of our common stock to five (5) September Offering investors. The
investors represented in writing that they were accredited investors and
acquired the securities for their own accounts. A legend was placed on the
securities stating that such securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration statement covering such shares or an the availability of an
exemption from the registration requirements of the Securities Act.

During
the second quarter of 2007, the Company sold to four (4) private investors a
total of 1,666,667 shares of restricted common stock for aggregate net proceeds
of $5,000,000. Additionally, the Company issued warrants to purchase 833,333
shares of common stock at a strike price of $4.00 to these same investors, the
warrants are exercisable for a period of four (4) years. The investors
represented in writing that they were accredited investors and acquired the
securities for their own accounts. A legend was placed on the securities
stating that such securities have not been registered under the Securities Act
and cannot be sold or otherwise transferred without an effective registration
statement covering such shares or the availability of an exemption from the
registration requirements of the Securities Act.

During
October of 2007, the Company sold to one (1) private investor a total of
250,000 shares of restricted common stock for aggregate net proceeds of
$500,000. The investor represented in writing that it was an accredited
investor and acquired the securities for its own accounts. A legend was placed
on the securities stating that such securities have not been registered under
the Securities Act and cannot be sold or otherwise transferred without an
effective registration statement covering such shares or the availability

42

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of
an exemption from the registration requirements of the Securities Act.

In
addition to the sale of restricted stock to the above mentioned investor, the
Company entered into a one-year consulting agreement with this investor. As
compensation for the services to be rendered the Company agreed to, and has,
issued 133,000 shares of restricted common stock.

During the fourth quarter of 2007, the Company issued to five (5) private investors approximately $6.4 million of twelve
month, 10% interest, senior secured convertible debentures.  Of this amount, approximately $1.4 million of the convertible debentures were issued as a result of four of the investors converting
previously issued promissory notes.  The investors represented in writing that they were accredited investors and acquired the securities for their own accounts.  The notes are convertible into common
stock at any time prior to maturity at an amount equal to 70% (75% for $3 million of the notes) of the average low bid price for the twenty day period prior to the conversion date subject to a floor
price of $1.00.  Additionally, if there is a Qualified Financing, the note holders are entitled to, but not required to, convert at a rate equal to a 30% discount of the price paid per share in the
Qualified Financing with the same limitation of a floor of $1.00.  Additionally, and in connection with the issuance of these convertible debentures, the Company issued 636,477 warrants to the five
private investors which are exercisable at any time prior to expiry at a strike price equal to the strike price for warrants granted under a Qualified Financing or if no Qualified Financing takes place
at the average of the lowest bid price for the 20 trading days prior to the expire date per share.  The Warrants have a five year maturity date from the date of the note issuance.  The
term Qualified Financing is defined as the sale for cash by the Company in a transaction or series of related transactions of debt, equity, equity-linked securities or any combination thereof generating
gross proceeds  to the Company (excluding the principal amount of any notes tendered in connection therewith) of at least $10,000,000.

In addition to the sale of $6.4 million worth of convertible debentures mentioned above the Company issued  a $150,000 twelve
month, 10% interest, senior secured convertible debenture on November 26, 2007 in satisfaction of a placement fee with one of its investors.  The debenture is convertible into common stock at any time prior
to maturity at an amount equal to 75% of the average low bid price for the twenty day period prior to the conversion date subject to a floor price of $1.00.  Additionally, if there is a Qualified Financing,
the debenture holders are entitled to, but not required to, convert at a rate equal to a 25% discount of the price paid per share in the Qualified Financing with the same limitation of a floor of $1.00.
This convertible debenture had a beneficial conversion discount because the conversion price of the debenture was less than the fair value of the Companys common stock. The value of the beneficial
conversion discount was dependent upon the conversion ratio of existing shares of the Companys common stock to shares of the Companys common stock. The total value of the beneficial conversion discount
of $27,000 is being amortized over the life of the debenture through a charge to interest expense. The convertible debenture of $150,000 is reflected on the consolidated balance sheets net of the
unamortized portion of beneficial conversion discount of $24,750. For the year ended December 31, 2007, the Company recorded interest expense of $2,250 related to the beneficial conversion discount.
In connection with the previously mentioned financing, the Company also paid $240,000 in cash and issued 192,000 warrants in the fourth quarter of 2007 to purchase its common stock to a financial advisor.
The warrants had a fair value of $281,278 on the commitment date.  The fair value of the warrants was determined by using the Black-Scholes model assuming an exercise price of $0.85, a risk free interest
rate of 5%, volatility of 152% and an expected life equal to the contractual life of the warrants.

On December 21, 2007, the Company satisfied $500,000 of accrued expenses due to a vendor by issuing $500,000 of twelve month,
10% interest, senior secured convertible debentures.  The debenture is convertible into common stock at any time prior to maturity at an amount equal to 70% of the average low bid price for the twenty day
period prior to the conversion date subject to a floor price of $1.00.

Additionally, if there is a Qualified Financing, the debenture holders are entitled to, but not required to, convert at a rate
equal to a 30% discount of the price paid per share in the Qualified Financing with the same limitation of a floor of $1.00.  This convertible debenture had a beneficial conversion discount because the
conversion price of the debenture was less than the fair value of the Companys common stock. The value of the beneficial conversion discount was dependent upon the conversion ratio of existing shares of
the Companys common stock to shares of the Companys common stock. The total value of the beneficial conversion discount of $360,000 will be amortized over the life of the debenture through a charge to
interest expense.

During the first quarter of 2008 the Company sold an additional $425,000, of which $250,000 was sold to the Chairman of the Company, under terms identical to those outlined above
relating to the $6,000,000 convertible debentures sold during the fourth quarter of 2007.

In August, September and November 2006, Dr. Chess, our President and Chief Executive Officer and his brother, loaned NP Care, LLC an aggregate of $345,000 as evidenced by five demand
promissory notes. The interest rate for each note is ten percent (10%) per annum and each matured at varying dates between September and January 2007. On November 3, 2006, the Company paid Dr. Chess $51,276 in satisfaction of principal and
accrued interest on one of the notes and has made payments of $10,000 towards another of the loans. The other four notes continue to accrue interest until paid in full and have a principal balance of $285,000 at December 31,
2006.

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During
2007 the Company borrowed on a short term basis an additional $50,000 from Dr.
Chess and paid the note with accrued interest back during the fourth quarter of
2007. The Company paid back $50,000 to Dr. Chess brother during the fourth
quarter of 2007 resulting in a balance payable to Dr. Chess as of December 31,
2007 of $235,000.

During
December 2005, the Company entered into a Memorandum of Understanding (MOU)
with BioScrip, Inc. (BioScrip). BioScrip provided a $250,000 refundable
advance towards the purchase of $1,500,000 worth of HCI common stock. BioScrip
did not purchase the common stock and the MOU was terminated due to disputes
arising between the Company and BioScrip regarding the return of the advance.
Under the terms of a settlement agreement dated October 11, 2006, BioScrip and
HCI agreed to settle the amount owed to BioScrip for a single payment of
$125,000 in full and final settlement and the Company made this payment on
November 15, 2006.

During
2004, the Company entered into a loan agreement with The Rubin Family
Irrevocable Stock Trust, a shareholder of HCI, whereby the Lender extended a
line of credit facility in the original principal amount not to exceed $500,000
to the Borrower for general company purposes. On December 31, 2007 and 2006,
there was $-0- and $-0- outstanding on the line of credit, respectively.

The
Company has expended significant amounts for the development of
software for internal use. During 2007 and 2006, the Company expended $1,126,508
and $638,270, respectively for capitalized software costs. The Company used one
vendor to develop this software.

Accounts
Receivable

As
of December 31, 2007 and 2006, the Companys accounts receivable
aging by major payers was as follows:

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December 31,
2007


|                       |  | 0- 30 |           | 31 - 60 |   | 61 - 90 |  | > 90 |         | Total |  
|---------------------- |  | ----- | --------- | ------- | - | ------- |  | ---- | ------- | ----- | -
|                       |  |       |           |         |   |         |  |      |         |       |  
|MEDICARE               |  | $     | 381,268   |         | $ | 95,460  |  | $    | 76,711  |       | $
|MEDICAID/STATE WELFARE |  |       | 11,842    |         |   | 9,917   |  |      | 10,898  |       |  
|BLUE CROSS/BLUE SHIELD |  |       | 33,267    |         |   | 19,154  |  |      | 18,040  |       |  
|HEALTH NET             |  |       | 5,779     |         |   | 1,766   |  |      | 1,193   |       |  
|OTHER PRIVATE          |  |       | 1,055,844 |         |   | 87,374  |  |      | 62,563  |       |  
|                       |  |       |           |         |   |         |  |      |         |       |  
|                       |  |       |           |         |   |         |  |      |         |       |  
|                       |  | $     | 1,488,000 |         | $ | 213,672 |  | $    | 169,406 |       | $
|                       |  |       |           |         |   |         |  |      |         |       |  

December 31, 2006

|                       |  | 0- 30 |         | 31 - 60 |   | 61 - 90 |  | > 90 |        | Total |  
|---------------------- |  | ----- | ------- | ------- | - | ------- |  | ---- | ------ | ----- | -
|                       |  |       |         |         |   |         |  |      |        |       |  
|MEDICARE               |  | $     | 181,598 |         | $ | 12,376  |  | $    | 11,007 |       | $
|MEDICAID/STATE WELFARE |  |       | 10,300  |         |   | 540     |  |      | 78     |       |  
|BLUE CROSS/BLUE SHIELD |  |       | 12,752  |         |   | 1,933   |  |      | 1,092  |       |  
|HEALTH NET             |  |       | 7,880   |         |   | 2,608   |  |      | 604    |       |  
|OTHER PRIVATE          |  |       | 45,407  |         |   | 11,553  |  |      | 5,419  |       |  
|                       |  |       |         |         |   |         |  |      |        |       |  
|                       |  |       |         |         |   |         |  |      |        |       |  
|                       |  | $     | 257,937 |         | $ | 29,010  |  | $    | 18,200 |       | $
|                       |  |       |         |         |   |         |  |      |        |       |  

Receivables
recorded at December 31, 2007 consist primarily of fees for services to be
reimbursed by Medicare, Medicaid and other private insurance payers. Self pay
accounts are not material. These accounts are actively monitored by a third
party billing company responsible for collecting amounts due.

A
significant portion of the Companys fee for service revenues have been
reimbursed by federal Medicare and, to a lesser extent, state Medicaid
programs. Payments for services rendered to patients covered by these programs
are generally less than billed charges. The Company monitors its revenues and
receivables from these reimbursement sources, as well as other third-party
insurance payers, and records an estimated contractual allowance for certain
service revenues and receivable balances in the month of revenue recognition,
to properly account for anticipated differences between billed and reimbursed
amounts. Reimbursement is determined based on historical payment trends as well
as current contract terms. Accordingly, a substantial portion of the total net
revenues and receivables reported in the Companys consolidated financial
statements for year ended December 31, 2007 is recorded at the amount
ultimately expected to be received from these payers. For the year ended
December 31, 2007 there were $4,565,333 recorded as contractual allowances.

Management
has provided for uncollectible accounts receivable through direct write-offs
and such write-offs have been within managements expectations. Historical
experience indicates that after such write-offs have been made, potential
collection losses are considered minimal and, therefore, no allowance for
doubtful accounts is considered necessary by management. On a monthly basis,
management reviews the accounts receivable aging by payer and rejected claims
to determine which receivables, if any are to be written off. For the years
ended December 31, 2007 and 2006, the bad debt direct write-offs totaled
approximately $0 and $48,000, respectively.

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Based
on our current financial resources, we will require additional working capital
to fund our ongoing business, business strategy including acquisitions and
further development of our proprietary software systems. There can be no
assurance that additional financing will be available, or if available, that such
financing will be on favorable terms. Any such failure to secure additional
financing could impair our ability to achieve our business strategy. There can
be no assurance that we will have sufficient funds or successfully achieve our
plans to a level that will have a positive effect on our results of operations
or financial condition. Our ability to execute our growth strategy is
contingent upon sufficient capital as well as other factors, including, but not
limited to, our ability to further increase awareness of our programs, our
ability to consummate acquisitions of complimentary businesses, general
economic and industry conditions, our ability to recruit, train and retain a
qualified sales and nursing staff, and other factors, many of which are beyond
our control. Even if our revenues and earnings grow rapidly, such growth may
significantly strain our management and our operational and technical
resources. If we are successful in obtaining greater market penetration with
our programs, we will be required to deliver increasing outcomes to our
customers on a timely basis at a reasonable cost to us. No assurance can be
given that we can meet increased program demand or that we will be able to
execute our programs on a timely and cost-effective basis.

COMMITMENTS,
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

There
are no guarantees, commitments, lease and debt agreements or other agreements
that would trigger adverse changes in our credit rating, earnings, or cash
flows, including requirements to perform under stand-by agreements.

The
Company is obligated under various operating leases for the rental of office
space and office equipment. Future minimum rental commitments with a remaining
term in excess of one year as of December 31, 2007 are as follows:

|                               |  |  |           | 
|------------------------------ |  |  | --------- | 
|Years
Ending December 31,      |  |  |           | 
|                               |  |  |           | 
|                               |  |  |           | 
|2008                           |  |  | 508,576   | 
|2009                           |  |  | 523,241   | 
|2010                           |  |  | 309,307   | 
|2011                           |  |  | 11,574    | 
|2012                           |  |  | 46,767    | 
|                               |  |  |           | 
|Total
  minimum lease payments |  |  | 1,399,465 | 
|                               |  |  |           | 

CRITICAL
ACCOUNTING POLICIES AND ESTIMATES

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

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We
believe that the following critical policies affect our more significant
judgments and estimates used in preparation of our financial statements.

REVENUE RECOGNITION

The Companys
    revenue includes fees for service revenue and revenue from capitated contracts.
    A significant portion of the Companys fee for service revenues have
    been reimbursed by federal Medicare and, to a lesser extent, state Medicaid
    programs.

Revenue from APRN
    and MD services are generated from billings to a patients respective
    insurance carrier, health maintenance organization, Medicare and Medicaid.
    Payments from these sources are generally based on prospectively determined
    rates that vary according to a classification system based on clinical, diagnostic
    and other factors and are substantially below established rates.

The Company monitors
    its revenues and receivables from these reimbursement sources, as well as
    other third-party insurance payors, and records an estimated contractual
    allowance for certain service revenues and receivable balances in the month
    service is provided and revenue is recognized, to properly account for anticipated
    differences between billed and reimbursed amounts. Accordingly, a substantial
    portion of the Companys total net revenues and receivables reported
    in the accompanying consolidated financial statements are recorded at the
    amount ultimately expected to be received from these payors. Net revenues
    from fee for service patients are recorded in the month service is provided
    by credentialed practitioners.

The Company evaluates several criteria in developing
    the estimated contractual allowances for unbilled and/or initially rejected
    claims on a monthly basis, including historical trends based on actual claims
    paid, current contract and reimbursement terms, and changes in patient base
    and payor/service mix. Contractual allowance estimates are adjusted to actual
    amounts as cash is received and claims are settled and the aggregate impact
    of these resulting adjustments were not significant to the Companys
    operations for the years ended December 31, 2007 and 2006. Further, the Company
    does not expect the reasonably possible effects of a change in estimate related
    to unsettled December 31, 2007 contractual allowance amounts from Medicare,
    Medicaid and other third-party payors to be significant to its future operating
results and consolidated financial position.

Revenues from capitated
    contracts are recorded monthly based on the number of members covered under
    each capitated contract per month. In October of 2007, the Company entered
    into new capitated contracts with HealthSpring to provide services under
    the Easy Care Program that contains a 25% at risk component. The at risk
    component is based upon the Company achieving certain performance criteria
    on an annual basis. As of December 31, 2007, the Company had insufficient
    data from which to determine if those performance criteria will be met and
    if that revenue component will be realized. The Company will realize this
    revenue in 2008 when, and if, the amount is both determinable and reasonably
    assured and is no longer subject to refund. Accordingly, the Company has
    deferred approximately $221,000 of revenue as of December 31, 2007 associated
    with the HealthSpring contracts. In February of 2007, the Company entered
    into a capitated contract with McKesson Health Solutions under the NP Care
    program to provide care management services to McKesson enrollees that contains
    a 20% at risk component. The at risk component is based on the Company providing
    to McKesson a return on investment of 2:1 for the first year of service.
    As of December 31, 2007, the Company was unable to determine the return on
    investment, and accordingly, deferred approximately $34,000 of revenue
    as of December 31, 2007. The Company will realize this revenue in 2008 when,
    and if, the amount is both determinable and reasonably assured and is no
    longer subject to refund.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

The Company has capitalized
    costs related to the development of software for internal use. Capitalized
    costs include external costs of materials and services and consulting fees
    devoted to the specific software development. These costs have been capitalized
    based upon Statement of Position (SOP) 98-1, Accounting
    for the Costs of Computer Software Developed or Obtained for Internal Use.In
    accordance with SOP 98-1, internal-use software development costs are capitalized
    once (i) the preliminary project stage is completed, (ii) management authorizes
    and commits to funding a computer software project, and (iii) it is probable
    that the project will be completed, and the software will be used to perform
    the function intended. Costs incurred prior to meeting these qualifications
    are expensed as incurred. Capitalization of costs ceases when the project
    is substantially complete and ready for its intended use. Internal-use software
    development costs are amortized using the straight-line method over estimated
    useful lives approximating five years.

The capitalization
    and ongoing assessment of recoverability of development costs requires considerable
    judgment by the Company with respect to certain external factors, including,
    but not limited to, technological and economic feasibility, and estimated
    economic life.

OTHER LONG-LIVED ASSETS

We account for our
    long-lived assets (excluding goodwill) in accordance with SFAS No. 144, Accounting
    for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
    of, which requires that long-lived assets and certain intangible assets
    be reviewed for impairment whenever events or changes in circumstances indicate
    that the carrying amount may not be recoverable, such as technological changes
    or significant increased competition. If undiscounted expected future cash
    flows are less than the carrying value of the assets, an impairment loss
    is to be recognized based on the fair value of the assets, calculated using
    a discounted cash flow model. There is inherent subjectivity and judgments
    involved in cash flow analyses such as estimating revenue and cost growth
    rates, residual or terminal values and discount rates, which can have a significant
    impact on the amount of any impairment.

Other long-lived
    assets, such as identifiable intangible assets, are amortized over their
    estimated useful lives. These assets are reviewed for impairment whenever
    events or circumstances provide evidence that suggests that the carrying
    amount of the assets may not be recoverable, with impairment being based
    upon an evaluation of the identifiable undiscounted cash flows. If impaired,
    the resulting charge reflects the excess of the assets carrying cost
    over its fair value. As described above, there is inherent subjectivity involved
    in estimating future cash flows, which can have a significant impact on the
    amount of any impairment. Also, if market conditions become less favorable,
    future cash flows (the key variable in assessing the impairment of these
    assets) may decrease and as a result we may be required to recognize impairment
    charges in the future. No such impairments were identified in 2007 and 2006.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial
    Accounting Standards (SFAS) No. 107, Fair Value
    of Financial Instruments,requires disclosure
    of the fair value of financial instruments for which the determination of
    fair value is practicable. SFAS No. 107 defines the fair value of a financial
    instrument as the amount at which the instrument could be exchanged in a
    current transaction between willing parties. The carrying

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amount of the Companys financial instruments
    consisting of cash and cash equivalents, accounts receivable, accounts payable
    and accrued expenses approximate their fair value because of the short maturity
    of those instruments. The fair value of the Companys lines of credit,
    notes payable, capital lease obligations and convertible debentures were
    estimated by discounting the future cash flows using current rates offered
    by lenders for similar borrowings with similar credit ratings. The fair value
    of the lines of credit, notes payable, capital lease obligations and convertible
    debentures approximate their carrying value due to the use of market interest
    rates. The Companys financial instruments are held for other than trading
    purposes.

FIXED ASSETS

Fixed assets are
    stated at cost, less accumulated depreciation and amortization. Major improvements
    and betterments to the fixed assets are capitalized. Expenditures for maintenance
    and repairs which do not extend the estimated useful lives of the applicable
    assets are charged to expense as incurred. When fixed assets are retired
    or otherwise disposed of, the assets and the related accumulated depreciation
    are removed from the accounts and any resulting gain orloss
    is recognized in operations.

The Company provides
    for depreciation and amortization using the straight-line method over the
    estimated useful lives of the assets, or, in the case of leasehold improvements,
    over the remaining term of the related lease, whichever is shorter.

STOCK BASED TRANSACTIONS

The Company accounts
    for share based compensation in accordance with Statement of Financial Accounting
    Standards (SFAS) No. 123(R), Share-Based Payment. Under
    the provisions of SFAS No. 123(R), share-based compensation issued to employees
    is measured at the grant date, based on the fair value of the award, and
    is recognized as an expense over the requisite service period (generally
    the vesting period of the grant). Share-based compensation issued to non-employees
    is measured at the grant date, based on the fair value of the equity instruments
    issued and is recognized as an expense over the requisite serviceperiod.

In connection with
    the valuation of equity transactions that occurred from January 1, 2006 to
    May 11, 2006, the Company considered SFAS No. 123(R), specifically paragraph
    7, and also considered the American Institute of Certified Public Accountants
    ("AICPA")
    Task Force's Audit and Accounting Practice Aid-- Valuation of Privately-Held-Company
    Equity Securities Issued as Compensation (the  "AICPA Practice Aid"). As
    a company without significant resources, management concluded that the expenditure
    of limited available funds to engage an outside valuation specialist to perform
    contemporaneous and comprehensive valuations during the period from January
    1, 2006 to May 11, 2006, was not an appropriate use of financial resources.
    We instead derived relevant valuations internally considering SFAS 123 (R)
    and the AICPA Practice Aid and evaluated those figures in light of accounting
    principles generally accepted in the United States of America to establish
    fair values for accounting purposes.

INCOME TAXES

Deferred income taxes
    are computed in accordance with SFAS No. 109,Accounting
    for Income Taxes
  and reflect the net tax effects of temporary differences between the financial
  reporting carrying amounts of assets and liabilities for financial reporting
  and income tax purposes. The Company establishes a valuation allowance if it
  believes that it is more likely than not that some or all of the deferred tax
  assets will not be realized.

The Company is subject
    to U.S. federal income tax as well as income tax of certain state jurisdictions.
    The Company has not been audited by the I.R.S. or any states in connection
    with income taxes. The periods from inception through 2007 remain open to
    examination by the I.R.S. and state authorities.

On January 1, 2007
    the Company adopted the provisions of FASB interpretation No. 48, Accounting
    for Uncertainty in Income Taxes- an interpretation of FASB Statement No.
    109
  (FIN No. 48). The Interpretation contains a two step approach to
  recognizing and measuring uncertain tax positions accounted for in accordance
  with FASB Statement No. 109. The first step is to evaluate the tax position
  for recognition by determining if the weight of the available evidence indicates
  that it is more likely than not that the position will be sustained on audit,
  including resolution of related appeals or litigation process, if any. The
  second step is to measure the tax benefit as the largest amount which is more
  than 50% likely of being realized upon ultimate settlement. The adoption of
  FIN No. 48 did not have any material impact on the Companys consolidated
  financial statements.

The Company recognizes
    interest accrued related to unrecognized tax benefits in interest expense.
    Penalties, if incurred, are recognized as a component of income tax expense.

ACCOUNTING STANDARDS NOT YET ADOPTED

In September 2006,
    the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
    No. 157) which provides a consistent definition of fair value which focuses
    on exit price and prioritizes, within a measurement of fair value, and the
    use of market-based inputs over entity-specific inputs. SFAS No. 157 requires
    expanded disclosures about fair value measurements and establishes a three-level
    hierarchy for fair value measurements based on the transparency of inputs
    to the valuation of an asset or liability as of the measurement date. The
    standard also requires that a company use its own nonperformance risk when
    measuring liabilities carried at fair value, including derivatives. SFAS
    No. 157 is effective for financial assets and financial liabilities and for
    nonfinancial assets and nonfinancial liabilities that are remeasured at least
    annually for financial statements issued for fiscal years beginning after
    November 15, 2007 and interim periods within those fiscal years. The provisions
    of SFAS No. 157 will be applied prospectively. As permitted, the Company
    intends to defer adoption of SFAS No. 157 for one year for nonfinancial assets
    and nonfinancial liabilities that are recognized or disclosed at fair value
    in the financial statements on a nonrecurring basis. The Company is currently
    evaluating the effects, if any, that SFAS No. 157 may have on our consolidated
    financial condition and consolidated results of operations.

In February 2007,
    the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets
    and Financial Liabilities  including an Amendment of SFAS No. 115 (SFAS
    No. 159), which permits an entity to measure certain financial assets and
    financial liabilities at fair value that are not currently required to be
    measured at fair value. Entities that elect the fair value option will report
    unrealized gains and losses in earnings at each subsequent reporting date.
    The fair value option may be elected on an instrument-by-instrument basis,
    with few exceptions. SFAS No. 159 amends previous guidance to extend the
    use of the fair value option to available-for-sale and held-to-maturity securities.
    The Statement also establishes presentation and disclosure requirements to
    help financial statement users understand the effect of the election. SFAS
    No. 159 is effective as of the beginning of the first fiscal year beginning
    after November 15, 2007. The Company is currently evaluating the effects,
    if any, that SFAS No. 159 may have on our consolidated financial condition
    and consolidated results of operations.

In June 2007, the
    FASB ratified Emerging Issue Task Force (EITF) Issue No. 07-3, Accounting
    for Nonrefundable Payments for Goods or Services to Be Used in Future Research
    and Development Activities (EITF 07-3), requiring that nonrefundable
    advance payments for future research and development activities be deferred
    and capitalized. Such amounts should be expensed as the related goods are
    delivered or the related services are performed. The Statement is effective
    for fiscal years beginning after December 15, 2007. The Company does not
    expect that upon adoption, this guidance will not have a material effect
    on our consolidated financial condition and consolidated results of operations.

In June 2007, the
    FASB ratified EITF Issue No. 06-11, Accounting
    for Income Tax Benefits of Dividends on Share-Based Payment Awards

(EITF 06-11), which requires entities to record
    to additional paid in capital the tax benefits on dividends or dividend equivalents
    that are charged to retained earnings for certain share-based awards. In
    a share-based payment arrangement, employees may receive dividends or dividend
    equivalents on awards of nonvested equity shares, nonvested equity share
    units during the vesting period, and share options until the exercise date.
    Generally, the payment of such dividends can be treated as deductible compensation
    for tax purposes. The amount of tax benefits recognized in additional paid-in
    capital should be included in the pool of excess tax benefits available to
    absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective
    for fiscal years beginning after December 15, 2007, and interim periods within
    those years. The Company estimates that upon adoption, this guidance will
    not have a material effect on our consolidated financial condition and consolidated
    results of operations.

In December 2007,
    the FASB issued SFAS No. 141(R),Business Combinations (SFAS
    No. 141(R)) which retained the underlying concepts of SFAS No. 141, in that
    all business combinations are still required to be accounted for at fair
    value under the acquisition method of accounting, but SFAS No. 141(R) changed
    the method of applying the acquisition method in a number of significant
    aspects. SFAS No. 141(R) will require that: (1) for all business combinations,
    the acquirer records all assets and liabilities of the acquired business,
    including goodwill, generally at their fair values; (2) certain contingent
    assets and liabilities acquired be recognized at their fair values on the
    acquisition date; (3) contingent consideration be recognized at its fair
    value on the acquisition date and, for certain arrangements, changes in fair
    value be recognized in earnings until settled; (4) acquisition-related transactions
    and restructuring costs be expensed

48

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rather than treated as part of the cost of the
    acquisition and included in the amount recorded for assets acquired; (5)
    in step acquisitions, previous equity interests in an acquiree held prior
    to obtaining control be re-measured to their acquisition-date fair values,
    with any gain or loss recognized in earnings; and (6) when making adjustments
    to finalize initial accounting, companies revise any previously issued post-acquisition
    financial information in future financial statements to reflect any adjustments
    as if they had been recorded on the acquisition date. SFAS No. 141(R) is
    effective on a prospective basis for all business combinations for which
    the acquisition date is on or after the beginning of the first annual period
    subsequent to December 15, 2008, with the exception of the accounting for
    valuation allowances on deferred taxes and acquired tax contingencies. SFAS
    No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances
    on deferred taxes and acquired tax contingencies associated with acquisitions
    that closed prior to the effective date of this statement should also apply
    the provisions of SFAS No. 141(R).

In December 2007,
    the FASB issued SFAS No. 160, Noncontrolling
    Interests in Consolidated Financial Statements, an Amendment of ARB 51(SFAS
    No. 160) which amends ARB 51 to establish new standards that will govern
    the accounting for reporting of noncontrolling interests in partially owned
    consolidated subsidiaries and the loss of control of subsidiaries. Also,
    SFAS No. 160 requires that: (1) noncontrolling interest, previously referred
    to as minority interest, be reported as part of equity in the consolidated
    financial statements; (2) losses be allocated to the noncontrolling interest
    even when such allocation might result in a deficit balance, reducing the
    losses attributed to the controlling interest; (3) changes in ownership interest
    be treated as equity transactions if control is maintained; and (4) upon
    a loss of control, any gain or loss on the interest sold be recognized in
    earnings. SFAS No. 160 is effective on a prospective basis for all fiscal
    years, and interim period with those fiscal years, beginning on or after
    December 15, 2008, except for the presentation and disclosure requirements,
    which will be applied retrospectively. The Company is currently evaluating
    the effects, if any, that SFAS No. 160 may have on the Companys consolidated
    financial condition and consolidated results of operations.

ITEM 7. Financial Statements.

See the
F-Pages contained herein, which include our audited consolidated financial
statements. The information required by this item is contained in the
consolidated financial statements set forth in Item 15(a) under the caption
Consolidated Financial Statements as part of this Annual Report on Form
10-KSB.

ITEM 8. Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure.

Prior to the
acquisition of Ayre Holdings, Inc. the financial statements of Ayre Holdings
were audited by Nicholas LaPIER CPA PC. Subsequent to the acquisition, our
consolidated financial statements will continue to be audited by Carlin,
Charron & Rosen, LLP and we will not use the services of Nicholas LaPIER CPA
PC.

ITEM 8A (T). Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure
    controls and procedures, as such term is defined in Rule 13a-15(e)
    under the Securities Exchange Act of 1934 (the Exchange Act),
    that are designed to ensure that information required to be disclosed in
    our Exchange Act reports is recorded, processed, summarized and reported
    within the time periods specified in the Securities and Exchange Commission
    rules and forms, and that such information is accumulated and communicated
    to our management, including our Chief Executive Officer and Acting Chief
    Financial Officer, as appropriate, to allow timely decisions regarding required
    disclosure. We conducted an evaluation (the
  Evaluation), under the supervision and with the participation of
  our Chief Executive Officer (CEO) and Acting Chief Financial Officer
  (CFO), of the effectiveness of the design and operation of our
  disclosure controls and procedures (Disclosure Controls) as of
  the end of the period covered by this report pursuant to Rule 13a-15 of the
  Exchange Act. Based on this Evaluation, our CEO and Acting CFO concluded that
  our Disclosure Controls were not effective as of the end of the period covered
  by this report.

49

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Based on the evaluation,
    the Companys Chief Executive Officer and the Companys Acting
    Chief Financial Officer concluded that there were material weaknesses in
    the Companys system of Internal Controls. As of December 31, 2007,
    there was not an independent Board of Directors and accordingly, there was
    not an independent Audit Committee with the appropriate Financial Expert.
    Additionally, as of December 31, 2007, there were insufficient resources
    within the Companys accounting and finance department resulting in
    an ineffective review, monitoring and analysis of schedules, reconciliations
    and financial statement disclosures. Due to the pervasive effect of the lack
    ofresources, and the absence of an independent Board
    of Directors and Audit Committee, in the aggregate, there is more than a
    remote likelihood that a material misstatement of the annual financial statements
    would not have been prevented or detected.

Remediation Plans

Management is in
    the process of remediating the above-mentioned weakness in our internal control
    over financial reporting and has implemented the following steps:

| | 1) | On March 21, 2008, HC Innovations,
          Inc. (the Company) appointed four (4) new members to its
          Board of Directors, bringing the total number of Directors to five.
          The Company appointed Mr. James Bigl, who was appointed
          as the Chairman of the Board, Mr. Richard Rakowski, Mr. Orlo L. Dietrich
          and Mr. Jeffrey L. Zwicker, the Companys former Chief Financial
          Officer and former Chief Operating Officer.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2) | On February 18, 2008, the Company
          obtained additional accounting and finance staff with the requisite
          experience and training to provide additional resources for internal
          preparation and review of financial reports. Additionally, the Company
          engaged the services of an outside firm to assist in the review of
          our financial reporting and complex accounting transactions.                                        
|
| | 3) | Developed procedures to implement
          a formal monthly closing calendar and process and hold monthly review
          meetings to review results of operations as compared to monthly plans.                                                                                                                                                                                                                                                                         
|
| | 4) | Established a detailed timeline
          for review and completion of financial reports to be included in our
          future filings Forms 10-Q and 10-K.                                                                                                                                                                                                                                                                                                               

Changes in Internal Controls

As stated herein,
    the Company is currently working on changes to its internal control over
    financial reporting and hopes to have these changes fully implemented by
    the end of the fiscal third quarter of 2008.

Limitations on the Effectiveness of Controls

Our management, including
    our CEO and Acting CFO, does not expect that our Disclosure Controls and
    internal controls will prevent all errors and all fraud. A control system,
    no matter how well conceived and operated, can provide only reasonable, not
    absolute, assurance that the objectives of the control system are met. Further,
    the design of a control system must reflect the fact that there are resource
    constraints, and the benefits of controls must be considered relative to
    their costs. Because of the inherent limitations in all control systems,
    no evaluation of controls can provide absolute assurance that all control
    issues and instances of fraud, if any, within the Company have been detected.
    These inherent limitations include the realities that judgments in decision-making
    can be faulty, and that breakdowns

50

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can occur because of a simple error or mistake.
    Additionally, controls can be circumvented by the individual acts of some
    persons, by collusion of two or more people, or by management or board override
    of the control.

The design of any
    system of controls also is based in part upon certain assumptions about the
    likelihood of future events, and there can be no assurance that any design
    will succeed in achieving its stated goals under all potential future conditions;
    over time, controls may become inadequate because of changes in conditions,
    or the degree of compliance with the policies or procedures may deteriorate.
    Because of the inherent limitations in a cost-effective control system, misstatements
    due to error or fraud may occur and not be detected.

Managements Report on Internal Control
      over Financial Reporting

The management of
    HC Innovations, Inc. is responsible for establishing and maintaining adequate
    internal control over financial reporting, as such term is defined in Exchange
    Act Rule 13a-15(f). The Companys internal control over financial reporting
    is a process designed to provide reasonable assurance to the Companys
    management and board of directors regarding the reliability of financial
    reporting and the preparation of the financial statements for external purposes
    in accordance with accounting principles generally accepted in the United
    States of America.

The Companys
    internal control over financial reporting includes those policies and procedures
    that (i) pertain to the maintenance of records that, in reasonable detail,
    accurately and fairly reflect the transactions and dispositions of the assets
    of the Company; (ii) provide reasonable assurance that transactions are recorded
    as necessary to permit preparation of financial statements in accordance
    with accounting principles generally accepted in the United States of America,
    and that receipts and expenditures of the Company are being made only in
    accordance with authorizations of management and directors of the Company;
    and (iii) provide reasonable assurance regarding prevention or timely detection
    of unauthorized acquisition, use, or disposition of the Companys assets
    that could have a material effect on the financial statements.

Because of its inherent
    limitations, internal controls over financial reporting may not prevent or
    detect misstatements. All internal control systems, no matter how well designed,
    have inherent limitations, including the possibility of human error and the
    circumvention of overriding controls. Accordingly, even effective internal
    control over financial reporting can provide only reasonable assurance with
    respect to financial statement preparation. Also, projections of any evaluation
    of effectiveness to future periods are subject to the risk that controls
    may become inadequate because of changes in conditions, or that the degree
    of compliance with the policies or procedures may deteriorate.

Our management assessed
    the effectiveness of the Companys internal control over financial reporting
    as of December 31, 2007. In making this assessment, it used the criteria
    set forth by the Committee of Sponsoring Organizations of the Treadway Commission
    (COSO) in Internal Control-Integrated Framework.
    Based on our assessment, we believe that, as of December 31, 2007, the Companys
    internal control over financial reporting was not effective based on those
    criteria as indicated above and remediation plans have been put in place.

This annual report does not include an attestation
    report of our registered public accounting firm regarding internal control
    over financial reporting. Managements report was not subject to attestation
    by our registered public accounting firm pursuant to temporary rules of the
Securities and Exchange

51

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Commission that permit us to provide only managements
report in this annual report.

ITEM 8B. Other Information.

None.

52

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PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCES; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT.

The following
table sets forth certain information concerning each of the Companys directors
and executive officers:

DIRECTORS AND
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

|                         |  |     |  |                                                                                 
|------------------------ |  | --- |  | --------------------------------------------------------------------------------
|NAME                     |  | AGE |  | POSITION                                                                        
|                         |  |     |  |                                                                                 
|David Chess,
  M.D.      |  | 54  |  | President,
  Chief Executive Officer, Chief Medical Officer, and
  Director     
|                         |  |     |  |                                                                                 
|Emile A.
  Laliberte     |  | 49  |  | Acting Chief
  Financial Officer, Corporate Controller, Secretary, and Treasurer
|                         |  |     |  |                                                                                 
|Mary
  Krentzman, MS, RN |  | 57  |  | Vice
  President Clinical Operations                                            
|                         |  |     |  |                                                                                 
|James J.
  Bigl          |  | 44  |  | Chairman of
  the Board                                                         
|                         |  |     |  |                                                                                 
|Jeffrey L.
  Zwicker     |  | 64  |  | Director                                                                        
|                         |  |     |  |                                                                                 
|Orlo L.
  Dietrich       |  | 61  |  | Director                                                                        
|                         |  |     |  |                                                                                 
|Richard
  Rakowski       |  | 56  |  | Director                                                                        
|                         |  |     |  |                                                                                 

Listed
below is certain information concerning our directors and executive officers.
Each of our executive officers is a full time employee of ours.

DAVID CHESS, M.D. is our President, Chief Executive Officer, Chief
Medical Officer, and Director. Dr. Chess is a Geriatrician, Internist and
Entrepreneur with over 20 years experience. Dr. Chess has been practicing
medicine as a Physician with PriMed - Internal Medicine and Geriatrics since
1985 till present. He also served as Vice President Medical Affaires in the
Hewitt Organization from 1998 to 2002. David also serves as President of Project
Patient Care (PPC), a non-profit 501(c) 3 patient advocacy organization he
founded in January 2000. David has recently co-authored a paper with David Nash
and his team at Department of Health Policy, Jefferson Medical College entitled,
Pharmacy Utilization and the Medicare Modernization Act A Review of the
Literature, published in the MILBANK QUARTERLY in spring 2005. During the
period from 2001 to 2003, Dr. Chess also consulted for Kidd and Company. He
received his Medical Degree from Creighton University School of Medicine,
performed his Internal Medicine Internship and Residency at Albert Einstein
School of Medicine, and was Chief Resident in Internal Medicine at Bridgeport
Hospital. He is an Alpha Omega Alpha recipient. David is an Associate Clinical
Professor of Medicine at Yale University School of Medicine.

EMILE LALIBERTE, CPA is our acting Chief Financial Officer, Corporate
Controller since December 2007 and was appointed our Secretary and Treasurer in

53

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March 2008. Mr. Laliberte brings more than 20 years experience in both private
and publicly held companies ranging in size from under five million to over 100
million in annual revenue. From December 2005 to March 2007, Mr. Laliberte was
the Accounting Manager with Aircastle Advisors (AYR), an aircraft leasing
company that completed a successful initial public offering in August of 2006.
Prior to Aircastle Mr. Laliberte held Controllership positions primarily in the
telecommunications/software sector including five years with a multi-national
division of ADC Telecommunication (ADCT). Mr. Laliberte has a BS in Accounting
from Fairfield University and is a licensed CPA in the State of Connecticut.

BRETT COHEN, Executive Vice President, Operations, joined the company
as Vice President of Strategic Development in 2007 and was promoted to Executive
Vice President of Operations in 2008. Prior to joining ECI, Mr. Cohen had
several management positions at UnitedHealth Group, most recently as the Senior
Director of Operations and Finance for the New England region of Evercare, a
division which provides health plans and care management to nursing home
residents and community-based dual eligible or chronically ill individuals.
Prior to his tenure with UnitedHealth Group, Brett served as Vice President,
Business Development and Clinical Research Administration for Clinical Research
Consultants, Inc., a site management organization specializing in clinical
trials of pharmaceutical and biotechnology products. While there, Brett was
responsible for revenue growth of over 150%, profit margin expansion of over
50%, and ultimately the negotiation of the sale to a national company.

Brett began his career as a management consultant with APM/CSC
Healthcare where he focused on strategic planning and operational redesign
projects for hospitals and health systems. Mr. Cohen has served as director on
the boards of Big Brothers/Big Sisters of Southwestern Connecticut, Clinical
Research Consultants, Inc. and Previva, Inc.

Brett has a BA in Psychology from Yale University and an MBA in Finance
and Healthcare Management from the Wharton School at The University of
Pennsylvania.

TINA BARTELMAY, Executive Vice President and Chief Marketing Officer,
brings more than twenty four years of diverse industry experience, including 15
years of sales, consulting and operations leadership in several care and disease
management companies. Prior to joining ECI in March 2008, Tina was the Vice
President of Employer Solutions for OptumHealth, a UnitedHealth Group company,
where she led a world class team of sales and business development
professionals. Previously, Tina served as the Vice President of Sales and
Account Management for Avivia Health from Kaiser Permanente, Executive Vice
President of Operations for CNA Health Partners and running her own consulting
company.

Tina has an MBA from Texas A&M University, and a BS in Allied Health
Professions from Ohio State University.

VINCENT PENRY, APRN, Senior Vice-President Clinical Operations /NP
Care, is a board certified Advanced Practice Registered Nurse and Co-founder of
NP Care, playing a key role in its initial development and ongoing
implementation. He combines unique skill sets which make Vin an instrumental
part of HCNV. Vin combines extraordinary leadership, communication and clinical
skills with a strong work ethic. These characteristics have allowed us to grow
from one nurse practitioner four years ago to over 100 nurses today.

Vincents clinical experience includes geriatric, long term, sub-acute
and acute care settings. He has been active in the development and evolution of
nurse practitioner-driven medical services within skilled nursing facilities. He
earned a BS in Nursing from Quinnipiac University and an MS in Nursing from
Southern Connecticut State University.

MARY KRENTZMAN, MS, RN is our Vice President Clinical Operations for
Enhanced Care Initiatives, Inc. Ms. Krentzman has over 30 years of nursing
experience and is a pioneer in the development of community-based patient care
delivery systems. Before joining the Company in 2004, she was a Registered Nurse
Case Manager with the Community Case Management program of the Hartford
Physician Hospital Organization (HPHO) at Hartford Hospital where she
implemented and managed provider-based community case management programs in
Hartford, CT. From 2002 to 2003 Ms. Krentzman was Community Case Management
Services Manager with the Health Resources division of VNA HealthCare. From
March, 1999 until January, 2002 she was a Community Case Manager for the
Hartford Physician Hospital Organization (HPHO). Ms. Krentzman also has
additional experience as an inpatient nurse case manager, which followed her
practical experience in the intensive care, coronary care and emergency
departments at Bridgeport Hospital. Her educational background includes a
Bachelor of Science in Nursing from Sacred Heart University and a Masters of
Science in Nursing Case Management from Pace University. Mary is recently
published for her work entitled COMMUNITY-BASED HEALTH PROGRAMS IN A MANAGED
CARE ENVIRONMENT.

JIM BIGL was appointed as a Director and Chairman of the Board in March
2008. Mr. Bigl President and CEO of NMHC, a national leader in managing
prescription benefits for employers, unions, government, and managed care groups
from June 2000 to August 2004. Mr. Bigl transformed NMHC by overseeing a
successful blend of strategic acquisitions with organic growth that drove
financial performance and shareholder value--NHMCs stock grew more than
ten-fold and the company was recognized by Fortune Magazine and other
publications as one of the fastest growing public companies in the U.S. (Fortune
ranking #27 in 2003 and #6 in 2004). Currently, Mr. Bigl is a corporate
strategic advisor to several companies and is enrolled in Walden Universitys
Ph.D. program studying leadership and organizational change. Jim has extensive
experience in health plan operations, pharmacy supply chain administration,
retail operations, technology, real estate, fulfillment, mergers and
acquisitions, as well as being a founder/principal in several start-up
operations. Mr. Bigl received undergraduate degrees in electrical engineering
technology and business and an MBA from Rensselaer Polytechnic Institute.

ORLO DIETRICH was appointed as a Director in March 2008. Following five
years as a pilot in the United States Marine Corps, Mr. Dietrich joined Baxter
Healthcare Corporation in 1974. During his eleven years with Baxter, Mr.
Dietrich developed and implemented a workers compensation management program,
developed and taught labor relations training programs to all domestic
manufacturing facilities, and developed and implemented a community-based
managed care program for Baxters domestic manufacturing facilities which
replaced the existing employee benefits program. Mr. Dietrich left Baxter in
1985 to start his own company, Burgett & Dietrich (B&D). From 1985 until 1992,
B&D developed and managed 140 managed care networks in 33 states for over 100

54

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clients including 45 Fortune 500 companies, developed a third party
administration (TPA) designed to function in a managed care environment, a
medical management function, a workers compensation subsidiary, and a data
integration/data warehouse function designed to support the managed care
initiatives. In 1992, Mr. Dietrich merged his Company with CoreSource, a
national TPA and workers compensation Company with 24 offices and 1,500
employees and served as the Chief Operating Officer. In 1995, Mr. Dietrich was
instrumental in retracting his original company from CoreSource and selling it
to CNA Insurance Company. He served as the President and CEO until 1998. Since
1998, Mr. Dietrich has been involved in numerous small companies in a variety of
roles including investor, board member, or advisor. Mr. Dietrich holds a BA
degree from the University of Arkansas and a commercial pilots license.

JEFFREY L. ZWICKER was appointed as a Director in March 2008. Mr.
Zwicker was our Chief Financial Officer and Chief Operating Office from May 2005
until his retirement in December 2007. Mr. Zwicker has over 35 years of business
management experience. From September 2001 until joining the Company, Mr.
Zwicker was an independent consultant. Mr. Zwicker served as CFO/COO and
ultimately President & CEO and a Director of DeLuca, Inc. (Subsidiary of Perdue
Farms, Inc) from April 1993 to August 2001. Prior to his positions with DeLuca,
Inc. he served as President/COO and CFO of several early to middle stage, micro
and small cap health care, manufacturing, retailing and distribution companies.
He holds a Bachelor of Science in Accounting from Quinnipiac University.

RICHARD RAKOWSKI was appointed to our Board in March 2008. Mr. Rakowski was
Chairman of KAAI from its formation in July 2003. He was Chief Executive Officer
of KAAI from November 1, 2004 until March 14, 2007. At that time, he resigned as
CEO while maintaining his position as Chairman. He is currently the Founding
Principal of Intersection, LLC, a strategy and investment firm specializing in
healthcare and renewable energy. He was also a Principal of KCO from March 2002
until March 2007. Prior to joining KCO as a Principal, Richard Rakowskis career
spanned manufacturing, consulting, business development, marketing,
entrepreneurship and the Presidency of American Healthways, Inc. (NASDAQ: AMHC)
from June 2001 to March 2002. From 1992 until 2001, Mr. Rakowski was a founder
of New Paradigm Ventures, a consulting and investment firm in the health-care
and food industry market. He was also a partner at Marketing Corporation of
America. Mr. Rakowskis background also includes process control consulting work
for Fortune 500 Companies in the U.S. and abroad. He holds a BA from City
University of New York.

ITEM 10. EXECUTIVE COMPENSATION.

COMPENSATION
OF EXECUTIVE OFFICERS

Dr.
Chesss current salary is $100,000 and he is presently drawing compensation
from NP Care, LLC at the annual rate of $200,000 in the form of guaranteed
payments.

Compensation
of Directors

We have not provided for Director Compensation through our fiscal year ended December 31, 2007. However, our newly
appointed directors, Messrs. Zwicker, Bigl, Dietrich, and Rakowski, each received options to purchase a total of 250,000 shares of common stock, whereby options to purchase 50,000 shares vested immediately
and the remaining options vesting in equal amounts of 50,000 shares per year over the next four years. The issuance of the options to each
Director is contingent upon the Director participating in a minimum of three
board meetings per year. Further, Mr. Bigl, the non-Executive Chairman of

55

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the Board, received additional options to purchase 50,000 for serving as the non-Executive Chairman. All
options to be issued to the Directors are issued pursuant to the Companys 2008 Incentive Compensation Plan.

Stock Option
Plan

In March 2008, the Board of Directors approved the Companys 2008 Incentive Compensation Plan (the Plan).
The Plan will be submitted to the Companys shareholders for ratification at the Companys next Annual Meeting of Shareholders.

SUMMARY COMPENSATION TABLE

The following
table sets forth the aggregate cash compensation paid by the Company for services rendered
during the last two (2) years to the Company by its Chief Executive Officer and
to each of the Companys other executive officers whose annual salary, bonus
and other compensation exceeded $100,000 in 2007.

|                              |  |              |  |   |         |  |                             |  |                         |  |                                
|----------------------------- |  | ------------ |  | - | ------- |  | --------------------------- |  | ----------------------- |  | -------------------------------
|Name and
 Principal
 Position |  | Fiscal
 Year |  |   | Salary  |  | Other
 Annual
 Compensation |  | Restricted
 Stock Award |  | Securities
 Underlying
 Options
|                              |  |              |  |   |         |  |                             |  |                         |  |                                
|David Chess                   |  | 2007         |  | $ | 100,000 |  |                            |  |                        |  |                               
|President,
 CEO,              |  |              |  |   |         |  |                             |  |                         |  |                                
|Chairman of
 the              |  | 2006         |  | $ | 100,000 |  |                            |  |                        |  |                               
|Board of
 Directors           |  |              |  |   |         |  |                             |  |                         |  |                                
|                              |  |              |  |   |         |  |                             |  |                         |  |                                
|Jeffrey L.
 Zwicker           |  | 2007         |  | $ | 200,000 |  |                            |  |                        |  |                               
|Former Chief                  |  |              |  |   |         |  |                             |  |                         |  |                                
|Financial
 Officer,           |  | 2006         |  | $ | 163,230 |  |                            |  |                        |  |                               
|Chief
 Operating              |  |              |  |   |         |  |                             |  |                         |  |                                
|Officer (1)                   |  |              |  |   |         |  |                             |  |                         |  |                                
|                              |  |              |  |   |         |  |                             |  |                         |  |                                
|Emile A.
 Laliberte           |  | 2007         |  |   | 87,863  |  |                            |  |                        |  |                               
|Acting Chief
 Financial       |  |              |  |   |         |  |                             |  |                         |  |                                
|Officer and                   |  |              |  |   |         |  |                             |  |                         |  |                                
|Corporate                     |  | 2006         |  |   |        |  |                            |  |                        |  |                               
|Controller                    |  |              |  |   |         |  |                             |  |                         |  |                                
|                              |  |              |  |   |         |  |                             |  |                         |  |                                
|Mary
 Krentzman               |  | 2007         |  | $ | 130,000 |  |                            |  |                        |  |                               
|Vice
 President,              |  |              |  |   |         |  |                             |  |                         |  |                                
|Clinical
 Operations          |  | 2006         |  | $ | 132,076 |  |                            |  |                        |  |                               

|                                                                                        |  | 
|--------------------------------------------------------------------------------------- |  | 
|(1) Mr. Zwicker
 retired in December 2007 and was appointed to our Board in March 2008. | 

Corporate Governance
 Board of Directors

Election of
Officers

Each
director is elected at the Companys annual meeting of shareholders and holds
office until the next annual meeting of stockholders or until the successors
are qualified and elected. The Companys bylaws provide for not less than one
(1) director and no more than five (5) directors. Currently there are five (5)
directors on the Companys Board; Dr. David Chess, our Chief Executive Officer,
James J. Bigl, Chairman, Jeffrey L. Zwicker, Orlo Dietrich, and Richard

56

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Rakowski. The
bylaws permit the Board of Directors to fill any vacancy and such director may
serve until the next annual meeting of shareholders or until his or her
successor is elected and qualified.

The
Company currently does not have any committees of the Board of Directors
although it plans to establish one or more committees in the near future,
including an audit committee.

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

The following
table sets forth as of March 28, 2008, the name and number of shares of the
Companys common stock, par value $0.001 per share, held of record by (i) each
of the three highest paid persons who are officers and directors of the
Company, (ii) beneficial owners of 5% or more of our common stock; and (iii)
all the officers and directors as a group. Pursuant to the rules and
regulations of the Securities and Exchange Commission, shares of common stock
that an individual or group has a right to acquire within 60 days pursuant to
the exercise of options or warrants are deemed to be outstanding for the
purposes of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purposes of computing the percentage
ownership of any other person shown in the table.

|                                                 |  |                                |  |                           |      |   | 
|------------------------------------------------ |  | ------------------------------ |  | ------------------------- | ---- | - | 
|STOCKHOLDERS NAME AND ADDRESS*                  |  | SHARES
 BENEFICIALLY OWNED (1) |  | PERCENTAGE
 OWNERSHIP (1) |     
|                                                 |  |                                |  |                           |      |   | 
|Dr.
 DAVID CHESS (2)                             |  | 10,095,822                     |  |                           | 26.4 | % | 
|EMILE
 LALIBERTE                                 |  |                               |  |                           |     |   | 
|RUBIN
 FAMILY IRREVOCABLE STOCK TRUST            |  | 7,915,590                      |  |                           | 20.4 | % | 
|D
 VINCENT PENRY                                 |  | 2,536,022                      |  |                           | 6.8  | % | 
|STEPHEN
 URCIUOLI                                |  | 1,889,015                      |  |                           | 4.9  | % | 
|JEFFREY
 L ZWICKER (2)                           |  | 1,050,130                      |  |                           | 2.7  | % | 
|MARY
 KRENTZMAN                                  |  | 542,463                        |  |                           | 1.4  | % | 
|JAMES
 J. BIGL (2)(3)                            |  | 100,000                        |  |                           | 0.3  | % | 
|ORLO
 DIETRICH (2)                               |  | 50,000                         |  |                           | 0.1  | % | 
|RICHARD
 RAKOWSKI (2)                            |  | 50,000                         |  |                           | 0.1  | % | 
|                                                 |  |                                |  |                           |      |   | 
|Officers
 and Directors as a group (Six persons) |  | 11,495,952                     |  |                           | 29.6 | % | 

|                                                                                                                                                                                |                                                                                                                     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                               
|*                                                                                                                                                                               | Each
 shareholders address is c/o HC Innovations, Inc., 10 Progress Drive, Suite
 200, Shelton, Connecticut, 06484.
|                                                                                                                                                                                |                                                                                                                     
|(1) Based on an
 aggregate of 38,615,363 shares (on a fully diluted basis)
 outstanding as of March 28, 2008.                                                                  
|                                                                                                                                                                                |                                                                                                                     
|(2) Includes options to purchase 50,000 share of common stock, out of a total of 250,000, which shall vest in equal amounts of 50,000 shares per year over the next four years.
|                                                                                                                                                                                |                                                                                                                     
|(3) Also includes options to purchase 50,000 shares of common stock issued to Mr. Bigl for his appointment as non-Executive Chairman of the Board.                             

Options and
Common Shares Granted in the Year Ended December 31, 2007

No
options or common shares were granted to executives during the year ended
October 31, 2007.

Compliance
with Section 16(A) of the Exchange Act

57

---



Section
16(a) of the Exchange Act requires the Companys directors, executive officers
and persons who own more than ten (10%) percent of the Companys outstanding
common stock, to file with the SEC initial reports of ownership on Form 3 and
reports of changes in ownership of common stock on Forms 4 or 5. Such persons
are required by SEC regulation to furnish the Company with copies of all such
reports they file.

Based solely on our review of Forms 3, 4 and 5, and amendments thereto which have been furnished to us, we believe that during
the year ended December 31, 2007, all of our officers, directors and beneficial owners of more than 10% of any class of equity securities, timely filed, reports required by Section 16(a) of the Exchange
Act of 1934, as amended.

ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The
Company consolidates all controlled subsidiaries, which control is effectuated
through ownership of voting common stock or by other means. In states where ECI
is not permitted to directly own a medical operation due to corporate practice
of medicine laws in those states, it performs only non-medical administrative
and support services, does not represent to the public or its clients that it
offers medical services and does not exercise influence or control over the
practice of medicine. In those states, ECI conducts business through LLCs that
it controls through Dr. Chess, our Chief Executive Officer, as the sole member,
and it is these affiliated LLCs that employ Advanced Practice Nurse
Practitioners (APRNs) who practice medicine. In such states, ECI generally
enters into exclusive long-term management services agreements with the LLCs
that operate the medical operations that restricts the member(s) of the
affiliated LLCs from transferring their ownership interests in the affiliated
LLCs and otherwise provides ECI or its designee with a controlling voting or
financial interest in the affiliated LLCs and their operations. The underlying
entities (LLCs), which are required to be consolidated under Financial
Accounting Standards Board (FASB) Interpretation No. 46, as revised (FIN
46R), Consolidation of Variable Interest Entities, would also be
consolidated under the provisions of Emerging Issues Task Force (EITF) No.
97-2, Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual Management
Arrangements. The LLCs have been determined to be variable interest entities
due to the existence of a call option under which ECI has the ability to
require the member(s) of all of the voting equity interests of the underlying
LLCs to transfer their equity interests at any time to any person specified by
ECI and vote the member(s) interests as ECI instructs. This call option
agreement represents rights provided through a variable interest other than the
equity interest itself that caps the returns that could be earned by the equity
holders. In addition, the Company has an exclusive long-term management
services agreement with each of the LLCs and the member(s) of the LLCs which
allows the Company to direct all of the non-clinical activities of the LLCs,
retain all of the economic benefits, and assume all of the risks associated
with ownership of the LLCs. In this manner, the Company has all of the economic
benefits and a risk associated with the LLCs, but has disproportionately few
voting rights.

As
of December 31, 2006 the Company owed Dr Chess its Chief Executive Officer and
his brother a total of $285,000. During 2007 the Company borrowed on a short
term basis an additional $50,000 from Dr. Chess and paid the note with accrued
interest back during the fourth quarter of 2007. The Company also paid back
$50,000 to Dr. Chess brother during the fourth quarter of 2007 resulting in a
balance payable to Dr. Chess as of December 31, 2007 of $235,000.

58

---



Dr.
Chess is presently drawing compensation from NP Care, LLC at the annual rate of
$200,000 in the form of guaranteed payments.

In
January of 2008 the Company borrowed from its Chairman $250,000 in the form of
a Secured Convertible Note. The Note provides a conversion feature allowing the
note holder to convert the debt in to common stock of the Company at an
exchange rate equal to 70% of the average of the lowest bid prices for the
Companys common stock for 20 consecutive trading days immediately preceding
the conversion date subject to a floor of $1.00.

On
December 20, 2007, the Company entered into a Separation Agreement (the
Agreement) with Jeffrey L. Zwicker, a member of our Board of Directors,
providing for Mr. Zwickers retirement as the Companys Chief Financial
Officer, effective December 31, 2007. Under the terms of the Agreement, Mr.
Zwicker shall receive approximately $100,000, or one-half of his annual salary
of $200,000, paid over twelve (12) months from the effective date of the
Agreement. In addition, the Company will continue to provide health and dental
coverage for Mr. Zwicker. The agreement contains customary non-compete and
confidentiality provisions.

On
January 15, 2008, Mr. James Bigl, our Chairman of the Board purchase Twelve-Month
10% Secured Convertible Notes in the principal face amount of $250,000 and a
warrant for the purchase of 25,000 shares of common stock through the Companys
Fourth Quarter 2007 Offering.

59

---



ITEM
13. EXHIBITS.

(a) Financial Statements  The
following consolidated Financial Statements of HC Innovations, Inc. and
subsidiaries are filed as part of this report:

| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Report
 of Independent Registered Public Accounting Firm                                         
| | Consolidated
 Balance Sheets as of December 31, 2007 and 2006                                    
| | Consolidated
 Statements of Operations for the year ended December 31, 2007 and 2006             
| | Consolidated
 Statements of Cash Flows for the year ended December 31, 2007 and 2006             
| | Consolidated
 Statements of Stockholders Equity (Deficit) for the years ended December
 31, 2007
| | Notes
 to Consolidated Financial Statements                                                      

(b) Reports on
Form 8-K

No reports on
Form 8-K have been filed during the last quarter of the period covered by this
report.

(c) Exhibits.

|      |                                                                                                                                                                                      
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   | Stock
 Acquisition Agreement by and between Ayre Holdings, Inc., HC Innovations,
 Inc., and the shareholders stated therein, dated May 11, 2006.*                                    
|      |                                                                                                                                                                                      
|3.1   | Certificate
 of Incorporation, dated November 7, 2001.*                                                                                                                              
|      |                                                                                                                                                                                      
|3.1.1 | Certificate
 of Amendment to Certificate of Incorporation, dated May 17, 2006.*                                                                                                      
|      |                                                                                                                                                                                      
|3.1.2 | Certificate
 of Amendment to Certificate of Incorporation, dated June 5, 2006.*                                                                                                      
|      |                                                                                                                                                                                      
|3.2   | By-laws.*                                                                                                                                                                            
|      |                                                                                                                                                                                      
|4.1   | Specimen
 of Common Stock certificate.*                                                                                                                                              
|      |                                                                                                                                                                                      
|10.1  | Form
 of Promissory Note issued to Rubin Family Irrevocable Stock Trust.*                                                                                                            
|      |                                                                                                                                                                                      
|10.2  | Form
 of Convertible Debenture issued to certain investors.*                                                                                                                         
|      |                                                                                                                                                                                      
|10.3  | Sublease
 Agreement between American Skandia Information and Technology Corporation and
 the Company, dates as of September 2004.*                                                   
|      |                                                                                                                                                                                      
|10.4  | Form
 of Registration Right Agreement signed with certain investors.*                                                                                                                
|      |                                                                                                                                                                                      
|10.5  | Form
 of Subscription Agreement.*                                                                                                                                                    
|      |                                                                                                                                                                                      
|10.6  | Form
 of Warrants to Purchase Common Stock*                                                                                                                                          
|      |                                                                                                                                                                                      
|10.7  | Disease
 Case Management Services Agreement and State of Work for Care Management
 Services between Alere Medical, Inc. and Enhanced Care Initiatives, Inc.
 dated October 16, 2006.*

60

---



|      |                                                                                                                                                                                                                                            
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8  | Amended
 and Restated Consulting Agreement between HC Innovations, Inc. and Strategic
 Growth International, Inc., dated September 22, 2006.*                                                                                              
|      |                                                                                                                                                                                                                                            
|10.9  | Memorandum
 of Understanding by and between NP Care of Ohio, LLC and Ohio Nurse
 Practitioners, Inc., Kayleen Berger and Kathryn Maxwell, dated October 20,
 2006.*                                                                        
|      |                                                                                                                                                                                                                                            
|10.10 | Separation
 Agreement between the Company and Jeffrey L. Zwicker, dated December 20, 2007
 (filed as Exhibit 10.1 to the Companys current Report on Form 8-K, filed
 December 20, 2007 and incorporated herein by reference.              
|      |                                                                                                                                                                                                                                            
|10.11 | Form
 of Subscription Agreement for the Purchase of Securities for the Fourth
 Quarter 2007 Offering (filed as Exhibit 10.1 to the Companys Current Report
 on Form 8-K, filed on December 20, 2007 and incorporated herein by reference).
|      |                                                                                                                                                                                                                                            
|10.12 | Form
 of Twelve-Month 10% Secured Convertible Notes for the Fourth Quarter 2007
 Offering (filed as Exhibit 10.2 to the Companys Current Report on Form 8-K,
 filed on December 20, 2007 and incorporated herein by reference).           
|      |                                                                                                                                                                                                                                            
|10.13 | Form
 of Warrant for the Purchase of Shares of Common Stock for the Fourth Quarter
 2007 Offering (filed as Exhibit 10.3 to the Companys Current Report on Form
 8-K, filed on December 20, 2007 and incorporated herein by reference).   
|      |                                                                                                                                                                                                                                            
|10.14 | Form
 of Security Agreement for the Fourth Quarter 2007 Offering (filed as Exhibit
 10.4 to the Companys Current Report on Form 8-K, filed on December 20, 2007
 and incorporated herein by reference).                                   
|      |                                                                                                                                                                                                                                            
|10.15 | Form
 of Corporate Guaranty for the Fourth Quarter 2007 Offering (filed as Exhibit
 10.5 to the Companys Current Report on Form 8-K, filed on December 20, 2007
 and incorporated herein by reference).                                   
|      |                                                                                                                                                                                                                                            
|10.16 | Form
 of Registration Rights Agreement for the Fourth Quarter 2007 Offering (filed
 as Exhibit 10.6 to the Companys Current Report on Form 8-K, filed on
 December 20, 2007 and incorporated herein by reference).                        
|      |                                                                                                                                                                                                                                            
|21    | List of
 Subsidiaries.*                                                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                            
|23.1  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                   
|      |                                                                                                                                                                                                                                            
|31.1  | Certification
 of Chief Executive 
 Officer and Chief Financial 
 Officer pursuant to Section 302 
 of the Sarbanes-Oxley Act of 2002                                                                                                      
|      |                                                                                                                                                                                                                                            
|31.2  | Certification
 of Vice President 
 pursuant to Section 302 of the 
 Sarbanes-Oxley Act of 2002                                                                                                                                             
|      |                                                                                                                                                                                                                                            
|32.1  | Certification
 of Chief Executive 
 Officer and Chief Financial 
 Officer pursuant to 18 U.S.C. 
 Section 1350                                                                                                                             

61

---



|     |                                                                      
|---- | ---------------------------------------------------------------------
|32.2 | Certification
 of Vice President 
 pursuant to 18 U.S.C. Section 1350

* These
documents are rendered as previously filed and incorporated by reference to the
Companys Form 10-SB, as amended.

ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The
following is a summary of the fees billed to us by Carlin, Charron & Rosen,
LLP for professional services rendered for 2007 and 2006:

|                    |  |           |         |           |   |         | 
|------------------- |  | --------- | ------- | --------- | - | ------- | 
|Fee Category        |  | 2007 Fees |         | 2006 Fees |  
|Audit Fees          |  | $         | 169,600 |           | $ | 90,875  | 
|Audit-Related
 Fees |  | $         | 22,405  |           | $ | 71,872  | 
|Tax Fees            |  | $         |        |           | $ |        | 
|All Other
 Fees     |  | $         |        |           | $ |        | 
|                    |  |           |         |           |   |         | 
|Total Fees          |  | $         | 192,005 |           | $ | 162,747 | 

Audit
Fees.Consists of fees and expenses incurred for
professional services rendered for the audit of our annual consolidated
financial statements and review of the interim consolidated financial
statements included in our Form 10-KSB for December 31, 2007 and our Form 10-QSB
filing for interim reviews in 2007, and services
that are normally provided by Carlin, Charron & Rosen, LLP in connection
with statutory and regulatory filings or engagements, regardless of when the
fees and expenses were billed.

Audit
Related Fees.Consists of fees and expenses for
assurance and related services that are reasonably related to the performance
of the audit or review of our consolidated financial statements and are not
reported under Audit Fees. These services include services related to
accounting consultations in connection with acquisitions and divestitures,
attest services that are not required by statute or regulation, and
consultations concerning financial accounting and reporting standards.

Tax
Fees.Consists of fees and expenses for professional
services related to tax compliance, tax advice and tax planning. These services
include assistance regarding federal and state tax compliance, tax audit
defense, acquisition and divestiture tax planning.

All
Other Fees.Consists of fees and expenses for products
and services other than the services reported above.

62

---



SIGNATURES

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

Date: March
31, 2008

By:

|                                                      
|------------------------------------------------------
|/s/
 David Chess, MD                                  
|                                                      
|David Chess, MD                                       
|President,
 Director and Chief Executive Officer      
|                                                      
|By:                                                   
|                                                      
|/s/ Emile A. Laliberte, CPA                           
|                                                      
|Emile A. Laliberte, CPA                               
|Acting Chief
 Financial Officer, Corporate Controller,
|Secretary
 and Treasurer                              

In accordance with the Exchange
Act, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

|                                  |                            
|--------------------------------- | ---------------------------
|/s/ David Chess, MD               | /s/ James J.
 Bigl         
|                                  |                            
|David Chess,
 President, Director | James J.
 Bigl, Chairman   
|and Chief
 Executive Officer      | March 31,
 2008            
|March 31,
 2008                   |                            
|                                  |                            
|/s/ Emile Laliberte, CPA          | /s/ Richard
 Rakowski      
|                                  |                            
|Emile
 Laliberte, CPA             | Richard
 Rakowski, Director
|Acting Chief
 Financial Officer,  | March 31,
 2008            
|Corporate
 Controller, Secretary  |                            
|and
 Treasurer                    |                            
|March 31,
 2008                   |                            
|                                  |                            
|/s/ Jeffrey L. Zwicker            | /s/ Orlo
 Dietrich         
|                                  |                            
|Jeffrey L.
 Zwicker, Director     | Orlo
 Dietrich, Director   
|March 31,
 2008                   | March 31,
 2008            

63

---



HC INNOVATIONS, IN`C. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

TOGETHER WITH

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

|                 
|-----------------
|Table of Contents
|                 

|                                                                                       |                  
|-------------------------------------------------------------------------------------- | -----------------
|                                                                                       | Page
      Number
|                                                                                       |                  
|Report
            of Independent Registered Public Accounting Firm                    | F-1              
|                                                                                       |                  
|Consolidated
          Financial Statements:                                           |                  
|                                                                                       |                  
|Consolidated
            Balance Sheets                                                | F-2              
|                                                                                       |                  
|Consolidated
            Statements of Operations                                      | F-3              
|                                                                                       |                  
|Consolidated
            Statements of Changes in Stockholders
      Equity (Deficit) | F-4              
|                                                                                       |                  
|Consolidated
            Statements of Cash Flows                                      | F-5              
|                                                                                       |                  
|Notes
            to Consolidated Financial Statements                                 | F-6              

---



Report of Independent Registered
      Public Accounting Firm

The Board of Directors and Shareholders of
  HC Innovations, Inc. and Subsidiaries

We
    have audited the accompanying consolidated balance sheets of HC Innovations,
    Inc. and Subsidiaries (the Company) as of December 31, 2007 and
    2006, and the related consolidated statements of operations, changes in stockholders equity
    (deficit), and cash flows for the years then ended. These consolidated financial
    statements are the responsibility of the Companys management. Our responsibility
    is to express an opinion on these consolidated financial statements based
    on our audits.

We
    conducted our audits in accordance with the standards of the Public Company
    Accounting Oversight Board (United States). Those standards require that
    we plan and perform the audits to obtain reasonable assurance about whether
    the consolidated financial statements are free of material misstatement.
    The Company is not required to have, nor were we engaged to perform, an audit
    of its internal control over financial reporting. Our audits included consideration
    of internal control over financial reporting as a basis for designing audit
    procedures that are appropriate in the circumstances, but not for the purpose
    of expressing an opinion on the effectiveness of the Companys internal
    control over financial reporting. Accordingly, we express no such opinion.
    An audit also includes examining, on a test basis, evidence supporting the
    amounts and disclosures in the consolidated financial statements, assessing
    the accounting principles used and significant estimates made by management,
    as well as evaluating the overall financial statement presentation. We believe
    that our audits provide a reasonable basis for our opinion.

In
    our opinion, the consolidated financial statements referred to above present
    fairly, in all material respects, the consolidated financial position of
    HC Innovations, Inc. and Subsidiaries at December 31, 2007 and 2006, and
    the results of their operations and their cash flows for the years then ended
    in conformity with accounting principles generally accepted in the United
    States of America.

The
    accompanying consolidated financial statements have been prepared assuming
    the Company will continue as a going concern. As shown in the accompanying
    consolidated financial statements, the Company has a working capital deficiency
    of approximately $2 million as of December 31, 2007, has had net losses
    of approximately $10.7 million and $3.3 million for the years ended December
    31, 2007 and 2006, respectively, has an accumulated deficit of approximately
    $16 million as of December 31, 2007. These factors raise substantial doubt
    about the Companys ability to continue as a going concern. Managements
    plans regarding these matters are described in Note 1. The consolidated financial
    statements do not include adjustments that might result from the outcome
    of this uncertainty.

/s/ Carlin, Charron & Rosen, LLP

Glastonbury, Connecticut
  March 31, 2008

F-1

---



HC INNOVATIONS, INC. AND SUBSIDIARIESConsolidated Balance Sheets 
  December 31, 2007 and 2006

|                                                                        |  |      |             |      |   |            |  
|----------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ---------- | -
|                                                                        |  | 2007 |             | 2006 |  
|                                                                        |  |      |             |      |  
|Assets                                                                  |  |      |             |      |   |            |  
|Current
          assets:                                               |  |      |             |      |   |            |  
|Cash
          and cash equivalents                                     |  | $    | 3,442,290   |      | $ | 151,534    |  
|Accounts
          receivable, net                                      |  |      | 2,216,059   |      |   | 330,822    |  
|Prepaid
          expenses                                              |  |      | 546,027     |      |   | 142,274    |  
|                                                                        |  |      |             |      |   |            |  
|Total
          current assets                                          |  |      | 6,204,376   |      |   | 624,630    |  
|                                                                        |  |      |             |      |   |            |  
|Fixed
          assets, net                                             |  |      | 1,030,920   |      |   | 292,435    |  
|Capitalized
          software development costs, net                   |  |      | 2,217,975   |      |   | 1,310,727  |  
|Deferred
          issuance costs, net                                  |  |      | 648,485     |      |   | 51,405     |  
|Other
          assets                                                  |  |      | 80,782      |      |   | 65,266     |  
|                                                                        |  |      |             |      |   |            |  
|Total
          assets                                                  |  | $    | 10,182,538  |      | $ | 2,344,463  |  
|                                                                        |  |      |             |      |   |            |  
|Liabilities
          and Stockholders Equity (Deficit)                |  |      |             |      |   |            |  
|Current
          liabilities:                                          |  |      |             |      |   |            |  
|Lines
          of credit                                               |  | $    | 200,000     |      | $ | 200,000    |  
|Current
          portion of notes payable                              |  |      | 388,414     |      |   | 441,139    |  
|Current
          portion of capital lease obligations                  |  |      | 284,943     |      |   | 93,942     |  
|Convertible
          debentures, net of discounts                      |  |      | 4,069,140   |      |   | 1,222,556  |  
|Accounts
          payable                                              |  |      | 1,770,358   |      |   | 1,498,216  |  
|Accrued
          expenses                                              |  |      | 1,196,882   |      |   | 368,919    |  
|Other
          current liabilities                                     |  |      | 317,128     |      |   | 75,941     |  
|                                                                        |  |      |             |      |   |            |  
|Total
          current liabilities                                     |  |      | 8,226,865   |      |   | 3,900,713  |  
|                                                                       
|                                                                        |  |      |             |      |   |            |  
|Notes
          payable, net of current portion                         |  |      |            |      |   | 29,449     |  
|Capital
          lease obligations, net of current portion             |  |      | 530,717     |      |   | 151,533    |  
|Convertible
          debentures, net of discount and current portion   |  |      |            |      |   | 398,385    |  
|                                                                        |  |      |             |      |   |            |  
|Total
          liabilities                                             |  |      | 8,757,582   |      |   | 4,480,080  |  
|                                                                        |  |      |             |      |   |            |  
|                                                                        |  |      |             |      |   |            |  
|Commitments
          and contigencies (Note 15)                        |  |      |            |      |   |           |  
|                                                                        |  |      |             |      |   |            |  
|Stockholders equity
          (deficit):                               |  |      |             |      |   |            |  
|Preferred
          stock, $.001 par value, 5,000,000 shares authorized |  |      |            |      |   |           |  
|Common
          stock, $.001 par value, 100,000,000 shares authorized  |  |      | 38,601      |      |   | 30,956     |  
|Additional
          paid-in capital                                    |  |      | 17,377,800  |      |   | 3,102,062  |  
|Stock
          subscriptions receivable                                |  |      | (21,671     | )    |   | (21,671    | )
|Deficit                                                                 |  |      | (15,969,774 | )    |   | (5,246,964 | )
|                                                                        |  |      |             |      |   |            |  
|Total
          stockholders equity (deficit)                          |  |      | 1,424,956   |      |   | (2,135,617 | )
|                                                                        |  |      |             |      |   |            |  
|Total
          liabilities and stockholders equity (deficit)          |  | $    | 10,182,538  |      | $ | 2,344,463  |  
|                                                                        |  |      |             |      |   |            |  

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

F-2

---



HC INNOVATIONS, INC. AND SUBSIDIARIESConsolidated Statements of Operations
  For the Years Ended December 31, 2007 and 2006

|                                                       |  |      |             |      |   |            |  
|------------------------------------------------------ |  | ---- | ----------- | ---- | - | ---------- | -
|                                                       |  | 2007 |             | 2006 |  
|                                                       |  |      |             |      |  
|                                                       |  |      |             |      |   |            |  
|Net
          revenues                                 |  | $    | 12,880,723  |      | $ | 6,166,092  |  
|                                                       |  |      |             |      |   |            |  
|Cost
          of services                             |  |      | 12,480,408  |      |   | 5,033,136  |  
|Selling,
          general and administrative expenses |  |      | 10,169,374  |      |   | 3,964,537  |  
|Depreciation
          and amortization                |  |      | 460,888     |      |   | 269,640    |  
|                                                       |  |      |             |      |   |            |  
|                                                       |  |      | 23,110,670  |      |   | 9,267,313  |  
|                                                       |  |      |             |      |   |            |  
|Loss
          from operations                         |  |      | (10,229,947 | )    |   | (3,101,221 | )
|                                                       |  |      |             |      |   |            |  
|Other
          income (expense)                       |  |      |             |      |   |            |  
|Interest
          income                              |  |      | 61,838      |      |   | 2,356      |  
|Other
          income                                 |  |      | 200         |      |   | 130,493    |  
|Interest
          expense                             |  |      | (554,901    | )    |   | (282,293   | )
|                                                       |  |      |             |      |   |            |  
|                                                       |  |      | (492,863    | )    |   | (149,444   | )
|                                                       |  |      |             |      |   |            |  
|Loss
          before provision for income taxes       |  |      | (10,722,810 | )    |   | (3,250,665 | )
|                                                       |  |      |             |      |   |            |  
|Provision
          for income taxes                   |  |      |            |      |   |           |  
|                                                       |  |      |             |      |   |            |  
|                                                       |  |      |             |      |   |            |  
|Net
          loss                                     |  | $    | (10,722,810 | )    | $ | (3,250,665 | )
|                                                       |  |      |             |      |   |            |  
|                                                       |  |      |             |      |   |            |  
|Basic
          and diluted net loss per share         |  | $    | (0.29       | )    | $ | (0.12      | )
|                                                       |  |      |             |      |   |            |  
|                                                       |  |      |             |      |   |            |  
|Weighted
          average common shares outstanding   |  |      | 36,976,232  |      |   | 27,305,114 |  
|                                                       |  |      |             |      |   |            |  

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

F-3

---



|                                                                              
|------------------------------------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES                                         
|Consolidated
          Statements of Changes in Stockholders Equity (Deficit)
|For the Years Ended December
          31, 2007 and 2006                      

|                                                                                                                                                           |  |               |            |        |   |                |   |                         |            |                                    |   |         |   |   |             |   |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ------ | - | -------------- | - | ----------------------- | ---------- | ---------------------------------- | - | ------- | - | - | ----------- | - | - | ----------- | -
|                                                                                                                                                          
|                                                                                                                                                           |  | Common Stock  |            |        |   |                |   |                         |            |                                    |  
|                                                                                                                                                           |  |               |            |        |   |                |   |                         |            | TotalStockholdersEquity (Deficit) |  
|                                                                                                                                                           |  |               |            |        |   | Paid-InCapital |   | SubscriptionsReceivable |            |                                    |   |        
|                                                                                                                                                           |  | Shares Issued |            | Amount |   |                |   | Deficit                 |            |                                   
|                                                                                                                                                           |  |               |            |        |   |                |   |                         |            |                                    |   |         |  
|Balance,
          January 1, 2006                                                                                                                         |  |               | 23,868,323 |        | $ | 238,684        |   | $                       | 421,767    |                                    | $ | (21,671 | ) | $ | (1,996,299  | ) | $ | (1,357,519  | )
|                                                                                                                                                          
|Common
          stock issued in connection with convertible debenture - April 17, 2006                                                                    |  |               | 500,000    |        |   | 5,000          |   |                         | 136,348    |                                    |   |        |   |   |            |   |   | 141,348     |  
|                                                                                                                                                          
|Reverse
          acquisition recapitalization adjustment (Note 2)                                                                                         |  |               | 328,637    |        |   | (218,988       | ) |                         | 218,988    |                                    |   |        |   |   |            |   |   |            |  
|                                                                                                                                                          
|Issuance
          of common stock - June 23, 2006                                                                                                         |  |               | 142,669    |        |   | 143            |   |                         | 106,859    |                                    |   |        |   |   |            |   |   | 107,002     |  
|                                                                                                                                                          
|Common
          stock issued in connection with exercise of warrants - June 28, 2006                                                                      |  |               | 5,166,711  |        |   | 5,167          |   |                         | 494,833    |                                    |   |        |   |   |            |   |   | 500,000     |  
|                                                                                                                                                          
|Common
          stock (106,400 shares) to be issued and warrants issued in satisfaction
          of note payable and accrued interest - October 25, 2006 |  |               |           |        |   |               |   |                         | 106,400    |                                    |   |        |   |   |            |   |   | 106,400     |  
|                                                                                                                                                          
|Common
          stock and warrants issued in connection with private placement net
          of issuance costs                                            |  |               | 950,000    |        |   | 950            |   |                         | 829,821    |                                    |   |        |   |   |            |   |   | 830,771     |  
|                                                                                                                                                          
|Common
          stock (900,000 shares) to be issued and warrants issued in connection
          with private placement, net of issuance costs             |  |               |           |        |   |               |   |                         | 787,046    |                                    |   |        |   |   |            |   |   | 787,046     |  
|                                                                                                                                                          
|Net
          loss                                                                                                                                         |  |               |           |        |   |               |   |                         |           |                                    |   |        |   |   | (3,250,665  | ) |   | (3,250,665  | )
|                                                                                                                                                           |  |               |            |        |   |                |   |                         |            |                                    |   |         |   |   |             |   |   |             |  
|                                                                                                                                                          
|Balance,
          December 31, 2006                                                                                                                       |  |               | 30,956,340 |        | $ | 30,956         |   | $                       | 3,102,062  |                                    | $ | (21,671 | ) | $ | (5,246,964  | ) | $ | (2,135,617  | )
|                                                                                                                                                          
|Common
          stock and warrants issued in connection with private placement, net
          of issuance costs (Note 12)                                 |  |               | 1,350,000  |        |   | 1,350          |   |                         | 1,168,650  |                                    |   |        |   |   |            |   |   | 1,170,000   |  
|                                                                                                                                                          
|Common
          stock and warrants issued in connection with exercise of warrants,
          net of issuance costs (Note 12)                              |  |               | 950,000    |        |   | 950            |   |                         | 1,056,643  |                                    |   |        |   |   |            |   |   | 1,057,593   |  
|                                                                                                                                                          
|Common
          stock issued in connection with conversion of debentures (Note 9)                                                                         |  |               | 1,708,000  |        |   | 1,708          |   |                         | 1,706,277  |                                    |   |        |   |   |            |   |   | 1,707,985   |  
|                                                                                                                                                          
|Issuance
          of common stock                                                                                                                         |  |               | 1,006,400  |        |   | 1,007          |   |                         | (1,007     | )                                  |   |        |   |   |            |   |   |            |  
|                                                                                                                                                          
|Issuance
          of warrants in connection with consulting services (Note 12)                                                                            |  |               |           |        |   |               |   |                         | 331,940    |                                    |   |        |   |   |            |   |   | 331,940     |  
|                                                                                                                                                          
|Issuance
          of common stock in connection with consulting services (Note 12)                                                                        |  |               | 30,000     |        |   | 30             |   |                         | 104,970    |                                    |   |        |   |   |            |   |   | 105,000     |  
|                                                                                                                                                          
|Common
          stock and warrants issued in connection with exercise of warrants,
          net of issuance costs (Note 12)                              |  |               | 550,000    |        |   | 550            |   |                         | 618,140    |                                    |   |        |   |   |            |   |   | 618,690     |  
|                                                                                                                                                          
|Common
          stock and warrants issued in connection with private placement, net
          of issuance costs (Note 12)                                 |  |               | 1,666,667  |        |   | 1,667          |   |                         | 4,998,333  |                                    |   |        |   |   |            |   |   | 5,000,000   |  
|                                                                                                                                                          
|Common
          stock and warrants issued in connection with private placement, net
          of issuance costs (Note 12)                                 |  |               | 250,000    |        |   | 250            |   |                         | 499,750    |                                    |   |        |   |   |            |   |   | 500,000     |  
|                                                                                                                                                          
|Issuance
          of common stock in connection with consulting services (Note 12)                                                                        |  |               | 133,000    |        |   | 133            |   |                         | 365,617    |                                    |   |        |   |   |            |   |   | 365,750     |  
|                                                                                                                                                          
|Beneficial
          conversion discount (Note 9)                                                                                                          |  |               |           |        |   |               |   |                         | 2,166,000  |                                    |   |        |   |   |            |   |   | 2,166,000   |  
|                                                                                                                                                          
|Issuance
          of warrants to advisor in connection with convertible debentures (Note
          9)                                                     |  |               |           |        |   |               |   |                         | 281,279    |                                    |   |        |   |   |            |   |   | 281,279     |  
|                                                                                                                                                          
|Issuance
          of warrants to investors in connection with convertible debentures
          (Note 9)                                                   |  |               |           |        |   |               |   |                         | 979,147    |                                    |   |        |   |   |            |   |   | 979,147     |  
|                                                                                                                                                          
|Net
          loss                                                                                                                                         |  |               |           |        |   |               |   |                         |           |                                    |   |        |   |   | (10,722,810 | ) |   | (10,722,810 | )
|                                                                                                                                                           |  |               |            |        |   |                |   |                         |            |                                    |   |         |   |   |             |   |   |             |  
|Balance,
          December 31, 2007                                                                                                                       |  |               | 38,600,407 |        | $ | 38,601         |   | $                       | 17,377,800 |                                    | $ | (21,671 | ) | $ | (15,969,774 | ) | $ | 1,424,956   |  
|                                                                                                                                                           |  |               |            |        |   |                |   |                         |            |                                    |   |         |   |   |             |   |   |             |  

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

F-4

---



HC INNOVATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
  For the Years Ended December 31, 2007 and 2006

|                                                                                                                                 |  |      |             |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ---------- | -
|                                                                                                                                 |  | 2007 |             | 2006 |  
|                                                                                                                                 |  |      |             |      |  
|Cash
          flows from operating activities:                                                                                  |  |      |             |      |   |            |  
|Net
          loss                                                                                                               |  | $    | (10,722,810 | )    | $ | (3,250,665 | )
|Adjustments
          to reconcile net loss to net cash used in operating activities:                                            |  |      |             |      |   |            |  
|Depreciation
          and amortization                                                                                          |  |      | 460,888     |      |   | 269,640    |  
|Amortization
          of discount - convertible debentures                                                                      |  |      | 213,233     |      |   | 174,851    |  
|Amortization
          of beneficial conversion discount                                                                         |  |      | 123,333     |      |   |           |  
|Consulting
          services expense - warrants                                                                                 |  |      | 331,940     |      |   |           |  
|Consulting
          services expense - common stock                                                                             |  |      | 196,438     |      |   |           |  
|Changes
          in operating assets and liabilities:                                                                           |  |      |             |      |   |            |  
|(Increase)
          decrease in:                                                                                                |  |      |             |      |   |            |  
|Accounts
          receivable, net                                                                                               |  |      | (1,885,237  | )    |   | (110,511   | )
|Prepaid
          expenses                                                                                                       |  |      | (129,441    | )    |   | 15,782     |  
|Increase
          (decrease) in:                                                                                                |  |      |             |      |   |            |  
|Accounts
          payable                                                                                                       |  |      | 272,142     |      |   | 1,042,032  |  
|Accrued
          expenses                                                                                                       |  |      | 1,342,728   |      |   | 215,493    |  
|Other
          current liabilities                                                                                              |  |      | 241,187     |      |   | (198,674   | )
|                                                                                                                                 |  |      |             |      |   |            |  
|Net
          cash used in operating activities                                                                                  |  |      | (9,555,599  | )    |   | (1,842,052 | )
|                                                                                                                                 |  |      |             |      |   |            |  
|Cash
          flow from investing activities:                                                                                   |  |      |             |      |   |            |  
|Increase
          in other assets                                                                                               |  |      | (15,516     | )    |   | (283,643   | )
|Purchases
          of fixed assets, net                                                                                         |  |      | (151,074    | )    |   | (68,375    | )
|Expenditures
          for capitalized software development costs                                                                |  |      | (1,126,508  | )    |   | (638,270   | )
|                                                                                                                                 |  |      |             |      |   |            |  
|Net
          cash used in investing activities                                                                                  |  |      | (1,293,098  | )    |   | (990,288   | )
|                                                                                                                                 |  |      |             |      |   |            |  
|Cash
          flows from financing activities:                                                                                  |  |      |             |      |   |            |  
|Proceeds
          from issuance of common stock, net                                                                            |  |      | 8,346,283   |      |   | 1,724,819  |  
|Proceeds
          from issuance of convertible debentures                                                                       |  |      | 5,000,000   |      |   | 500,000    |  
|Proceeds
          from notes payable                                                                                            |  |      | 1,350,000   |      |   | 560,000    |  
|Payments
          on line of credit, net                                                                                        |  |      |            |      |   | (10,122    | )
|Payments
          on convertible debentures                                                                                     |  |      | (50,000     | )    |   |           |  
|Payments
          on notes payable                                                                                              |  |      | (82,174     | )    |   | (80,200    | )
|Payments
          on capital lease obligations                                                                                  |  |      | (151,731    | )    |   | (85,953    | )
|Debt
          issuance costs paid                                                                                               |  |      | (272,925    | )    |   | (60,045    | )
|                                                                                                                                 |  |      |             |      |   |            |  
|Net
          cash provided by financing activities                                                                              |  |      | 14,139,453  |      |   | 2,548,499  |  
|                                                                                                                                 |  |      |             |      |   |            |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Net
          increase (decrease) in cash and cash equivalents                                                                   |  |      | 3,290,756   |      |   | (283,841   | )
|                                                                                                                                 |  |      |             |      |   |            |  
|Cash
          and cash equivalents - beginning of period                                                                        |  |      | 151,534     |      |   | 435,375    |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Cash
          and cash equivalents - end of period                                                                              |  | $    | 3,442,290   |      | $ | 151,534    |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Supplemental
          cash flow information:                                                                                    |  |      |             |      |   |            |  
|Cash
          paid during the year for:                                                                                         |  |      |             |      |   |            |  
|Interest                                                                                                                         |  | $    | 239,773     |      | $ | 263,261    |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Noncash
          investing and financing activities:                                                                            |  |      |             |      |   |            |  
|Convertible
          debentures issued in satisfaction of accrued expenses                                                      |  | $    | 504,955     |      | $ |           |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Convertible
          debentures issued for debt issuance costs                                                                  |  | $    | 150,000     |      | $ |           |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Convertible
          debentures issued in satisfaction of notes payable and accrued interest
          thereon                  |  | $    | 1,359,810   |      | $ |           |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Warrants
          issued for debt issuance costs                                                                                |  | $    | 281,278     |      | $ |           |  
|                                                                                                                                 |  |      |             |      |   |            |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Common
          stock issued in connection with conversion of convertible debentures                                            |  | $    | 1,707,985   |      | $ | 106,400    |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Common
          stock issued for prepaid consulting services                                                                    |  | $    | 274,312     |      | $ |           |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Common
          stock issued in connection with exercise of warrants and satisfaction
          of note payable - related party |  | $    |            |      | $ | 500,000    |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Beneficial
          conversion discount on convertible debentures                                                               |  | $    | 2,166,000   |      | $ |           |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Discount
          on convertible debentures - common stock and warrants                                                         |  | $    | 979,147     |      | $ | 141,348    |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Computer
          equipment acquired through capital lease                                                                      |  | $    | 721,916     |      | $ | 59,834     |  
|                                                                                                                                 |  |      |             |      |   |            |  
|Capitalized
          software acquired through capital lease                                                                    |  | $    |            |      | $ | 114,718    |  
|                                                                                                                                 |  |      |             |      |   |            |  

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

F-5

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial
    Statements

1.       Nature of Operations

By Stock Acquisition Agreement dated May
    11, 2006, Ayre Holdings, Inc. (Ayre or the Company),
    a Delaware corporation, acquired 100% of the issued and outstanding shares
    of HC Innovations, Inc., in exchange for 24,368,323 shares of common stock
    of the Company representing approximately 99% of the total issued and outstanding
    shares of the Company at the time. Prior to the consummation of the acquisition,
    Ayre, a non-reporting pink sheet company and public shell, effectuated a
    reverse stock split whereby the then current 793,000 issued and outstanding
    shares of common stock were reverse split into 328,637 shares of common stock
    at the rate of .41442.

The post-acquisition entity is accounted
    for as a recapitalization of HC Innovations, Inc. using accounting principles
    applicable to reverse acquisitions with HC Innovations, Inc. being treated
    as the accounting parent (acquirer) and Ayre Holdings, Inc., the legal parent,
    being treated as the accounting subsidiary (acquiree). HC Innovations, Inc.
    is regarded as the predecessor entity. In accordance with the provisions
    governing the accounting for reverse acquisitions (Note 2), the historical
    figures presented are those of HC Innovations, Inc. Upon consummation of
    the acquisition on June 9, 2006, Ayre changed its name to HC Innovations,
    Inc. (HCI). The Company, through its subsidiaries, provides specialty
    care management products and services.

HCI and subsidiaries (the Company)
    is a specialty care management company comprised of separate divisions each
    with a specific focus and intervention. The Companys mission is to
    identify subgroups of people with high costs and disability and create and
    implement programs and interventions that improve their health, resulting
    in dramatic reductions in the cost of their care. The Company also develops
    and implements medical management systems for the long term care industry.

Enhanced Care Initiatives, Inc. (ECI),
    a wholly owned subsidiary of HCI was founded in 2002 and is the management
    company for all HCI entities. ECI has four wholly owned subsidiaries operating
    in Tennessee, Texas, Massachusetts, and New York. ECI markets its proprietary
    specialty care management programs for the medically frail and other costly
    sub-populations to Health Maintenance Organizations (HMOs) and
    other managed care organizations (MCOs) as well as state Medicaid
    departments.

F-6

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

1.       Nature of Operations
      (continued)

NP Care, LLCs (LLCs) are nursing
    home medical management systems. The LLCs nurse practitioner program provides
    onsite medical care by an Advanced Practice Registered Nurse (APRN)
    under the oversight of the patients individual physician to residents
    in nursing homes and assisted living facilities. The LLCs operate in the
    states of Connecticut, Florida, New Jersey, Ohio, Illinois, Massachusetts
    and Tennessee and are managed exclusively by ECI.

Going Concern / Managements Plan

As shown in the accompanying consolidated
    financial statements, as is typical of a company going through early-stage
    development of its services and strategic initiatives, the Company has sustained
    consolidated net losses for the years ended December 31, 2007 and 2006 of
    approximately $10.7 million and $3.3 million, respectively. At December 31,
    2007, the Company had a working capital deficiency of approximately $2
    million and an accumulated deficit of approximately $16 million. These
    factors raise substantial doubt about the Companys ability to continue
    as a going concern. The consolidated financial statements do not include
    adjustments that might result from the outcome of this uncertainty.

Management believes that the Company will
    be successful in its efforts to adequately meet its capital needs and continue
    to grow its businesses. The Company raised an additional $430,000 through
    the issuance of convertible debt during the first quarter of 2008. The Company
    is currently working with an investment banking firm and hopes to raise an
    additional $12 to $15 million in 2008 through the sale of common stock, warrants,
    issuance of debt or a combination of both.

F-7

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

1.       Nature of Operations
      (continued)

Going Concern / Managements Plan
      (continued)

During 2007, the Company opened NP Care
    operations in the states of Illinois and Massachusetts bringing the total
    number of NP Care operations to seven at December 31, 2007. During 2007 the
    Company opened Easy Care operations in the state of New York under a contract
    with Health Insurance Plan of New York (HIP) bringing the total
    number of Easy Care operations to four at December 31, 2007. During the first
    quarter of 2008 the Company opened Easy Care operations in the state of Alabama
    bringing the total number of Easy Care operations to five at March 30, 2008.
    The Company enrolled the first two members in Alabama on March 11, 2008.

In addition to the new operations opened
    during 2007, the Company has experienced growth in members under care within
    its Easy Care Operations. During the second half of 2007, members under care
    increased by approximately 2,000 representing a 186% growth rate when compared
    to members under care at June 30, 2007.

2.       Recapitalization

By Stock Acquisition Agreement dated May
    11, 2006, Ayre Holdings, Inc. (Ayre or the Company),
    a Delaware corporation, acquired 100% of the issued and outstanding shares
    of HC Innovations, Inc., in exchange for 24,368,323 shares of common stock
    of the Company representing approximately 99% of the total issued and outstanding
    shares of the Company at the time which resulted in a change in control of
    the Company. Simultaneously, with this exchange of shares, HC Innovations,
    Inc. paid $175,000 in cash to the Ayre shareholders, which has been included
    in selling, general and administrative expenses in the consolidated statements
    of operations for the year ended December 31, 2006. Prior to the consummation
    of the acquisition, Ayre, a non-reporting pink sheet company, effectuated
    a reverse stock split whereby the then current 793,000 issued and outstanding
    shares of common stock were reverse split into 328,637 shares of common stock
    at the rate of .41442.

F-8

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

2.       Recapitalization
      (continued)

The post-acquisition entity is accounted
    for as a recapitalization of HC Innovations, Inc. using accounting principles
    applicable to reverse acquisitions with HC Innovations, Inc. being treated
    as the accounting parent (acquirer) and Ayre Holdings, Inc., the legal parent,
    being treated as the accounting subsidiary (acquiree). Ayre Holdings, Inc.
    was an inactive public shell with no net assets prior to the transaction.
    Therefore, the value assigned to the common shares based on the fair value
    of the net assets of Ayre Holdings, Inc. at the recapitalization date was
    $-0- and the revenue, net loss and loss per share, assuming the transaction
    had been completed on January 1, 2006, would be the same as reported.

HC Innovations, Inc. is regarded as the
    predecessor entity. In accordance with the provisions governing the accounting
    for reverse acquisitions, the historical figures presented are those of HC
    Innovations, Inc.

Prior to the consummation of the acquisition
    on June 9, 2006, Ayre Holdings, Inc. had 328,637 shares of common stock outstanding.
    At the date of the reverse acquisition merger, Ayre Holdings, Inc. was a
    public shell and had no assets, no liabilities, and no net stockholders equity.
    Therefore, this was the only recapitalization adjustment that was recorded.
    The key components of the reverse acquisition recapitalization adjustment
    were as follows:

|                                                                                                                 |  |                                                 |             |        |   |                        |   |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ----------- | ------ | - | ---------------------- | - | - | ------- | -
|                                                                                                                 |  | Common Stock                                    |            
|                                                                                                                 |  |                                                 |            
|                                                                                                                 |  | Shares Issued
            and
      Outstanding |             | Amount |   | Paid -in
      Capital |  
|                                                                                                                 |  |                                                 |             |        |   |                        |  
|Public
          company shares already outstanding on date of merger (June 9, 2006),
          par value $0.001 |  |                                                 | 328,637     |        | $ | 328                    |   | $ | (328    | )
|                                                                                                                 |  |                                                 |             |        |   |                        |   |   |         |  
|Public
          company shares issued in a 1:1 exchange for private company Shares,
          par value $0.001  |  |                                                 | 24,368,323  |        |   | 24,368                 |   |   | (24,368 | )
|                                                                                                                 |  |                                                 |             |        |   |                        |   |   |         |  
|Private
          company shares exchanged, par value $0.01                                                      |  |                                                 | (24,368,323 | )      |   | (243,684               | ) |   | 243,684 |  
|                                                                                                                 |  |                                                 |             |        |   |                        |   |   |         |  
|                                                                                                                 |  |                                                 |             |        |   |                        |   |   |         |  
|Reverse
          acquisition recapitalization adjustment, net                                                   |  |                                                 | 328,637     |        | $ | (218,988               | ) | $ | 218,988 |  
|                                                                                                                 |  |                                                 |             |        |   |                        |   |   |         |  

F-9

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

3.       Summary of Significant
      Accounting Policies

Basis of Presentation

The consolidated financial statements
    have been prepared in accordance with accounting principles generally accepted
    in the United States of America (GAAP) and include the accounts of HC Innovations,
    Inc. and its wholly-owned, majority-owned and controlled subsidiaries (which
    are referred to as the Company, unless the context otherwise requires), as
    well as certain affiliated limited liability companies, which are variable
    interest entities required to be consolidated. The company consolidates all
    controlled subsidiaries, in which control is effectuated through ownership
    of voting common stock or by other means. All significant intercompany transactions
    have been eliminated in consolidation.

In states where ECI is not permitted to
    directly own a medical operation due to corporate practice of medicine laws
    in those states, it performs only non-medical administrative and support
    services, does not represent to the public or its clients that it offers
    medical services and does not exercise influence or control over the practice
    of medicine. In those states, ECI conducts business through Limited Liability
    Companies (LLCs) that it controls, and it is these affiliated LLCs that employ
    Advanced Practice Nurse Practitioners (APNPs) who practice medicine.
    In such states, ECI generally enters into exclusive long-term management
    services agreements with the LLCs that operate the medical operations that
    restricts the member(s) of the affiliated LLCs from transferring their ownership
    interests in the affiliated LLCs and otherwise provides ECI or its designee
    with a controlling voting or financial interest in the affiliated LLCs and
    their operations.

The LLCs, which are required to be consolidated
    under Financial Accounting Standards Board (FASB) Interpretation
    No. 46, as revised (FIN 46(R)), Consolidation of Variable
    Interest Entities, would also be consolidated under the provisions
    of Emerging Issues Task Force (EITF) No. 97-2, Application
    of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
    Entities and Certain Other Entities with Contractual Management Arrangements. The
    LLCs have been determined to be variable interest entities due to the existence
    of a call option under which ECI has the ability to require the member(s)
    holding all of the voting equity interests of the underlying LLCs to transfer
    their equity interests at any time to any person specified by ECI and vote
    the member(s) interests as ECI instructs. This call option agreement represents
    rights provided through a variable interest other than the equity interest
    itself that caps the returns that could be earned

F-10

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

3.       Summary of Significant
      Accounting Policies (continued)

Basis of Presentation (continued)

by the equity holders.

In addition the Company has an exclusive
    long-term management services agreement with each of the LLCs and the
    member(s) of the LLCs which allows the Company to direct all of the non-clinical
    activities of the LLCs, retain all of the economic benefits, and assume all
    of the risks associated with ownership of the LLCs. Due to these agreements,
    the Company has all of the economic benefits and risks associated with the
    LLCs and the Company is considered to be the primary beneficiary of the activities
    of the LLCs and is required to consolidate the LLCs under FIN 46(R).

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents consist of cash
    balances on hand and short-term, highly liquid investments with original
    maturities of three months or less.

Revenue Recognition

The Companys revenue includes fees
    for service revenue and revenue from capitated contracts. A significant portion
    of the Companys fee for service revenues have been reimbursed by federal
    Medicare and, to a lesser extent, state Medicaid programs.

Revenue from APRN and MD services are
    generated from billings to a patients respective insurance carrier,
    health maintenance organization, Medicare and Medicaid. Payments from these
    sources are generally based on prospectively determined rates that vary according
    to a classification system based on clinical, diagnostic and other factors
    and are substantially below established rates.

F-11

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

3.       Summary of Significant
      Accounting Policies (continued)

Revenue Recognition (continued)

The Company monitors its revenues and
    receivables from these reimbursement sources, as well as other third-party
    insurance payors, and records an estimated contractual allowance for certain
    service revenues and receivable balances in the month service is provided
    and revenue is recognized, to properly account for anticipated differences
    between billed and reimbursed amounts. Accordingly, a substantial portion
    of the Companys total net revenues and receivables reported in the
    accompanying consolidated financial statements are recorded at the amount
    ultimately expected to be received from these payors. Net revenues from fee
    for service patients are recorded in the month service is provided by credentialed
    practitioners.

The Company evaluates several criteria
    in developing the estimated contractual allowances for unbilled and/or initially
    rejected claims on a monthly basis, including historical trends based on
    actual claims paid, current contract and reimbursement terms, and changes
    in patient base and payor/service mix. Contractual allowance estimates are
    adjusted to actual amounts as cash is received and claims are settled and
    the aggregate impact of these resulting adjustments were not significant
    to the Companys operations for the years ended December 31, 2007 and
    2006. Further, the Company does not expect the reasonably possible effects
    of a change in estimate related to unsettled December 31, 2007 contractual
    allowance amounts from Medicare, Medicaid and other third-party payors to
    be significant to its future operating results and consolidated financial
    position.

Revenues from capitated contracts are
    recorded monthly based on the number of members covered under each capitated
    contract per month. In October of 2007, the Company entered into new capitated
    contracts with HealthSpring to provide services under the Easy Care Program
    that contains a 25% at risk component. The at risk component is based upon
    the Company achieving certain performance criteria on an annual basis. As
    of December 31, 2007, the Company had insufficient data from which to determine
    if those performance criteria will be met and if that revenue component will
    be realized. The Company will realize this revenue in 2008 when, and if,
    the amount is both determinable and reasonably assured and is no longer subject
    to refund. Accordingly, the Company has deferred approximately $221,000 of
    revenue as of December 31, 2007 associated with the HealthSpring contracts.
    In February of 2007, the Company entered into a capitated contract with McKesson
    Health Solutions under the NP Care program to provide care management services
    to McKesson enrollees that contains a 20% at risk component.

F-12

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

3.       Summary of Significant
      Accounting Policies (continued)

Revenue Recognition (continued)

The at risk component is based on the
    Company providing to McKesson a return on investment of 2:1 for the first
    year of service. As of December 31, 2007, the Company was unable to determine
    the return on investment, and accordingly, deferred approximately $34,000
    of revenue as of December 31, 2007. The Company will realize this revenue
    in 2008 when, and if, the amount is both determinable and reasonably assured
    and is no longer subject to refund.

Fixed Assets

Fixed assets are stated at cost, less
    accumulated depreciation and amortization. Major improvements and betterments
    to the fixed assets are capitalized. Expenditures for maintenance and repairs
    which do not extend the estimated useful lives of the applicable assets are
    charged to expense as incurred. When fixed assets are retired or otherwise
    disposed of, the assets and the related accumulated depreciation are removed
    from the accounts and any resulting gain or loss is recognized in operations.

The Company provides for depreciation
    and amortization using the straight-line method over the estimated useful
    lives of the assets, or, in the case of leasehold improvements, over the
    remaining term of the related lease, whichever is shorter.

Capitalized Software Development Costs

The Company has capitalized costs related
    to the development of software for internal use. Capitalized costs include
    external costs of materials and services and consulting fees devoted to the
    specific software development. These costs have been capitalized based upon
    Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
    Software Developed or Obtained for Internal Use.In accordance
    with SOP 98-1, internal-use software development costs are capitalized once
    (i) the preliminary project stage is completed, (ii) management authorizes
    and commits to funding a computer software project, and (iii) it is probable
    that the project will be completed, and the software will be used to perform
    the function intended. Costs incurred prior to meeting these qualifications
    are expensed as incurred. Capitalization of costs ceases when the project
    is substantially complete and ready for its intended use. Internal-use software
    development costs are amortized using the straight-line method over estimated
    useful lives approximating five years.

F-13

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

3.       Summary of Significant
      Accounting Policies (continued)

Capitalized Software Development Costs
      (Continued)

The capitalization and ongoing assessment
    of recoverability of development costs requires considerable judgment by
    the Company with respect to certain external factors, including, but not
    limited to, technological and economic feasibility, and estimated economic
    life.

Other Long-Lived Assets

We account for our long-lived assets (excluding
    goodwill) in accordance with SFAS No. 144,
  Accounting for the Impairment of Long-lived Assets and for Long-lived
  Assets to be Disposed of, which requires that long-lived assets and certain
  intangible assets be reviewed for impairment whenever events or changes in
  circumstances indicate that the carrying amount may not be recoverable, such
  as technological changes or significant increased competition. If undiscounted
  expected future cash flows are less than the carrying value of the assets,
  an impairment loss is to be recognized based on the fair value of the assets,
  calculated using a discounted cash flow model. There is inherent subjectivity
  and judgments involved in cash flow analyses such as estimating revenue and
  cost growth rates, residual or terminal values and discount rates, which can
  have a significant impact on the amount of any impairment.

Other long-lived assets, such as identifiable
    intangible assets, are amortized over their estimated useful lives. These
    assets are reviewed for impairment whenever events or circumstances provide
    evidence that suggests that the carrying amount of the assets may not be
    recoverable, with impairment being based upon an evaluation of the identifiable
    undiscounted cash flows. If impaired, the resulting charge reflects the excess
    of the assets carrying cost over its fair value. As described above,
    there is inherent subjectivity involved in estimating future cash flows,
    which can have a significant impact on the amount of any impairment. Also,
    if market conditions become less favorable, future cash flows (the key variable
    in assessing the impairment of these assets) may decrease and as a result
    we may be required to recognize impairment charges in the future. No such
    impairments were identified in 2007 and 2006.

F-14

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

3.       Summary of Significant
      Accounting Policies (continued)

Advertising

Advertising costs are expensed as incurred.
    Advertising expense for the years ended December 31, 2007 and 2006 totaled
    approximately $28,000 and $86,000, respectively.

Stock Based Transactions

The Company accounts for share based compensation
    in accordance with Statement of Financial Accounting Standards (SFAS)
    No. 123(R), Share-Based Payment. Under the provisions of SFAS
    No. 123(R), share-based compensation issued to employees is measured at the
    grant date, based on the fair value of the award, and is recognized as an
    expense over the requisite service period (generally the vesting period of
    the grant). Share-based compensation issued to non-employees is measured
    at the grant date, based on the fair value of the equity instruments issued
    and is recognized as an expense over the requisite service period.

In connection with the valuation of equity
    transactions that occurred from January 1, 2006 to May 11, 2006, the Company
    considered SFAS No. 123(R), specifically paragraph 7, and also considered
    the American Institute of Certified Public Accountants (AICPA)
    Task Forces Audit and Accounting Practice Aid  Valuation of Privately-Held-Company
    Equity Securities Issued as Compensation (the AICPA Practice Aid).
    As a company without significant resources, management concluded that the
    expenditure of limited available funds to engage an outside valuation specialist
    to perform contemporaneous and comprehensive valuations during the period
    from January 1, 2006 to May 11, 2006, was not an appropriate use of financial
    resources. We instead derived relevant valuations internally considering
    SFAS 123 (R) and the AICPA Practice Aid and evaluated those figures in light
    of accounting principles generally accepted in the United States of America
    to establish fair values for accounting purposes.

Income Taxes

Deferred income taxes are computed in
    accordance with SFAS No. 109, Accounting for Income Taxes and
    reflect the net tax effects of temporary differences between the financial
    reporting carrying amounts of assets and liabilities for financial reporting
    and income tax purposes. The Company establishes a valuation allowance if
    it believes that it is more likely than not that some or all of the deferred
    tax assets will not be realized.

F-15

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

Income Taxes (Continued)

The Company is subject to U.S. federal
    income tax as well as income tax of certain state jurisdictions. The Company
    has not been audited by the I.R.S. or any states in connection with income
    taxes. The periods from inception through 2007 remain open to examination
    by the I.R.S. and state authorities.

On January 1, 2007 the Company adopted
    the provisions of FASB interpretation No. 48,
  Accounting for Uncertainty in Income Taxes- an interpretation of FASB
  Statement No. 109 (FIN No. 48). The Interpretation contains
  a two step approach to recognizing and measuring uncertain tax positions accounted
  for in accordance with FASB Statement No. 109. The first step is to evaluate
  the tax position for recognition by determining if the weight of the available
  evidence indicates that it is more likely than not that the position will be
  sustained on audit, including resolution of related appeals or litigation process,
  if any. The second step is to measure the tax benefit as the largest amount
  which is more than 50% likely of being realized upon ultimate settlement. The
  adoption of FIN No. 48 did not have any material impact on the Companys
  consolidated financial statements.

The Company recognizes interest accrued
    related to unrecognized tax benefits in interest expense. Penalties, if incurred,
    are recognized as a component of income tax expense.

Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS)
    is computed dividing the net income (loss) attributable to the common stockholders
    (the numerator) by the weighted average number of shares of common stock
    outstanding (the denominator) during the reporting periods. Diluted income
    (loss) per share is computed by increasing the denominator by the weighted
    average number of additional shares that could have been outstanding from
    securities convertible into common stock, such as stock options and warrants
    (using the treasury stock method), and convertible preferred
    stock and debt (using the if-converted method), unless their
    effect on net income (loss) per share is antidilutive. Under the if-converted
  method, convertible instruments are assumed to have been converted as of the
  beginning of the period or when issued, if later. The effect of computing the
  diluted income (loss) per share is antidilutive and, as such, basic and diluted
  earnings (loss) per share are the same for the years ended December 31, 2007
  and 2006.

F-16

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

Accounting Standards Not Yet Adopted

In September 2006, the FASB issued SFAS
    No. 157, Fair Value Measurements (SFAS No. 157) which
    provides a consistent definition of fair value which focuses on exit price
    and prioritizes, within a measurement of fair value, and the use of market-based
    inputs over entity-specific inputs. SFAS No. 157 requires expanded disclosures
    about fair value measurements and establishes a three-level hierarchy for
    fair value measurements based on the transparency of inputs to the valuation
    of an asset or liability as of the measurement date. The standard also requires
    that a company use its own nonperformance risk when measuring liabilities
    carried at fair value, including derivatives. SFAS No. 157 is effective for
    financial assets and financial liabilities and for nonfinancial assets and
    nonfinancial liabilities that are remeasured at least annually for financial
    statements issued for fiscal years beginning after November 15, 2007 and
    interim periods within those fiscal years. The provisions of SFAS No. 157
    will be applied prospectively. As permitted, the Company intends to defer
    adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial
    liabilities that are recognized or disclosed at fair value in the financial
    statements on a nonrecurring basis. The Company is currently evaluating the
    effects, if any, that SFAS No. 157 may have on our consolidated financial
    condition and consolidated results of operations.

In February 2007, the FASB issued SFAS
    No. 159 The Fair Value Option for Financial Assets and Financial Liabilities  including
    an Amendment of SFAS No. 115 (SFAS No. 159), which permits an entity
    to measure certain financial assets and financial liabilities at fair value
    that are not currently required to be measured at fair value. Entities that
    elect the fair value option will report unrealized gains and losses in earnings
    at each subsequent reporting date. The fair value option may be elected on
    an instrument-by-instrument basis, with few exceptions. SFAS No. 159 amends
    previous guidance to extend the use of the fair value option to available-for-sale
    and held-to-maturity securities. The Statement also establishes presentation
    and disclosure requirements to help financial statement users understand
    the effect of the election. SFAS No. 159 is effective as of the beginning
    of the first fiscal year beginning after November 15, 2007. The Company is
    currently evaluating the effects, if any, that SFAS No. 159 may have on our
    consolidated financial condition and consolidated results of operations.

F-17

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

|                                                    
|----------------------------------------------------
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

Accounting Standards Not Yet Adopted
      (Continued)

In June 2007, the FASB ratified Emerging
    Issue Task Force (EITF) Issue No. 07-3, Accounting for Nonrefundable
    Payments for Goods or Services to Be Used in Future Research and Development
    Activities (EITF 07-3), requiring that nonrefundable advance payments
    for future research and development activities be deferred and capitalized.
    Such amounts should be expensed as the related goods are delivered or the
    related services are performed. The Statement is effective for fiscal years
    beginning after December 15, 2007. The Company does not expect that upon
    adoption, this guidance will not have a material effect on our consolidated
    financial condition and consolidated results of operations.

In June 2007, the FASB ratified EITF Issue
    No. 06-11, Accounting for Income Tax Benefits of Dividends
    on Share-Based Payment Awards(EITF 06-11), which requires entities
    to record to additional paid in capital the tax benefits on dividends or
    dividend equivalents that are charged to retained earnings for certain share-based
    awards. In a share-based payment arrangement, employees may receive dividends
    or dividend equivalents on awards of nonvested equity shares, nonvested equity
    share units during the vesting period, and share options until the exercise
    date. Generally, the payment of such dividends can be treated as deductible
    compensation for tax purposes. The amount of tax benefits recognized in additional
    paid-in capital should be included in the pool of excess tax benefits available
    to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective
    for fiscal years beginning after December 15, 2007, and interim periods within
    those years. The Company estimates that upon adoption, this guidance will
    not have a material effect on our consolidated financial condition and consolidated
    results of operations.

F-18

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

|                                                    
|----------------------------------------------------
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

Accounting Standards Not Yet Adopted
      (Continued)

In December 2007, the FASB issued SFAS
    No. 141(R), Business Combinations (SFAS No. 141(R)) which
    retained the underlying concepts of SFAS No. 141, in that all business combinations
    are still required to be accounted for at fair value under the acquisition
    method of accounting, but SFAS No. 141(R) changed the method of applying
    the acquisition method in a number of significant aspects. SFAS No. 141(R)
    will require that: (1) for all business combinations, the acquirer records
    all assets and liabilities of the acquired business, including goodwill,
    generally at their fair values; (2) certain contingent assets and liabilities
    acquired be recognized at their fair values on the acquisition date; (3)
    contingent consideration be recognized at its fair value on the acquisition
    date and, for certain arrangements, changes in fair value be recognized in
    earnings until settled; (4) acquisition-related transactions and restructuring
    costs be expensed rather than treated as part of the cost of the acquisition
    and included in the amount recorded for assets acquired; (5) in step acquisitions,
    previous equity interests in an acquiree held prior to obtaining control
    be re-measured to their acquisition-date fair values, with any gain or loss
    recognized in earnings; and (6) when making adjustments to finalize initial
    accounting, companies revise any previously issued post-acquisition financial
    information in future financial statements to reflect any adjustments as
    if they had been recorded on the acquisition date. SFAS No. 141(R) is effective
    on a prospective basis for all business combinations for which the acquisition
    date is on or after the beginning of the first annual period subsequent to
    December 15, 2008, with the exception of the accounting for valuation allowances
    on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends
    SFAS No. 109 such that adjustments made to valuation allowances on deferred
    taxes and acquired tax contingencies associated with acquisitions that closed
    prior to the effective date of this statement should also apply the provisions
    of SFAS No. 141(R).

In December 2007, the FASB issued SFAS
    No. 160, Noncontrolling Interests in Consolidated Financial Statements,
    an Amendment of ARB 51 (SFAS No. 160) which amends ARB 51 to establish
    new standards that will govern the accounting for reporting of noncontrolling
    interests in partially owned consolidated subsidiaries

F-19

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

|                                                    
|----------------------------------------------------
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

Accounting Standards Not Yet Adopted
      (Continued)

and the loss of control of subsidiaries.
    Also, SFAS No. 160 requires that: (1) noncontrolling interest, previously
    referred to as minority interest, be reported as part of equity in the consolidated
    financial statements; (2) losses be allocated to the noncontrolling interest
    even when such allocation might result in a deficit balance, reducing the
    losses attributed to the controlling interest; (3) changes in ownership interest
    be treated as equity transactions if control is maintained; and (4) upon
    a loss of control, any gain or loss on the interest sold be recognized in
    earnings. SFAS No. 160 is effective on a prospective basis for all fiscal
    years, and interim period with those fiscal years, beginning on or after
    December 15, 2008, except for the presentation and disclosure requirements,
    which will be applied retrospectively. The Company is currently evaluating
    the effects, if any, that SFAS No. 160 may have on the Companys consolidated
    financial condition and consolidated results of operations.

Reclassifications

Certain prior year amounts have been reclassified
    to conform to the current year presentation.

4.       Concentrations
      of Credit Risk

The Companys financial instruments
    that are exposed to concentrations of credit risk are cash and cash equivalents
    and accounts receivable.

Cash and Cash Equivalents

Currently, the Company maintains its cash
    and cash equivalent accounts with balances in excess of the federally insured
    limits. The Company mitigates this risk by selecting high quality financial
    institutions to hold such cash deposits. At December 31, 2007, the Company
    had cash and cash equivalent balances on deposit that exceeded federal depository
    insurance limits by approximately $3.3 million.

F-20

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

|                                                    
|----------------------------------------------------
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

4.       Concentrations
      of Credit Risk (Continued)

Accounts Receivable

The Company grants credits without collateral
    to its fee for service patients, most of whom are insured under third-party
    payor agreements as well as its corporate customers. The mix of receivables
    from patients and third-party payors as of December 31, 2007 and 2006 is
    as follows:

|         |  |      |           |      |   |         | 
|-------- |  | ---- | --------- | ---- | - | ------- | 
|         |  | 2007 |           | 2006 |  
|         |  |      |           |      |  
|Medicare |  | $    | 744,221   |      | $ | 212,674 | 
|Medicaid |  |      | 82,044    |      |   | 22,308  | 
|Private  |  |      | 1,389,794 |      |   | 95,840  | 
|         |  |      |           |      |   |         | 
|         |  | $    | 2,216,059 |      | $ | 330,822 | 
|         |  |      |           |      |   |         | 

On a monthly basis, management reviews
    the accounts receivable aging by payer and rejected claims to determine which
    receivables, if any are to be written off. For the years ended December 31,
    2007 and 2006, bad debt direct write-offs totaled approximately $-0- and
    $48,000, respectively.

Management has provided for uncollectible
    accounts receivable through direct write- offs and such write-offs have been
    within managements expectations. Historical experience indicates that
    after such write-offs have been made, potential collection losses are considered
    minimal and, therefore, no allowance for doubtful accounts is considered
    necessary by management.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards
    (SFAS) No. 107, Fair Value of Financial Instruments, requires
    disclosure of the fair value of financial instruments for which the determination
    of fair value is practicable. SFAS No. 107 defines the fair value of a financial
    instrument as the amount at which the instrument could be exchanged in a
    current transaction between willing parties. The carrying amount of the Companys
    financial instruments consisting of cash and cash equivalents, accounts receivable,
    accounts payable and accrued expenses approximate their fair value because
    of the short maturity of those instruments. The fair value of the Companys
    lines of credit, notes payable, capital lease obligations and convertible
    debentures were estimated by discounting the future cash flows using current
    rates offered by lenders for similar borrowings with similar credit ratings.
    The fair value of the lines of credit, notes payable, capital lease obligations
    and convertible debentures approximate their

F-21

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

4.       Concentrations
      of Credit Risk (Continued)

Fair Value of Financial Instruments
      (Continued)

carrying value due to the use of market
    interest rates. The Companys financial instruments are held for other
    than trading purposes.

5.       Fixed Assets

At December 31, 2007 and 2006 fixed assets
    consist of:

|                                                |  |      |           |      |   |          |  
|----------------------------------------------- |  | ---- | --------- | ---- | - | -------- | -
|                                                |  | 2007 |           | 2006 |  
|                                                |  |      |           |      |  
|                                                |  |      |           |      |  
|Medical and office equipment                    |  | $    | 95,734    |      | $ | 71,866   |  
|Furniture and fixtures                          |  |      | 93,172    |      |   | 46,296   |  
|Computer equipment                              |  |      | 1,049,228 |      |   | 313,890  |  
|Leasehold Improvements                          |  |      | 88,525    |      |   | 21,617   |  
|                                                |  |      |           |      |   |          |  
|                                                |  |      | 1,326,659 |      |   | 453,669  |  
|Less: accumulated depreciation and amortization |  |      | (295,739  | )    |   | (161,234 | )
|                                                |  |      |           |      |   |          |  
|                                                |  | $    | 1,030,920 |      | $ | 292,435  |  
|                                                |  |      |           |      |   |          |  

Depreciation and amortization expense
    related to fixed assets totaled approximately $135,000 and $71,000 for the
    years ended December 31, 2007 and 2006 respectively totaled.

F-22

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

6.       Capitalized Software
      Development Costs

Capitalized software development costs
    as of December 31, 2007, and 2006 are summarized as follows:

|                                                 |  |      |           |      |   |           |  
|------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | -
|                                                 |  | 2007 |           | 2006 |  
|                                                 |  |      |           |      |  
|                                                
|Capitalized software
          development costs |  | $    | 2,613,092 |      | $ | 1,486,584 |  
|Less: accumulated amortization                   |  |      | (395,117  | )    |   | (175,857  | )
|                                                 |  |      |           |      |   |           |  
|                                                 |  | $    | 2,217,975 |      | $ | 1,310,727 |  
|                                                 |  |      |           |      |   |           |  

Amortization expense related to capitalized
    software development costs for the years ended December 31, 2007 and 2006
    totaled approximately $219,000 and $129,000 respectively.

7.       Lines of Credit

At December 31, 2007 and 2006, the Company
    had the following line-of-credit facilities outstanding:

|                                                                                                                                                                                                                                                                                                                             |  |      |         |      |   |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                                                                                                                                                                                                                                                                                                                             |  | 2007 |         | 2006 |  
|                                                                                                                                                                                                                                                                                                                             |  |      |         |      |  
|Revolving
          line-of-credit dated January 29, 2003 with interest at the rate of
          prime plus 1% (8.25% at December 31, 2007). The amount outstanding
          is due on demand and is collateralized by the assets of ECI.                                                                                   |  | $    | 50,000  |      | $ | 50,000  | 
|Revolving
          line-of-credit dated February 23, 2004 with interest at prime plus
          1.75% (9% at December 31, 2007). The amount outstanding is due on demand
          and expires on February 23, 2009. The line-of-credit is secured by
          the personal assets of the managing member of NP Care, LLC. |  | $    | 150,000 |      | $ | 150,000 | 
|                                                                                                                                                                                                                                                                                                                             |  |      |         |      |   |         | 
|                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                             |  | $    | 200,000 |      | $ | 200,000 | 
|                                                                                                                                                                                                                                                                                                                             |  |      |         |      |   |         | 

F-23

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

8.       Capital Lease
      Obligations

The Company leases certain fixed assets
    in accordance with the terms of capitalized lease obligations. The leases
    require monthly interest and principal payments ranging from $171 to $5,725,
    expiring on various dates through June 2012. The net book value of the capitalized
    equipment at December 31, 2007 and 2006 was $642,757 and $288,056, respectively.
    Depreciation expense related to capital lease assets totaled approximately
    $120,000 and $67,000 for the years ended December 31, 2007 and 2006 respectively.
    The future minimum lease payments and the present value of the payments at
    December 31, 2007 are as follows:

|                                                      |  |  |          |         | 
|----------------------------------------------------- |  |  | -------- | ------- | 
|                                                      |  |  |          |         | 
|Years Ending December 31,                             |  |  |          |         | 
|                                                      |  |  |          |         | 
|                                                      |  |  |          |         | 
|2008                                                  |  |  | $        | 362,128 | 
|2009                                                  |  |  |          | 302,887 | 
|2010                                                  |  |  |          | 252,623 | 
|2011                                                  |  |  |          | 25,658  | 
|2012                                                  |  |  |          | 14,370  | 
|                                                      |  |  |          |         | 
|Total minimum lease payments                          |  |  | 957,666  |        
|                                                      |  |  |          |         | 
|Less: amount
          representing interest          |  |  | (142,006 | )      
|                                                      |  |  |          |         | 
|                                                      |  |  |          |         | 
|Present value of net minimum
          lease payments |  |  | 815,600  |        
|                                                      |  |  |          |         | 
|Less: current
          portion of principal          |  |  | (284,943 | )      
|                                                      |  |  |          |         | 
|                                                      |  |  | $        | 530,717 | 
|                                                      |  |  |          |         | 

F-24

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

9.       Debt

Note Payable

The Company has a Small Business Administration
    loan dated September 4, 2003. The original principal balance of the loan
    was $150,000 and it is intended to be used to fund general operations. The
    loan agreement provides for sixty monthly principal and interest installments
    of $2,924 and bears interest at 6.25% per annum. The loan matures on October
    1, 2008 and is secured by the personal residence of the Companys President.
    At December 31, 2007 and 2006, the principal balance due on the loan was
    $28,414 and $60,588, respectively. The maturities of this note at December
    31, 2007 are as follows:

|                          |  |  |   |        | 
|------------------------- |  |  | - | ------ | 
|Years Ending December 31, |  |  |   |        | 
|                          |  |  |   |        | 
|                         
|2008                      |  |  | $ | 28,414 | 
|                          |  |  |   |        | 

Notes Payable  Stockholder

The Company entered into two promissory
    notes payable with a stockholder. The first promissory note, dated February
    20, 2006 has an original principal balance of $125,000 and is intended as
    a bridge loan until further financing is secured by the Company. Interest
    accrues on the note at 10% and was originally payable on demand or before
    May 20, 2006. The term was extended through December 31, 2007. The remaining
    balance on this note as of December 31, 2007 and 2006 is $125,000; the accrued
    but unpaid interest as of December 31, 2007 and 2006 is $25,418 and $11,182,
    respectively.

The second promissory note dated March
    15, 2006 had an original principal balance of $100,000 and was intended as
    a bridge loan until further financing was secured by the Company. Interest
    accrued on the note at 10% and was originally payable on demand or before
    June 15, 2006. On October 25, 2006 this note and its related accrued interest
    totaling $6,400 were satisfied in full by issuing 106,400 shares of common
    stock and warrants under the terms of the Companys private placement
    offering.

F-25

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

9.       Debt (continued)

Conversion of Note Payable to Common
      Stock

The Company entered into a loan agreement
    with The Rubin Family Irrevocable Stock Trust (Lender), a shareholder
    of HCI, on December 27, 2004, whereby, among other provisions, the Lender
    extended a line of credit facility to the Company for general company purposes.
    The Lender also received warrants to purchase 5,166,711 shares of common
    stock of the Company. The line of credit was in the original principal amount
    not to exceed $500,000. In June, 2006, there was $500,000 outstanding on
    the line of credit. In June 2006, the warrants for 5,166,711 shares of the
    Companys common stock were exercised by the Lender realizing $500,000.
    This $500,000 was applied to the outstanding note payable due to the Lender
    in the amount of $500,000 in a non-cash transaction.

F-26

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

9.       Debt (continued)

Notes Payable  Chairman

The Company has promissory notes payable
    to the Companys Chief Executive Officer and his relative which are
    intended as bridge loans until HCI financing is secured.

|                                                                                                                                                                                                                                                                                                                                                                                           |  |              |         |      |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- | - | ------- | 
|                                                                                                                                                                                                                                                                                                                                                                                           |  | December 31, |        
|                                                                                                                                                                                                                                                                                                                                                                                           |  |              |        
|                                                                                                                                                                                                                                                                                                                                                                                           |  | 2007         |         | 2006 |  
|                                                                                                                                                                                                                                                                                                                                                                                           |  |              |         |      |  
|On August 31, 2006, the
          Company entered into a promissory note with an original due date of
          September 30, 2006. The original due date was extended through December
          31, 2008. Interest accrues at the rate of 10% per annum.                                                                                                                                 |  | $            | 90,000  |      | $ | 90,000  | 
|On September 9, 2006, the Company entered
          into a promissory note with an original due date of October 7, 2006.
          The original due date was extended through December 31, 2008. Interest
          accrues at the rate of 10% per annum.                                                                                                                                  |  |              | 50,000  |      |   | 50,000  | 
|On September 28, 2006,
          the Company entered into a promissory note with an original due date
          of October 27, 2006. The original due date was extended through December
          31, 2008. Interest accrues at the rate of 10% per annum.                                                                                                                                |  |              | 95,000  |      |   | 95,000  | 
|On November 27, 2006, the Company entered
          into a promissory note with the Chairmans brother with an original
          due date of January 31, 2007. The original due date was extended through
          April 30, 2007. Interest accrues at the rate of 10% per annum. This
          note was paid in full plus accrued interest of $5,326.45 in December
          of 2007. |  |              |        |      |   | 50,000  | 
|                                                                                                                                                                                                                                                                                                                                                                                           |  |              |         |      |   |         | 
|                                                                                                                                                                                                                                                                                                                                                                                           |  | $            | 235,000 |      | $ | 285,000 | 
|                                                                                                                                                                                                                                                                                                                                                                                           |  |              |         |      |   |         | 

Accrued interest on the notes payable
    to the Chief Executive Officer, as of December 31, 2007 and 2006, was approximately
    $32,000 and $7,000, respectively.

F-27

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

9.       Debt (continued)

Convertible Debentures

During 2005, the Company issued convertible
    debentures to private accredited investors (the
  Investors). The total principal amount of the debentures was $1,257,985
  convertible into 1,257,985 shares of the Companys common stock. The conversion
  price of the debentures was equal to 50% of the market price of the HCIs
  common stock on the day prior to conversion. In no circumstances was the conversion
  price to be less than $.40 per share. During 2007, the Company made a principal
  payment of $50,000 to the Investors and the Investors converted the remaining
  balance of $1,207,985 into 1,208,000 shares of the Companys common stock.

The term of the debentures was 18 months
    from the date of issuance and did not bear interest. In lieu of interest,
    the Company issued 1,257,985 shares of its common stock to the holders of
    the convertible debentures which was treated as a discount on the debentures
    and amortized as interest expense over the life of the debentures. The discount
    was established as the fair value of the common stock of $202,678, which
    was determined using fair value interest rates for similar types of underlying
    instruments. The discount has been fully amortized at December 31, 2007.
    Amortization of the discount for the year ended December 31, 2007 and 2006,
    was approximately $35,000 and $135,000, respectively, is included in interest
    expense in the accompanying consolidated statements of operations.

HCI incurred $76,858 in legal, financing
    and other costs in issuing these debentures. The costs were deferred and
    were being amortized over 18 months. Deferred financing costs has been fully
    amortized at December 31, 2007. Amortization expense relating to deferred
    issuance costs totaled approximately $8,500 and $51,000 for the years ended
    December 31, 2007 and 2006, respectively.

F-28

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

9.       Debt (continued)

Convertible Debentures (continued)

On April 17, 2006, the Company closed
    on a convertible debenture note in the amount of $500,000. The terms of this
    note, with an existing stockholder, were identical to the 2005 convertible
    debentures. The total principal amount of the debentures of $500,000 was
    convertible into 500,000 shares of the Companys common stock. The conversion
    price of the debentures was equal to 50% of the market price of HCIs
    common stock on the day prior to conversion. In no circumstances was the
    conversion price be less than $.40 per share. The term of the debentures
    was 18 months from the date of issuance and did not bear interest. In lieu
    of interest, the Company issued 500,000 shares of its common stock to the
    holders of the convertible debentures which were treated as a discount on
    the debentures to be amortized as interest expense over the life of the debentures.
    The discount was established as the fair value of the common stock of $141,348,
    which was determined using fair value interest rates for similar types of
    underlying instruments. The discount has been fully amortized at December
    31, 2007. Amortization of the discount for the year ended December 31, 2007
    and 2006 was approximately $101,000 and $40,000, respectively, and is included
    in interest expense in the accompanying consolidated statements of operations.
    During 2007, the holder of this convertible debenture converted the outstanding
    balance of $500,000 into 500,000 shares of the Companys common stock.

HCI incurred $60,045 in legal, financing
    and other costs issuing these debentures. The costs were deferred and were
    being amortized over 18 months. The deferred issuance have been fully amortized
    at December 31, 2007. Amortization expense relating to the deferred issuance
    costs totaled approximately $43,000 and $17,000 for the years ended December
    31, 2007 and 2006, respectively.

During the fourth quarter of 2007, the
    Company issued to five (5) private investors approximately $6.4 million of
    twelve month, 10% interest, senior secured convertible debentures. Of this
    amount, approximately $1.4 million of the convertible debentures were issued
    as a result of four of the investors converting previously issued promissory
    notes. Three of these debentures, totaling approximately $6 million of the $6.4 million, are secured by
substantially all of the Companys assets but are subordinated to the Companys lines of credit. The notes are convertible into common stock at any time prior to maturity
    at an amount equal to 70% (75% for $3 million of the notes) of the average
    low bid price for the twenty day period prior to the conversion date subject
    to a floor price of $1.00. Additionally, if there is a Qualified Financing,
    the note holders are entitled to, but not required to,

F-29

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

9.       Debt (continued)

Convertible Debentures (continued)

convert at a rate equal to a 30% discount
    of the price paid per share in the Qualified Financing with the same limitation
    of a floor of $1.00. Additionally, and in connection with the issuance of
    these convertible debentures, the Company issued 636,477 warrants to the
    five private investors which are exercisable at any time prior to expiry
    at a strike price equal to the strike price for warrants granted under a
    Qualified Financing or if no Qualified Financing takes place at the average
    of the lowest bid price for the 20 trading days prior to the expire date
    per share. The Warrants have a five year maturity date from the date of the
    note issuance. The term Qualified Financing is defined as the
    sale for cash by the Company in a transaction or series of related transactions
    of debt, equity, equity-linked securities or any combination thereof generating
    gross proceeds to the Company (excluding the principal amount of any notes
    tendered in connection therewith) of at least $10,000,000.

The five debentures issued to accredited
    investors contain beneficial conversion discounts totaling $1,779,000 because
    the value allocated to the debentures is less than the fair value of the
    Companys common stock. The Company valued the warrants at $979,147
    (see below) and allocated $5,385,618 to the debentures. The discount related
    to the fair value of the warrants and the beneficial conversion discounts
    are being amortized over the life of the debentures through a charge to interest
    expense. The convertible debentures totaling $6,364,765 are reflected on
    the consolidated balance sheets net of the unamortized portion ($902,958)
    of the $979,147 discount on the convertible debentures relating to the warrants
    and net of the unamortized portion ($1,657,917) of the beneficial conversion
    discount of $1,779,000. For the year ended December 31, 2007, the Company
    recorded interest expense of $76,189 related to the warrants, and interest
    expense of $121,083 related to the beneficial conversion discount.

The features of the convertible debentures
    and terms of the warrants were evaluated under applicable accounting literature,
    including SFAS No. 133, Accounting for Derivative Instruments and Hedging
    Activities, and EITF 00-19, Accounting for Derivative Financial
    Instruments Indexed to, and Potentially Settled in, a Companys Own
    Stock,. The conclusion was that none of the features of the convertible
    debenture should be separately accounted for as derivatives and that the
    warrants meet the tests for equity classification.

F-30

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

9.       Debt (continued)

Convertible Debentures (continued)

The fair value of the warrants was determined
    by using the Black-Scholes model assuming an exercise price of $0.85, risk
    free interest rate of 5%, volatility of 152% and an expected life equal
    to the contractual life of the warrants.

In addition to the sale of $6.4 million
     of convertible debentures mentioned above the Company issued a $150,000
    twelve month, 10% interest, senior secured convertible debenture on November
    26, 2007 in satisfaction of a placement fee with one of its investors. The
    debenture is convertible into common stock at any time prior to maturity
    at an amount equal to 75% of the average low bid price for the twenty day
    period prior to the conversion date subject to a floor price of $1.00. Additionally,
    if there is a Qualified Financing, the debenture holders are entitled to,
    but not required to, convert at a rate equal to a 25% discount of the price
    paid per share in the Qualified Financing with the same limitation of a floor
    of $1.00. This convertible debenture had a beneficial conversion discount
    because the conversion price of the debenture was less than the fair value
    of the Companys common stock. The value of the beneficial conversion
    discount was dependent upon the conversion ratio of existing shares of the
    Companys common stock to shares of the Companys common stock.
    The total value of the beneficial conversion discount of $27,000 is being
    amortized over the life of the debenture through a charge to interest expense.
    The convertible debenture of $150,000 is reflected on the consolidated balance
    sheets net of the unamortized portion of beneficial conversion discount of
    $24,750. For the year ended December 31, 2007, the Company recorded interest
    expense of $2,250 related to the beneficial conversion discount. In connection
    with the previously mentioned financing, the Company also paid $240,000 in
    cash and issued 192,000 warrants in the fourth quarter of 2007 to purchase
    its common stock to a financial advisor. The warrants had a fair value of
    $281,278 on the commitment date. The fair value of the warrants was determined
    by using the Black-Scholes model assuming an exercise price of $0.85, a risk
    free interest rate of 5%, volatility of 152% and an expected life equal
    to the contractual life of the warrants. These debt issuance costs totaling
    $671,278 have been recorded as deferred debt issuance costs and are being
    amortized over the lives of the convertible debentures. The unamortized balance
    totaled $615,338 at December 31, 2007. Amortization expense totaled $55,940
for the year ended December 31, 2007.

F-31

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

9.       Debt (continued)

Convertible Debentures (continued)

On December 21, 2007, the Company satisfied
    $500,000 of accrued expenses due to a vendor by issuing $500,000 of twelve
    month, 10% interest, senior secured convertible debentures. The debenture
    is convertible into common stock at any time prior to maturity at an amount
    equal to 70% of the average low bid price for the twenty day period prior
    to the conversion date subject to a floor price of $1.00. Additionally, if there is a Qualified
    Financing, the debenture holders are entitled to, but not required to, convert
    at a rate equal to a 30% discount of the price paid per share in the Qualified
    Financing with the same limitation of a floor of $1.00. This convertible
    debenture had a beneficial conversion discount because the conversion price
    of the debenture was less than the fair value of the Companys common
    stock. The value of the beneficial conversion discount was dependent upon
    the conversion ratio of existing shares of the Companys common stock
    to shares of the Companys common stock. The total value of the beneficial
    conversion discount of $360,000 will be amortized over the life of the debenture
    through a charge to interest expense. The convertible debenture of $500,000
    is reflected on the consolidated balance sheets net of the unamortized beneficial
    conversion discount of $360,000. For the year ended December 31, 2007, interest
expense related to the beneficial conversion discount was deminimus.

F-32

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

10.     Net Patient Service Revenue
      and Billing Fees

Revenue from nurse practitioner services
    is substantially collected through billings to a patients respective
    insurance carrier, health maintenance organization, Medicare and Medicaid.
    Payments from these sources are generally based on prospectively determined
    rates that vary according to a classification system based on clinical, diagnostic
    and other factors and are substantially below established rates.

Net patient service revenue consists of
    the following components for the years ended December 31, 2007 and 2006:

|                                                     |  |      |            |      |   |            |  
|---------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                     |  | 2007 |            | 2006 |  
|                                                     |  |      |            |      |  
|Gross patient service
          revenue              |  | $    | 11,561,755 |      | $ | 6,087,625  |  
|Less:
          provision for contractual allowances |  |      | (4,565,333 | )    |   | (1,701,268 | )
|                                                     |  |      |            |      |   |            |  
|Net patient service revenue                          |  |      | 6,996,422  |      |   | 4,386,357  |  
|Capitated
          contract revenue                 |  |      | 5,884,301  |      |   | 1,779,735  |  
|                                                     |  |      |            |      |   |            |  
|Total net revenue                                    |  | $    | 12,880,723 |      | $ | 6,166,092  |  
|                                                     |  |      |            |      |   |            |  

11.     Income Taxes

As of December 31 2007 and 2006, the
    Company had net operating loss carryforwards for federal and state income
    tax purposes of approximately $9.3 million and $4 million respectively,
    which is available to offset future taxable income, if any, through 2027.
    The available net operating loss carry forwards resulted in a deferred tax
    asset of approximately $3.8 million and $1.6 million at December 31, 2007
    and 2006, respectively. Management has established a 100% valuation allowance
    against the deferred tax asset created by the available net operating loss
    carryforwards at December 31, 2007. In assessing the need for a valuation
    allowance, the Company estimates future taxable income, considering the feasibility
    of ongoing tax planning

F-33

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

11.     Income Taxes (continued)

strategies and the realizability of tax
    loss carryforwards. Valuation allowances related to deferred tax assets can
    be impacted by changes to tax laws, changes to statutory tax rates and future
    taxable income levels. In the event the Company were to determine that it
    would be able to realize its deferred tax assets in the future it would decrease
    the recorded valuation allowance through an increase to income in the period
    in which that determination is made. The valuation allowance increased approximately
    $2.2 million and $1.0 million during the years ended December 31, 2007 and
    2006, respectively. Any significant change in ownership, as defined in Section
    382 of the Internal Revenue Code, may result in limitation on the amount
    of net operating loss which could be utilized in a single year.

The provision for (benefit from) income
    taxes reconciles to the statutory federal rate as follows:

|                                                   |  |              |        |      |  |        |    
|-------------------------------------------------- |  | ------------ | ------ | ---- |  | ------ | ---
|                                                   |  | December 31, |       
|                                                   |  |              |       
|                                                   |  | 2007         |        | 2006 | 
|                                                   |  |              |       
|Statutory
          federal tax rate               |  |              | (34.00 | ) %  |  | (34.00 | ) %
|State
          income tax, net of federal benefit |  |              | (5.59  | )    |  | (4.26  | )  
|Permanent
          differences                    |  |              | 1.48   |      |  | 18.78  |    
|Deferred
          tax state rate change           |  |              | (5.54  | )    |  | (4.98  | )  
|Deferred
          tax asset valuation allowance   |  |              | 43.65  |      |  | 24.46  |    
|                                                   |  |              |        |      |  |        |    
|Effective
          tax rate                       |  |              |       | %    |  |       | %  
|                                                   |  |              |        |      |  |        |    

The Company complies with the provisions
    of FASB Interpretation No. 48, Accounting for Uncertainty in Income
    Taxes  an interpretation of FASB Statement No. 109(FIN
    No. 48). FIN 48 addresses the determination of whether tax benefits
    claimed or expected to be claimed on a tax return should be recorded in the
    financial statements. Under FIN 48, the Company may recognize the tax benefit
    from an uncertain tax position only if it is more likely than not that the
    tax position will be sustained on an examination by the taxing authorities,
    based on the technical merits of the position. The Company has determined
    that the Company has no uncertain tax positions requiring recognition under
    FIN No. 48.

The Company is subject to U.S. federal
    income tax as well as income tax of certain state jurisdictions. The Company
    has not been audited by the U.S. Internal Revenue Service or any states in
    connection with its income taxes. The periods up to and including to December
    31, 2007 remain open to examination by the U.S. Internal Revenue Service
    and state authorities.

F-34

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

11.     Income Taxes (continued)

The Company recognizes interest accrued
    related to unrecognized tax benefits and penalties, if incurred, as a component
    of income tax expense.

12.     Stockholders Equity
      (Deficit)

Private Placement Offering

On September 25, 2006, HCI issued a Private
    Placement Offering Memorandum (PPM) for 2,000,000 shares of common
    stock at $1.00 per share and warrants to purchase 2,000,000 shares of common
    stock in the future. The offer to purchase common stock expires on February
    28, 2007. In December, 2006, the Company increased the total offering to
    3,200,000 shares of common stock at $1.00 per share and warrants to purchase
    3,200,000 shares of common stock in the future. The warrants have a term
    of two years. The exercise price is $1.25 per share. The warrants shall be
    redeemable at $.05 per warrant share contingent upon HCIs common stock
    trading at a closing price of at least $3.50 per share for twenty consecutive
    days.

As of December 31, 2006, 1,956,400 shares
    of common stock and 1,956,400 warrants to purchase HCI common stock had been
    issued through this PPM.

During the first quarter of 2007, 1,350,000
    shares of common stock and 1,300,000 warrants were issued through the PPM.
    The Company received $1,300,000 in cash for 1,300,000 shares, incurred cash
    issuance costs of $130,000, issued 50,000 shares of common stock, at $1.30
    per share relating to legal services incurred with capital raising efforts
    and issued 300,000 warrants to purchase shares at $1.25 per share for non-cash
    issuance costs.

During the first quarter of 2007, and
    in connection with the September 2006 PPM, the Company requested that 29
    investors exercise their respective warrants and in return the Company offered
    the investors an additional two year warrant (2007 Warrant) at
    an exercise price of $3.00 for every two warrants exercised from the September
    2006 PPM. During the three months ended March 31, 2007, the Company received
    $1,187,500 upon the exercise of 950,000 of the September PPM warrants and
    issued warrants for an additional 475,000 shares of the Companys common
    stock to five (5) investors. The Company incurred cash issuance costs of
    $129,907 and non-cash issuance costs consisting of 300,000 warrants to purchase
    shares of the Companys

F-35

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

12.     Stockholders Equity
      (Deficit) (continued)

Private Placement Offering (Continued)

common stock at $1.25. During the second
    quarter of 2007, the Company received $687,500 upon the exercise of 550,000
    of the September PPM warrants and issued warrants for an additional 275,000
    shares of the Companys common stock to five (5) investors. The Company
    incurred cash issuance costs of $68,810 relating to this transaction. A legend
    was placed on the securities stating that such securities have not been registered
    under the Securities Act and cannot be sold or otherwise transferred without
    an effective registration statement covering such shares or an the availability
    of an exemption from the registration requirements of the Securities Act.

During the second quarter of 2007, the
    Company also sold to four (4) private investors a total of 1,666,667 shares
    of restricted common stock for aggregate net proceeds of $5,000,000. Additionally,
    the Company issued warrants to purchase 833,333 shares of common stock at
    a strike price of $4.00 to these same investors, the warrants are exercisable
    for a period of four (4) years. A legend was placed on the securities stating
    that such securities have not been registered under the Securities Act and
    cannot be sold or otherwise transferred without an effective registration
    statement covering such shares or the availability of an exemption from the
    registration requirements of the Securities Act.

During October of 2007, the Company sold
    to one (1) private investor a total of 250,000 shares of restricted common
    stock for aggregate net proceeds of $500,000. A legend was placed on the
    securities stating that such securities have not been registered under the
    Securities Act and cannot be sold or otherwise transferred without an effective
    registration statement covering such shares or the availability of an exemption
    from the registration requirements of the Securities Act.

During 2007, the
    Company issued warrants to purchase 300,000 shares of the Companys
    common stock at an exercise price of $1.00 per share; the term of the warrant
    is five years. The fair value of the warrants totaled $331,940 determined
    using the Black-Scholes model assuming a risk free interest rate of 5%, volatility
    of 116% and an expected life equal to the contractual life of the warrants.

F-36

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    

12.      Stockholders Equity
      (Deficit) (continued)

Private Placement Offering (Continued)

Consulting fee expense is recognized monthly
    over the agreement period. For the year ended December 31, 2007
    the full amount of $331,940 has been charged to consulting expense in the
    consolidated statement of operations.

During the second quarter of 2007, the
    Company also issued 30,000 shares of common stock, valued at $105,000 or
    $3.50 per share on the date of issuance, in exchange for consulting services.
    As a result of this transaction $105,000 was charged to consulting expense
    and to capital as a non-cash event.

During the fourth quarter of 2007, the
    Company issued 133,000 shares of common stock, valued at $365,750 or $2.75
    per share on the date of issuance, in exchange for consulting services for
    a one year period (Note 15). As a result of this transaction $91,468 was
    charged to consulting expense in the consolidated statements of operations.
    Other assets include the remaining $274,282 of prepaid consulting fees at
    December 31, 2007.

Restricted Stock Sale to Company Employees

In June 2006, the Company sold a total
    of 142,669 shares of restricted common stock to several of its key managers
    for aggregate net proceeds of $107,002.

F-37

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

|                                                    
|----------------------------------------------------
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

12.     Stockholders Equity
      (Deficit) (continued)

Warrants

A summary of warrant activity for the
    years ended December 31, 2007 and 2006 is as follows:

|                                           |  |          |            |       |   |                                    |  |                                     |         |  |  |      | 
|------------------------------------------ |  | -------- | ---------- | ----- | - | ---------------------------------- |  | ----------------------------------- | ------- |  |  | ---- | 
|                                           |  | Warrants |            | Price |   | Weighted
      Average
      Price |  | Weighted
      Average Life (Years) |        
|                                           |  |          |            |       |   |                                    |  |                                     |        
|                                          
|Balance
          January 1, 2006          |  |          | 5,166,711  |       | $ | 0.09677                            |  | $                                   | 0.09677 |  |  | 7    | 
|Issued                                     |  |          | 1,956,400  |       |   | 1.25                               |  |                                     | 1.25    |  |  |      | 
|Exercised                                  |  |          | (5,166,711 | )     |   | 0.09677                            |  |                                     |        |  |  |      | 
|                                           |  |          |            |       |   |                                    |  |                                     |         |  |  |      | 
|Balance
          December 31, 2006        |  |          | 1,956,400  |       | $ | 1.25                               |  | $                                   | 1.25000 |  |  | 2.0  | 
|                                           |  |          |            |       |   |                                    |  |                                     |         |  |  |      | 
|Issued                                     |  |          | 300,000    |       |   | 1.00                               |  |                                     | 1.00    |  |  |      | 
|Issued                                     |  |          | 1,300,000  |       |   | 1.25                               |  |                                     | 1.25    |  |  |      | 
|Issued                                     |  |          | 600,000    |       |   | 1.25                               |  |                                     | 1.25    |  |  |      | 
|Issued                                     |  |          | 750,000    |       |   | 3.00                               |  |                                     | 3.00    |  |  |      | 
|Issued                                     |  |          | 833,333    |       |   | 4.00                               |  |                                     | 4.00    |  |  |      | 
|Issued                                     |  |          | 828,477    |       |   | .85                                |  |                                     | .85     |  |  |      | 
|Exercised                                  |  |          | (1,500,000 | )     |   | 1.25                               |  |                                     | 1.25    |  |  |      | 
|                                           |  |          |            |       |   |                                    |  |                                     |         |  |  |      | 
|Balance
          December 31, 2007        |  |          | 5,068,210  |       |   |                                    |  | $                                   | 1.88    |  |  | 3.01 | 
|                                           |  |          |            |       |   |                                    |  |                                     |         |  |  |      | 
|Exercisable
          at December 31, 2007 |  |          | 4,239,733  |       |   |                                    |  | $                                   | 2.08    |  |  | 2.39 | 
|                                           |  |          |            |       |   |                                    |  |                                     |         |  |  |      | 

As disclosed in Note 9, warrants for 5,166,711
    shares of the Companys common stock were exercised by a shareholder
    with the Company.

The aggregate intrinsic value of warrants
    outstanding and exercisable at December 31, 2007 totaled approximately $1.3
    million. The aggregate intrinsic value represents the total pretax intrinsic
    value, based on warrants with an exercise price less than the Companys
    closing stock price as of December 31, 2007, which would have been received
    by the warrant holders had those warrant holders exercised their warrants
    as of that date.

13.     Benefit Plans

The Company established a 401(k) retirement
    plan (the Plan) on February 1, 2005. Employees 21 years or older
    are eligible the first day of the quarter upon completing three months of
    employment. The maximum deferral under the plan is 100% of total pay, not
    to exceed the elective annual deferral limits of the Internal Revenue Code.
    At the Companys discretion, there may be an employer matching contribution
    which

F-38

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

|                                                    
|----------------------------------------------------
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

13.     Benefit Plans (Continued)

is not to exceed the employees deferral
    amount. Employer contributions are generally vested after 1 year of service
    with the Company. During 2007 and 2006, the Company contributed to the Plan
    for employees approximately $77,000 and $44,000, respectively.

14.     Business Segments

The Companys operations by business
    segment for the years ended December 31, 2007 and 2006 were as follows:

|                        |  |                             |            |                          |   |            |   |   |             |  
|----------------------- |  | --------------------------- | ---------- | ------------------------ | - | ---------- | - | - | ----------- | -
|2007                    |  | Professional
      Services |            | Disease
      Management |   | Total      |  
|                        |  |                             |            |                          |   |            |  
|                        |  |                             |            |                          |   |            |   |   |             |  
|Net revenues            |  | $                           | 7,449,034  |                          | $ | 5,431,689  |   | $ | 12,880,723  |  
|                       
|Operating profit/(loss) |  |                             | (3,653,850 | )                        |   | (6,576,097 | ) |   | (10,229,947 | )
|Identifiable assets     |  |                             | 2,005,751  |                          |   | 8,176,787  |   |   | 10,182,538  |  
|                        |  |                             |            |                          |   |            |   |   |             |  
|2006                    |  | Professional
      Services |            | Disease
      Management |   | Total      |  
|                        |  |                             |            |                          |   |            |  
|Net revenues            |  | $                           | 4,386,357  |                          | $ | 1,779,735  |   | $ | 6,166,092   |  
|                       
|Operating profit/(loss) |  |                             | 186,998    |                          |   | (3,288,219 | ) |   | (3,101,221  | )
|Identifiable assets     |  |                             | 423,092    |                          |   | 1,921,371  |   |   | 2,344,463   |  

15.     Commitments and Contingencies

Consulting Agreements

During July 2005, the Company entered
    into a Consulting Agreement with Strategic Growth International, Inc. (SGI),
    whereby SGI advised and assisted HCI in its efforts to raise capital and
    secure a public shell. During September 2006, the Company amended and restated
    the Consulting Agreement with SGI. Under the new Consulting Agreement, SGI
    will assist HCI in determining a strategy to raise funds in the aggregate
    amount of $1,000,000 through a private placement of debt, equity or convertible
    securities. HCI has agreed to pay an initial retainer of $50,000 for these

F-39

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|15.     Commitments
            and Contingencies (continued)
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              | Consulting Agreements (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              | services from the future gross proceeds of
          any offering raised. The Company also agrees to pay SGI a total consulting
          fee of 10% of the future gross proceeds raised for the offering excluding
          the initial $50,000 retainer. The term of this agreement is for six
          months and expired March 25, 2007. Through December 31, 2006, the Company
          raised $1,850,000 through this arrangement. A consulting fee of $185,000
          was charged to equity for the year ended December 31, 2006 and $50,000
          was charged to deferred financing charges for the year ended December
          31, 2006. The Company raised an additional $1,300,000 and incurred
          fees payable to SGI in the amount of $130,000 in consulting fees in
          2007.
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              | On June 1, 2007 the Company exercised its
          right to terminate this agreement and provided written notice of termination
          to SGI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              | During the fourth quarter of 2007, the Company
          issued 133,000 shares of common stock, valued at $365,750 or $2.75
          per share on the date of issuance, in exchange for consulting services
          for a one year period (Note 12). As a result of this transaction $91,438
          was charged to consulting expense in the consolidated statements of
          operations. Other assets includes the remaining $274,282 of prepaid
          consulting fees at December 31, 2007.                                                                                                                                                                                                                                                                                                         
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              | Business Advisor Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              | In September 2005, the Company entered into
          an agreement (Advisor Agreement) with an outside advisor
          whereby the advisor has been engaged to provide advice to the Company
          as the Chairperson of its Business Advisory Board, assist in the development
          of the Business Advisory Board, and provide other services on behalf
          of the Company. The Advisor was issued 100,000 shares of the Companys
          common stock in connection with the Advisor Agreement. The fair value
          of the shares on the date of issuance was $40,000 or $.40 per share.                                                                                                                                                                                              
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              | The Advisor could have been issued contingent
          warrants to purchase up to 360,000 common shares of the Company at
          an exercise price of $1.25 per share upon the attainment of specified
          growth goals of the Business Advisory Board. On July 18, 2007, the
          Company exercised its right to terminate this agreement and provided
          written notice of termination to the Business Advisor. No warrants
          had been earned in connection with the Advisor Agreement.                                                                                                                                                                                                                                                                                             

F-40

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HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|                                                              |                                                                                                                                                                                                                                                                 
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                              |                                                                                                                                                                                                                                                                 
|                                                              |                                                                                                                                                                                                                                                                 
|15.     Commitments
            and Contingencies (continued)
|                                                              |                                                                                                                                                                                                                                                                 
|                                                              | Operating Leases                                                                                                                                                                                                                                                
|                                                              |                                                                                                                                                                                                                                                                 
|                                                              | The Company is obligated under various operating
          leases for the rental of office space and office equipment. Future
          minimum rental commitments with a remaining term in excess of one year
          as of December 31, 2007 are as follows:

|                             |  |   |           | 
|---------------------------- |  | - | --------- | 
|Years Ending December 31,    |  |   |           | 
|                             |  |   |           | 
|                             |  |   |           | 
|2008                         |  | $ | 508,576   | 
|2009                         |  |   | 523,241   | 
|2010                         |  |   | 309,307   | 
|2011                         |  |   | 11,574    | 
|2012                         |  |   | 46,747    | 
|                             |  |   |           | 
|                             |  |   |           | 
|Total minimum lease payments |  | $ | 1,399,445 | 
|                             |  |   |           | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rent expense for the years ended December
          31, 2007 and 2006 totaled approximately $448,000 and $155,000 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Alere Medical Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In October 2006, HCI entered into a Disease
          Management Services Agreement with Alere Medical, Inc. (Alere).
          Alere provides disease management tools, services and systems to Payers
          which are designed to assist with and improve management of health
          care outcomes for patients. Alere has contracted with Tufts Health
          Plan (Tufts) to provide disease management services in
          Massachusetts. Tufts provides various commercial and Medicare Health
          Plans to members. ECI will provide care management services to Tufts
          program participants in Massachusetts and Alere began paying to ECI
          $295 per enrolled member per month commencing February 1, 2007.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Ohio Nurse Practitioners, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Effective November 6, 2006, NP Care of Ohio,
          LLC (NP Ohio) entered into an agreement with Ohio Nurse
          Practitioners, Inc. (ONP). ONP is in the business of providing
          advance practice registered nursing services to residents of nursing
          homes. ONP agreed to terminate its existing service agreements with
          its customers and NP Ohio agreed to hire the shareholders of ONP as
          employees. In addition, ONP agreed to provide consulting services commencing
          on the effective date and ending on September 30, 2009. In consideration
          of ONPs consulting services NP Ohio agreed to pay ONP a maximum
          consulting fee of $225,000 with payments              

F-41

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15.     Commitments
            and Contingencies (continued)
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                              | Ohio Nurse Practitioners, Inc. (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                              | due as earned in accordance with the terms
          of the agreement. The Company has recognized consulting expenses totaling
          approximately $50,000 and $125,000 for the years ended December 31,
          2007 and 2006, respectively, in connection with the services provided
          under the agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                              | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                              | The Company is involved in certain legal
          proceedings and is subject to certain lawsuits and compliance regulations
          in the ordinary course of its business. Although the ultimate effect
          of these matters is often difficult to predict, management believes
          that the resolution will not have a material adverse effect on the
          Companys consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|16.     Risks
            and Uncertainties                  
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                              | Patient Service Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                              | Approximately 47% and 61% of net patient
          services revenue in 2007 and 2006 was derived under federal (Medicare)
          and state (Medicaid) third-party reimbursement programs. These revenues
          are based, in part, on cost reimbursement principles and are subject
          to audit and retroactive adjustment by the respective third-party fiscal
          intermediaries. The general trend in the healthcare industry is lower
          private pay utilization due to liberal asset transfer rules and the
          degree of financial planning that takes place by the general public.
          The Companys ability to maintain the current level of private
          pay utilization and thereby reduce reliance on third-party reimbursement
          is uncertain due to the economic and regulatory environment in which
          the Company operates.
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                              | Malpractice Insurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                              | The Company maintains malpractice insurance
          coverage on an occurrence basis. It is the intention of the Company
          to maintain such coverage on the occurrence basis in ensuing years.
          During the year ended December 31, 2007, no known malpractice claims
          have been asserted against the Company which, either individually or
          in the aggregate, are in excess of insurance coverage.                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-42

---



|                                                    
|----------------------------------------------------
|HC INNOVATIONS, INC. AND SUBSIDIARIES               
|                                                    
|Notes to Consolidated Financial
          Statements
|                                                    
|                                                    

|                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|17.     Subsequent
            Events
|                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                      | Convertible Debt issued during the first
            quarter of 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                      | During the first quarter of 2008, the Company
          received an additional $425,000 in connection with the issuance of
          convertible debt with the same terms as described in note 9. Of this
          amount, $250,000 has been issued to the Companys Chairman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                      | Appointment of the Board of Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                      | On March 21, 2008, the Company appointed
          four (4) new members to its Board of Directors, bringing the total
          number of Directors to five. The Company appointed Mr. James Bigl,
          who was appointed as the Chairman of the Board, Mr. Richard Rakowski,
          Mr. Orlo L. Dietrich and Mr. Jeffrey L. Zwicker, the Companys
          former Chief Financial Officer and former Chief Operating Officer.                                                                                                                                                                                                                                                                                                                                                                            
|                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                      | Each Director received stock options
          to purchase 250,000 shares of the Companys common stock for being
          appointed to the Board. The issuance of the options to each Director
          is contingent upon the Director participating in a minimum of three
          board meetings per year, 50,000 options vested immediately and the
          remaining options vest in equal amounts of 50,000 options per year
          over the next four years. The non-executive Chairman of the Board of
          Directors received additional options to purchase 50,000 shares
          of the Companys
          common stock for services as non-executive Chairman. All options issued
          to the Directors are issued pursuant to the Companys
    2008 incentive compensation plan.

F-43

---