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|------------------------------------------------------------------------------------
|UNITED STATES                                                                       
|SECURITIES AND EXCHANGE COMMISSION                                                  
|Washington,
 D.C. 20549                                                             
|                                                                                    
|FORM 10-K                                                                           
|                                                                                    
|xANNUAL REPORT UNDER
 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                                                    
|For
 the fiscal year ended  December 31, 2008                                      
|                                                                                    
|OR                                                                                  
|oTRANSITION 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 | (I.R.S.
 Employer Identification Number)
|incorporation
 or organization)  |                                         

|                                                                    
|--------------------------------------------------------------------
|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                           

Indicate by check mark if the
registrant is a well-know seasoned issuer, as defined in Rule 405 of the
Securities Act YES o NO x

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Act YES o NO x

Indicate by check mark if
whether the registrant (1) has 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

Indicate by check mark if
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 the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.

|                        |   |                           |  
|----------------------- | - | ------------------------- | -
|Large Accelerated Filer | o | Accelerated Filer         | o
|                        |   |                           |  
|Non-Accelerated Filer   | o | Smaller Reporting Company | 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 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 the last business day
of the registrants most recently completed second fiscal quarter (June 30,
2008) was $14,898,904.

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.

---

---



TABLE OF
CONTENTS

|                     |  |                                                                                                                |  |     
|-------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|                     |  |                                                                                                                |  | Page
|                     |  |                                                                                                                |  |     
|PART I               |  |                                                                                                                |  |     
|                     |  |                                                                                                                |  |     
|Item 1.              |  | Business                                                                                                       |  | 1   
|                     |  |                                                                                                                |  |     
|Item 1A.             |  | Risk
 Factors                                                                                                  |  | 14  
|                     |  |                                                                                                                |  |     
|Item 2.              |  | Properties                                                                                                     |  | 25  
|                     |  |                                                                                                                |  |     
|Item 3.              |  | Legal
 Proceedings                                                                                             |  | 25  
|                     |  |                                                                                                                |  |     
|Item 4.              |  | Submission
 of Matters to a Vote of Security Holders                                                           |  | 25  
|                     |  |                                                                                                                |  |     
|PART II              |  |                                                                                                                |  |     
|                     |  |                                                                                                                |  |     
|Item 5.              |  | Market for
 Registrants Common Equity, Related Stockholder Matters and Issued Purchases
 of Equity Securities |  | 26  
|                     |  |                                                                                                                |  |     
|Item 6.              |  | Selected
 Financial Data                                                                                       |  | 30  
|                     |  |                                                                                                                |  |     
|Item 7.              |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                         |  | 30  
|                     |  |                                                                                                                |  |     
|Item 7A.             |  | Quantitative
 and Qualitative Disclosures About Market Risk                                                    |  | 46  
|                     |  |                                                                                                                |  |     
|Item 8.              |  | Financial
 Statements                                                                                          |  | 46  
|                     |  |                                                                                                                |  |     
|Item 9.              |  | Changes In
 and Disagreements with Accountants on Accounting and Financial Disclosure                          |  | 47  
|                     |  |                                                                                                                |  |     
|Item 9A.             |  | Controls
 and Procedures                                                                                       |  | 47  
|                     |  |                                                                                                                |  |     
|Item 9B.             |  | Other
 Information                                                                                             |  | 48  
|                     |  |                                                                                                                |  |     
|PART III             |  |                                                                                                                |  |     
|                     |  |                                                                                                                |  |     
|Item 10.             |  | Directors,
 Executive Officers and Corporate Governance                                                        |  | 49  
|                     |  |                                                                                                                |  |     
|Item 11.             |  | Executive
 Compensation                                                                                        |  | 51  
|                     |  |                                                                                                                |  |     
|Item 12.             |  | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters               |  | 52  
|                     |  |                                                                                                                |  |     
|Item 13.             |  | Certain
 Relationships and Related Transactions, and Director Independence                                     |  | 53  
|                     |  |                                                                                                                |  |     
|Item 14.             |  | Principal
 Accounting Fees and Services                                                                        |  | 54  
|                     |  |                                                                                                                |  |     
|Item 15.             |  | Exhibits                                                                                                       |  | 55  
|                     |  |                                                                                                                |  |     
|Signatures           |  |                                                                                                                |  |     
|                     |  |                                                                                                                |  | 57  
|PART F/S             |  |                                                                                                                |  |     
|                     |  |                                                                                                               
|Financial Statements |  |                                                                                                               

---



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. 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, the Chief Executive Officer as of December 31, 2008.
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.

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.

1

---



OUR BUSINESS

We
are a specialty 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 in order to save money by
attempting to keep patients with chronic conditions out of the hospital, which
helps both patients and our customers 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 subset of patients. To do this, we combine our
proprietary information systems with specially trained nurses and nurse
practitioners. As of December 31, 2008, we were operating in 8 states. As of
March 26, 2009, we were operating in 6 states, having closed operations in 2
states during the first quarter of 2009. 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 care 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.                                                                   

Our
services extend to having our nurses accompany the patient to the doctor and
weekly group visits in the community. In the event that the patient requires
admission to a hospital or nursing home, we also coordinate with other plan
resources to support the patient and their caregiver(s).

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 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 measures for both patients and our
customers. We also seek to be able to facilitate care delivery support services
in the community and, in nursing homes. 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
over seven active diagnosis and an average of three hospitalizations per year
that require complex solutions.

2

---



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 the delivery
of quality care.

TECHNOLOGY

Our
electronic health record (EHR) software is a key supporting infrastructure to
our business and is critical to the effective delivery of care. It is
fundamental in our ability to deliver reproducible outcomes and have a scalable
model. The program is a web-based system with the care guidance and rules built
into the system.

PRODUCTS AND SERVICES

As
of December 31, 2008, we offered our products and services through three
business products: (1) specialty care management which consisted of our Easy
Care business and our Quality of Life business, (2) Professional Services which
consisted of our NP Care business, and (3) DOQ Care (DOQ). DOQ 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 (via 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 PATIENTS

The
Easy Care program focuses on the medically complex, fragile and costly
community-based patients. Easy Care creates 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. As part of the Easy Care Program,
we work closely with the patient, their family and their physician. The Easy
Care tools and approach include:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hands-on nurse and nurse
 practitioner care in the home. The nurse does a comprehensive evaluation of a
 patient which includes physical, cognitive and social situation evaluation.
 The care manager reviews medications, diet and exercise, puts in place
 condition appropriate exercises, reviews advanced directives and connects the
 patient to community resources to assure that the patient is getting what
 they need to stay well.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Strong physician
 integration, whereby our nurses accompany the patient to selected physician
 visits, and communicate on an ongoing basis regarding the patients progress.                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Call center support,
 pairing each patient with 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 and assists in setting up appointments and
 transportation.                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | 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.                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | 24/7 Caregiver Support
 Program which 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 includes a 24/7 emotional support
 hotline, referral services, and legal hotline.                                                                                                                                    

---



| |   |                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pharmacist, medical
 director, nutritionist and athletic trainer monitoring, with direct feedback
 to our care management nurses.                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                             
| |  | WIFI-enabled biometrics,
 such as scales, medication monitoring devices, blood pressure machines to
 support remote surveillance of the patients condition.                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                             
| |  | Electronic Health Record
 (EHR) with point/click and handwriting recognition technology, allows us to
 efficiently gather and maintain large amounts of actionable data; it also
 prompts the nurse to consider specific interventions driving best practices.
 The EHR also supports communication via faxing, e-mailing and integrated
 report generation.

3

---



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 2008, members under care increased by approximately
3,400 representing a 132% growth rate when compared to members under care at
December 31, 2007.

As
of March 26, 2009, ECI, our wholly owned subsidiary, has secured contracts to
provide services to the following:

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2008,
 had approximately 1,256 enrollees. We enrolled our first member in Texas
 during November 2007 and as of December 31, 2008 had approximately 125
 enrollees. As of February 28, 2009 the combined enrollment for Tennessee and
 Texas was approximately 1,581 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 June 1, 2006 through November 30,
 2007, and was extended through December 31, 2009. As of February 28, 2009
 enrollment was approximately 200 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 28, 2009,
 enrollment was approximately 390 members.                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4. | Emblem Health, Inc.
 (Emblem): 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 Emblem to provide services for both its general
 medical and oncology members. We enrolled our first member in July 2007 and
 as of December 31, 2008 had approximately 3,499 enrollees. As of February 28,
 2009 enrollment was approximately 3,754 members.                                                                                                                                            

4

---



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.

A
study published by the National Heart, Lung, and Blood Institute in 2007 found
that the total direct and indirect cost of cardiovascular diseases and stroke
in the United States for 2009 is estimated at $475.3 billion.

|                                                       |  |                                           |       | 
|------------------------------------------------------ |  | ----------------------------------------- | ----- | 
|Disease                                                |  | Approximate
 Economic Cost 
 ($ Billions) |      
|                                                       |  |                                           |      
|Coronary Heart Disease                                 |  | $                                         | 165.4 | 
|Stroke                                                 |  |                                           | 68.9  | 
|Hypertensive Disease                                   |  |                                           | 73.4  | 
|Heart Failure                                          |  |                                           | 37.2  | 
|Other (Cardiomyopathy, Pulmonary Heart
 Disease, etc.) |  |                                           | 130.4 | 
|                                                       |  |                                           |       | 
|Total                                                  |  | $                                         | 475.3 | 
|                                                       |  |                                           |       | 

Source:
American Heart Association

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 | % | 

Source: Center
on an Aging Society, Georgetown University, January 2004

5

---



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.

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, and the Company
believes that it is likely that further analysis will uncover clear benefit of
better care coordination and protocol compliance.

Sales and Marketing
for Easy Care

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:

| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Initial
 presentations to key leadership;                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                            
| |  | 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;
| |   |                                                                                                                                                                                                                                                                                            
| |  | Presentation
 of findings and delivery of proposal specific to the companys needs and
 their particular gaps;                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                            
| |  | Negotiation
 and discussion period (3 weeks); and                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                            
| |  | 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.

Quality of Life Care
(QOLC)ONCOLOGY CARE MANAGEMENT FOR COMMUNITY-BASED PATIENTS

The
goal of the 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
diagnosis through treatment decision, actual treatment, and after treatment is
complete.

6

---



The
QOLC Program necessitates that we support 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 may be
appropriate.

The
QOLC Program has the opportunity to create a new standard of care for patients
with cancer and is intended to allow patients and their families, employers,
payers and providers to provide more efficient and effective assistance to
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 which 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).

7

---



Stratification
Analysis and Management (SAM) EHR - SAM EHR SOFTWARE

The
SAM EHR 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:

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

NP Care (NPC) -
NURSING HOME MEDICAL MANAGEMENT SYSTEMS

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 nursing 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:

| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Problem-oriented
 nurse documentation tools that guide the nurse through appropriate, efficient
 patient evaluation and interventions.                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                
| |  | On-site
 nurse practitioner providing support and care.                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                
| |  | Integration
 with the physician, staff and family.                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                
| |  | Patient risk
 assessments of adverse events, such as falls, fractures, and dehydration.
 drive our Risk Avoidance Program and 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
 service                                                                                                                                                                                                                                                                                               

| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Where our
 Nurse Practitioners visit patients for acute care needs and bill the
 patients insurance company. Medicare and Medicaid comprise 84% of our fee
 for service revenue.

---



| |   |             
| | - | ------------
| |  | Managed Care

| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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

This
is an important new innovation in the healthcare marketplace. It was designed
by Centers for Medicare and Medicaid Services in an attempt to make sicker
patients more attractive to managed care companies. 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*.                                        

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).

NP
Care offers a medical infrastructure to nursing homes that is important to
controlling costs and care.

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

8

---



Sales and Marketing
for NP Care

Our
strategy for 2008 and prior for NP Care was to position it to become a national
healthcare company delivering primary care and improving the quality of life
for the elderly living in nursing homes.

The
strategies consisted of the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | 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.                                                                                                                                                                                                                                                           

9

---



DOQ CARE -
DEMONSTRATION PROJECT

The
Company has been selected by one of the nations largest risk bearing
organizations, Emblem Health, Inc. (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

| |  |   |                                                                                                                                                                                                            
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | $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                                
| |  |   |                                                                                                                                                                                                            
| |  |  | 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
| |  |   |                                                                                                                                                                                                            
| |  |  | The U.S.
spends more per capita for
health care than any other country                                                                                                                                     
| |  |   |                                                                                                                                                                                                            
| |  |  | While health
 care inflation moderated in 2008, costs still climbed more than two times
 faster than general inflation and workers earnings                                                                
| |  |   |                                                                                                                                                                                                            
| |  |  | National
 health care expenditures are projected to reach $3.6 trillion by 2014                                                                                                                            
| |  |   |                                                                                                                                                                                                            
| |  |  | Average
 annual medical costs for Medicare patients is $40,000                                                                                                                                             
| |  |   |                                                                                                                                                                                                            
| |  |  | Between the
 spring of 2007 and the fall of 2008, health care premiums increased an
 average of 6.9% for employer sponsored health insurance                                                               
| |  |   |                                                                                                                                                                                                            
| |  |  | While
 representing the lowest rate of growth since 1999, health inflation was still
 higher than wages (up 2.7%) and general inflation (3.85%)                                                            
| |  |   |                                                                                                                                                                                                            
| |  |  | 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 disease and 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 depend
largely to their understanding of the business case for continued investment in
traditional call center care management and the applicability of these
telephonic programs to medically complex patients with significant
comorbidities. 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 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.

10

---



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            |  |          |  |       

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

CAREGUIDE@HOMEis
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 MANAGEMENTprovides
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.

11

---



COMPETITIVE STRATEGY AND METHODS OF
COMPETITION

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | THE COMPANY,
 THROUGH 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | 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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Patient
 stratification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Assessment
 tools - physical exams, standardized testing, ADLs, IADLs, cognitive testing,
 depression, SF 12, etc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | True
 integration with the Physician                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Interventions
 in the home and via call center                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Biometrics                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Community
 based nursing staff                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Pharmacists                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Athletic
 trainers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Nutritionist                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Report
 writing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Community
 centers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | THE EASY
 CARE PROGRAM, A SCALABLE COMPLEX INTERVENTION WILL BE DIFFICULT TO REPRODUCE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | THE CLINICAL
 EXPERTISE to both understand the populations cared for and create
 cost-effective, rapidly integrateable, scalable models requires a team with
 diverse expertise                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | 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                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | SAM
 ELECTRONIC HEALTH RECORD - 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.

12

---



DEPENDENCE ON A LIMITED CUSTOMER BASE

For the
calendar years ending December 31, 2008 and 2007 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, reductions in reimbursement from Medicare may have a negative
impact on our future results of operations.

|                     |  |                                |      |            |  |      |  
|-------------------- |  | ------------------------------ | ---- | ---------- |  | ---- | -
|                     |  | Percentage of Service
 Revenue |     
|Provider             |  | 12/31/2008                     |      | 12/31/2007 | 
|                     |  |                                |      |            | 
|Emblem
 Health, Inc. |  |                                | 34.0 | %          |  | 47.3 | %
|HealthSpring         |  |                                | 22.0 | %          |  | 19.4 | %
|                     |  |                                |      |            |  |      |  
|                     |  |                                |      |            |  |      |  
|Total                |  |                                | 56.0 | %          |  | 66.7 | %
|                     |  |                                |      |            |  |      |  

PATENTS AND TRADEMARKS

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.

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, 2008, we had 294 full time employees, of whom 4 are executive
officers, and 61 are part time employees.

13

---



ITEM 1A. 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 $14.4 million and $10.7 million
for years ended December 31, 2008 and 2007, respectively. The Company had an
accumulated deficit of approximately $30 million and $16 million and had a
working capital deficiency of approximately $10 million and $2 million at
December 31, 2008 and 2007, respectively, 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-K 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 2008 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, 2008, there is substantial doubt
about our ability to continue as a going concern.

14

---



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

Our
cash position on a consolidated basis at December 31, 2008 was $0.4 million as
compared to $3.4 million at December 31, 2007. 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 2009 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 OR 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. In connection with a refinancing of the Companys convertible debt the
remaining amount of authorized shares of common stock is committed to the note
holders.

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 59% 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.

15

---



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
upon key executives as of December 31, 2008. Although we maintain key man life
insurance on Dr. Chess, our Chief Executive Officer at December 31, 2008, 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 was to leave our
Company, we could lose the financial benefit derived from those limited
liability companies.

See
also Subsequent Events note (Note 16) for updated discussion on the related
executives mentioned above.

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 SUBSIDIARIES.

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
populations. However, at this time, services of this type have not gained wide
spread acceptance from the market. 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.

16

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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.

17

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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, 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.

18

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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 2008 represented approximately 77% of all gross
charges for our fee for service billings. Additionally, Medicare payments
during 2008 represented approximately 70% 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
enrolled member per month (PEMPM) 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
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.

19

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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.

20

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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 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.

21

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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 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.

22

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

The
Company is 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 is 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-K for the fiscal year ended
December 31, 2007. We have completed an initial assessment of our internal
control environment. We did identify material weaknesses which are currently
being addressed. If we are unable to complete this testing, 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 accurate bid and ask
quotations, establishing the market value of the shares, and a lack of
securities analyst coverage.

23

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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.

24

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ITEM 2. PROPERTIES.

We
entered in to a sublease for our corporate offices at Ten Progress Drive,
Shelton, CT, effective October 1, 2007, which renews automatically in one year
increments. Our corporate offices consist of 12,920 square feet of space with a
gross annual rental of $134,580.

We
lease approximately 15,000 square feet of office space in six other states for
our operating units, including Alabama, Tennessee, Illinois, Massachusetts, New
York and Texas. The lease expirations range from April 2009 to October 2013.

We
believe that the condition of all of our leased facilities provides us with
sufficient space 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 may be subject to 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, 2008, there has not been any matter which was
submitted to a vote of the Companys shareholders through the solicitation of
proxies or otherwise.

25

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PART II

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

MARKET INFORMATION

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.

|                |  |      |      |     |   |      | 
|--------------- |  | ---- | ---- | --- | - | ---- | 
|                |  | 2008 |     
|                |  | High |      | Low |  
|                |  |      |      |     |  
|                |  |      |      |     |   |      | 
|First
 Quarter  |  | $    | 1.80 |     | $ | 1.01 | 
|Second
 Quarter |  | $    | 1.26 |     | $ | 0.72 | 
|Third
 Quarter  |  | $    | 1.01 |     | $ | 0.65 | 
|Fourth
 Quarter |  | $    | 0.80 |     | $ | 0.20 | 
|                |  |      |      |     |   |      | 
|                |  | 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

Since
shares are held by brokers and institutions on behalf of stock holders, the
Company is unable to estimate the total number of individual stockholders
represented by these holders of record.

DIVIDENDS

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

26

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SECURITIES AUTHORIZED
FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Below
is a table setting forth the information relating to the Companys Annual
Incentive Compensation Plan for the fiscal year ending December 31, 2008:

|                                                       |  |                                                                                                |  |                                                                                |  |                                                                                                
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------------
|Plan
 Category                                         |  | Number of
 Securities to be
 Issued Upon Exercise of
 Outstanding Options,
 Warrants or Rights |  | Weighted
 Average Exercise
 Price of Outstanding Options,
 Warrants and Rights |  | Number of
 Securities
 Remaining Available for
 Future Issuance under Equity
 Compensation Plan
|                                                       |  |                                                                                                |  |                                                                                |  |                                                                                                
|Equity
 Compensation Plan Approved by Shareholders     |  | Options -
 2,389,000                                                                           |  | Options -
 $0.90                                                               |  | 4,559,073                                                                                      
|                                                       |  | Warrants 
 31,812,432                                                                         |  | Warrants 
 $0.57                                                              |  |                                                                                                
|Equity
 Compensation Plan not Approved by Shareholders |  | N/A                                                                                            |  | N/A                                                                            |  | N/A                                                                                            

TRANSFER AGENT

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

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.

27

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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
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-K, 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

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 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.

In
October 2007, the Company sold to one 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.

28

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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 as of December 31, 2007. 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, 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
Company incurred $671,278 in 2007 in deferred issuance costs relating to the
issuance of the convertible notes.

At
December 31, 2007, the unamortized balance of the beneficial conversion
features was $2,042,667, the unamortized balance of the warrant discounts was
$902,958, and the unamortized balance of deferred issuance costs was $648,485.

The
Company issued $985,000 in twelve month, 10% interest, senior secured
convertible notes to ten private investors during the first six months of 2008.
The Company issued $250,000 of the $985,000 convertible notes to its
non-executive Chairman. Each of the investors have represented in writing that
they are 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% 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 (as defined below) 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. In connection with the sale of $985,000 of
convertible notes the Company issued 98,500 warrants which are exercisable at
any time prior to expiration at a strike price equal to the strike price per
share 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
consecutive trading days prior to the expire date per share.

---



The
warrants had a fair value of $118,511 on the commitment date and were treated
as a discount on the debentures. 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 ranging from 165% to 168% and an expected
life equal to the contractual life of the warrants.

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
totaled $359,000 and was to be amortized as interest expense over the life of
the debentures.

In
connection with the issuance of the $985,000 inconvertible notes, the Company
issued 48,665 warrants to purchase its common stock to a financial advisor. The
warrants had a fair value of $45,435 on the commitment date and were treated as
a deferred issuance cost to be amortized to expense over the life of the
debentures. 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 ranging from 152% to 168% and an expected life equal to
the contractual life of the warrants.

The
warrants have a five year maturity date from the date of the debenture
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 (the Securities)
generating gross proceeds to the Company (excluding the principal amount of any
notes tendered in connection therewith) of at least $10,000,000.

The
features of the convertible notes 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 notes should be separately accounted for as derivatives and that
the warrants meet the tests for equity classification.

The
Company entered into a Securities Amendment and Purchase Agreement dated
December 23, 2008 (the Agreement) pursuant to which certain holders (the
Holders) of certain senior secured promissory notes (the Notes) previously
issued by the Company agreed to amend the Notes (Amended Notes) to provide
for the extension of the maturity date. The Amended Notes shall mature on
either (a) the earlier of (x) May 31, 2009, or (y) the closing date of a
Qualifying Transaction; (b) in the event no Markman Group Transaction (as such
term is defined in the Agreement) closes by the earliest maturity date
currently in effect of any of the Markman Group Notes, then the New Maturity
Date shall mean the same date as such earliest maturity date of any of the
Markman Group Notes; or (c) in the event no Qualifying Transaction closes by
May 31, 2009, then the New Maturity Date shall mean May 30, 2010, subject to
the terms of the Agreement. The Agreement further provided that payment of the
Amended Notes shall be secured by a first ranking security interest over all
assets of the Company and its subsidiaries. The Amended Notes shall carry
compounding interest of 1% per month (the Interest). Interest shall be
payable at the New Maturity Date of the Amended Notes.

The
Agreement also provided that in the event that a Qualifying Transaction does
not close by May 31, 2009, at any time after such date, the Holders may convert
their Amended Notes plus accrued interest into the Companys common stock at a
conversion rate of $0.20 per share. The Amended Notes also provided for 100%
warrant coverage of the face value of the Amended Notes, plus Interest,
exercisable at $0.30 per share (the Warrants). The Warrants shall be
exercisable after May 31, 2009 (in the event a Qualifying Transaction does not
close) for a period of five years. The Company shall endeavor to seek
shareholder approval for an increase in its authorized shares of common stock,
sufficient to permit the exercise of the Warrants.

Further,
pursuant to certain provisions in the Agreement, the Company and all of its subsidiaries
also entered into a Guarantee and Amended and Restated Security Agreement dated
December 23, 2008 (the Guarantee and Security Agreement) wherein the Company
and all of its subsidiaries guaranteed the payment of the Amended Notes,
subject to certain conditions set forth in the Guarantee and Security
Agreement. The Company also agreed to register the common stock underlying the
securities issued to the Holders under the Agreement.

The
Company had previously issued to the Noteholders certain secured convertible
promissory notes in the aggregate principal amount of $7,999,765 as of December
22, 2008, plus accrued interest of $826,568, plus a balance on a previously
held line of credit of $200,000, with a total obligation of $9,026,333 as of
December 31, 2008. The Notes have an interest rate of 12% effective December
23, 2008.

The
Company also included warrants within the above transaction for rights to
purchase an aggregate of 25,817,057 shares of Common Stock of the Company at $0.30
per share. The warrants had a fair value of $1,679,544 on the commitment date,
each warrant option having a value of $0.13 per share and a probability of
vesting of 50%. The fair value of the warrants was determined by using the
Black-Scholes model assuming an stock price of $0.20, a risk free interest rate
of 1.53%, volatility of 89% and an expected life of 5.44 years, which is equal
to the contractual life of the warrants.

Based
upon the above fair value of the warrants as a percentage of the sum of total
value of debt issued with the warrants plus the fair value of the warrants, the
beneficial conversion discount was calculated to be $1,380,237 and is included
within the accompanying consolidated statements of changes in stockholders equity
(deficit) as of December 31, 2008. In addition, the fair value of the warrants
recorded by the Company was calculated to be $1,380,237 and is included within
the accompanying

---



consolidated
statements of changes in stockholders equity (deficit) as of December 31,
2008. This is in accordance with EITF 00-27, Application of Issue 98-5 to
Certain Convertible Instruments.

At
December 31, 2008, the unamortized balance of the beneficial conversion
features was $1,346,625 and the unamortized balance of the warrant discounts
was $1,360,634. Amortization related to the discounts for the beneficial
conversion features and warrants totaled $2,435,279 and $1,041,070 for the year
ended December 2008, respectively.

Due
to the characteristics of the convertible features within the instruments of
the above recapitalization, the Company may require the Board of Directors to
authorize another issuance of common shares subsequent to December 31, 2008.

29

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ITEM 6. SELECTED FINANCIAL DATA

Not
applicable.

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

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, 2008 and 2007, contained elsewhere
in this Annual Report on Form 10-K.

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 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 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
care support 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, 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.

30

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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 model for Easy Care is
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.

31

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RESULTS OF OPERATIONS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 2008 AND 2007

Revenues

For
the twelve months ended December 31, 2008, net revenue was $27,883,239,
representing an increase of $15,002,516 or 116% as compared to the net revenue
of $12,880,723 for the twelve months ended December 31, 2007. The increase is a
result of growth from existing operations in the amount of $12,416,766 or 130%
as compared to the twelve months of 2007 as well as $2,585,750 of revenue from
new operations in the twelve months of 2008.

During
the twelve months of 2008, there was no new NP Care revenue generated from
existing operations. Also during 2008, new Easy Care operations generated
$1,108,200 in revenue. In addition, the Company entered into a DOQ Care
Demonstration Project, which generated $1,477,550 in revenue.

Cost
of Net Revenue and Gross Profit

For
the twelve-months ended December 31, 2008 cost of net services was $18,403,810
which represents an increase of $5,923,402 or 47% as compared to the cost of
net services of $12,480,408 for the twelve months ended December 31, 2007. For
the twelve months ended December 31, 2008 gross profit was $9,479,429, 34% of
net revenues, which represents an increase of $9,079,114 (2,268%) as compared
to the gross profit of $400,315, 3% of net revenue, for the twelve-months ended
December 31, 2007.

Selling,
General and Administrative Expenses (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, 2008 total SG&A Expenses were $18,242,444 representing an
increase of $8,073,070 (79%) as compared to the total SG&A Expenses of
$10,169,374 for the twelve-months ended December 31, 2007.

Included
within SG&A Expenses as of December 31, 2008 is a $1,352,446 impairment
charge for internally developed software related to the NP Care Program that
was deemed to be impaired.

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, 2008 depreciation and amortization expense
included in operating expenses was $557,714 representing an increase of $96,826
(21%) as compared to the total depreciation and amortization expense of
$460,888 for the twelve-months ended December 31, 2007.

32

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Income
(Loss) from operations

For
the twelve months ended December 31, 2008 we incurred a loss from operations of
($9,320,729) representing a decrease of $909,218, or 9%, compared to
($10,229,947) for the twelve-months ended December 31, 2007. These changes are
a result of factors mentioned above as well as the improvement 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 significant net operating losses (NOLs) since inception.
At December 31, 2008, the Company had net operating loss carry forwards for
federal and state income tax purposes of approximately $22.6 million, which is
available to offset future federal taxable income, if any, ratably through
2027. These NOLs 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.

33

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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 specialty care 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)

CURRENT DIRECT
CONTRACT

|                                    |  |          |  |                    |                   | 
|----------------------------------- |  | -------- |  | ------------------ | ----------------- | 
|CONTRACT                            |  | LOCATION |  | ENROLLED EASY CARE |                  
|                                    |  |          |  |                    |                   | 
|Alere                               |  | MA       |  |                    | 400 at 12/31/08   | 
|                                    |  |          |  |                    |                   | 
|HealthSpring                        |  | TN       |  |                    | 1,256 at 12/31/08 | 
|                                    |  |          |  |                    |                   | 
|HealthSpring                        |  | TX       |  |                    | 125 at 12/31/08   | 
|                                    |  |          |  |                    |                   | 
|HealthSpring                        |  | AL       |  |                    | 520 at 12/31/08   | 
|                                    |  |          |  |                    |                   | 
|Health
 Insurance
 Plan of New York |  | NY       |  |                    | 3,499 at 12/31/08 | 
|                                    |  |          |  |                    |                   | 
|Amerigroup                          |  | TX       |  |                    | 225 at 12/31/08   | 

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       |  | 1,151 at 12/31/08 | 
|             |  |          |  |                   | 
|HealthSpring |  | TN       |  | 126 at 12/31/08   | 

34

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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

Financial Engine

NP Cares
revenue streams include four channels:

| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fee-for-Service
  our nurse practitioners are paid on an event basis in all of our current nursing
 homes.                                                                                                                                         
| |   |                                                                                                                                                                                                                                                     
| |  | Special
 Services  Resident Risk Assessments, Employee Physicals, Nursing Home-based
 Educational programs are available on a service-based fee schedule.                                                                                          
| |   |                                                                                                                                                                                                                                                     
| |  | Medicare
 Advantage SNPs  We have entered into a contractual relationship with
 HealthSpring in Nashville, Tennessee.                                                                                                                              
| |   |                                                                                                                                                                                                                                                     
| |  | 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.

During
2008 the Company exited certain markets that were not aligned with its
long-term strategic growth. As of December 31, 2008, the Company continues to
evaluate the NP Care operations and markets that it operates.

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, 2008 and 2007, we had approximately $0.4 million
and $3.4 million, respectively, in cash and cash equivalents. Operating
activities for the twelve-months ended December 31, 2008 used $3.8 million,
representing a decrease of $5.8 million (60%) when compared to the cash used in
operating activities of $9.6 million for the twelve-months ended December 31,
2007. This change is primarily due to the increased revenues associated with
new contracts and business development.

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 2008 and 2007, the total amounts outstanding on the lines of credit
were $0 and $200,000, respectively.

35

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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
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-K, 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
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
2007, the Company sold to four 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 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.

36

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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
2007, the Company also issued to five 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.

As
of December 31, 2008 and 2007, obligations to Dr. Chess and his brothers
entered into from 2006 to 2008 had amounts due of $388,097 and $235,000,
respectively.

37

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During
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.

During
2008, the Company received $250,000 upon the sale of 500,000 shares of common
stock, along with warrants to purchase 500,000 shares of common stock in a
private placement to one investor. For each dollar invested the investors
received two shares of common stock together with a warrant to purchase two
shares of common stock. The warrants mature in five years and were issued with
a strike price of $0.50. These investors had an opportunity to ask questions
and receive answers from our executive officers and were provided with access
to our documents and records in order to verify the information provided.

During
2008, the Company issued 15,000, 250,000 and 20,000 shares to consultants for
services rendered. The share values on the dates of issuance were $1.25, $0.36
and $0.45, respectively.

The
Company issued approximately $985,000 in twelve month, 10% interest, senior
secured convertible notes to nine private investors during 2007 and the first
six months of 2008, respectively. The company also issued $800,000 in twelve
month, 10% interest, unsecured convertible notes to two investors and one
vendor (who converted $500,000 of payables) in 2007. The Company issued
$250,000 of the $985,000 convertible notes to its non-executive Chairman. Each
of the investors have represented in writing that they are 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 $3.15 million worth 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 (as defined below) the
debenture holders are entitled to, but not required to, convert at a rate equal
to a 30% discount (25% for $3.15 million worth of the notes) of the price paid
per share in the Qualified Financing with the same limitation of a floor of
$1.00. In connection with the sale of $6.5 million and $985,000 of convertible
notes in 2007 and 2008 the Company issued 636,477 and 98,500 warrants,
respectively, which are exercisable at any time prior to expiration at a strike
price equal to the strike price per share 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 consecutive trading days prior to the expire
date per share. No convertible notes were issued in the third quarter of 2008.

The
Warrants have a five year maturity date from the date of the debenture
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 (the Securities)
generating gross proceeds to the Company (excluding the principal amount of any
notes tendered in connection therewith) of at least $10,000,000.

The
convertible notes issued during 2007 and 2008 contained beneficial conversion
discounts totaling $2,166,000 and $359,000, respectively, because the value
allocated to the notes on a relative basis were less than the fair value of the
Companys common stock. The Company valued the warrants issued during 2007 at
$979,147 and allocated $5,385,618 to the notes that were issued with warrants.
The fair value of the warrants were determined by using the Black-Scholes model
assuming an exercise price of $0.85, risk free interest rate of 5%,
volatilities ranging from 152% to 168%, and a term of five years, which is
equal to the contractual life of the warrants. The discount related to the fair
value of the warrants and the beneficial conversion discounts are being
amortized over the term of the notes through a charge to interest expense. The
convertible notes totaling $7,014,765 at December 31, 2007 are reflected in the
consolidated balance sheets net of the unamortized portion of the discounts and
warrants of the beneficial conversion discount.

The
features of the convertible notes 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 notes should be separately accounted for as derivatives and that
the warrants meet the tests for equity classification.

The
Company incurred $671,278 in 2007 in deferred issuance costs relating to the
issuance of the convertible notes.

At
December 31, 2007, the unamortized balance of the beneficial conversion
features was $2,042,667, the unamortized balance of the warrant discounts was
$902,958, and the unamortized balance of deferred issuance costs was $648,485.

38

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The
Company entered into a Securities Amendment and Purchase Agreement dated
December 23, 2008 (the Agreement) pursuant to which certain holders (the
Holders) of certain senior secured promissory notes (the Notes) previously
issued by the Company agreed to amend the Notes (Amended Notes) to provide
for the extension of the maturity date. The Amended Notes shall mature on
either (a) the earlier of (x) May 31, 2009, or (y) the closing date of a
Qualifying Transaction; (b) in the event no Markman Group Transaction (as such
term is defined in the Agreement) closes by the earliest maturity date
currently in effect of any of the Markman Group Notes, then the New Maturity
Date shall mean the same date as such earliest maturity date of any of the Markman
Group Notes; or (c) in the event no Qualifying Transaction closes by May 31,
2009, then the New Maturity Date shall mean May 30, 2010, subject to the terms
of the Agreement. The Agreement further provided that payment of the Amended
Notes shall be secured by a first ranking security interest over all assets of
the Company and its subsidiaries. The Amended Notes shall carry compounding
interest of 1% per month (the Interest). Interest shall be payable at the New
Maturity Date of the Amended Notes.

The
Agreement also provided that in the event that a Qualifying Transaction does
not close by May 31, 2009, at any time after such date, the Holders may convert
their Amended Notes plus accrued interest into the Companys common stock at a
conversion rate of $0.20 per share. The Amended Notes also provided for 100%
warrant coverage of the face value of the Amended Notes, plus Interest,
exercisable at $0.30 per share (the Warrants). The Warrants shall be
exercisable after May 31, 2009 (in the event a Qualifying Transaction does not
close) for a period of five years. The Company shall endeavor to seek
shareholder approval for an increase in its authorized shares of common stock,
sufficient to permit the exercise of the Warrants.

Further,
pursuant to certain provisions in the Agreement, the Company and all of its
subsidiaries also entered into a Guarantee and Amended and Restated Security
Agreement dated December 23, 2008 (the Guarantee and Security Agreement)
wherein the Company and all of its subsidiaries guaranteed the payment of the
Amended Notes, subject to certain conditions set forth in the Guarantee and
Security Agreement. The Company also agreed to register the common stock
underlying the securities issued to the Holders under the Agreement.

The
Company had previously issued to the Noteholders certain secured convertible
promissory notes in the aggregate principal amount of $7,999,765 as of December
22, 2008, plus accrued interest of $826,565, plus a balance on a previously
held line of credit of $200,933, with a total obligation of $9,027,262 as of
December 31, 2008. The Notes have an interest rate of 12% effective December
23, 2008.

The
Company also included warrants within the above transaction for rights to purchase
an aggregate of 25,817,057 shares of Common Stock of the Company at $0.30 per
share. The warrants had a fair value of $1,679,544 on the commitment date, each
warrant option having a value of $0.13 per share and a probability of vesting
of 50%. The fair value of the warrants was determined by using the
Black-Scholes model assuming an stock price of $0.20, a risk free interest rate
of 1.53%, volatility of 89% and an expected life of 5.44 years, which is equal
to the contractual life of the warrants.

Based
upon the above fair value of the warrants as a percentage of the sum of total
value of debt issued with the warrants plus the fair value of the warrants, the
beneficial conversion discount was calculated to be $1,380,237 and is included
within the accompanying consolidated statement of changes in stockholders
equity (deficit) as of December 31, 2008. In addition, the fair value of the
warrants recorded by the Company was calculated to be $1,380,237 and is
included within the accompanying consolidated statement of changes in
stockholders equity (deficit) as of December 31, 2008. This is in accordance
with EITF 00-27, Application of Issue 98-5 to Certain Convertible
Instruments.

At
December 31, 2008, the unamortized balance of the beneficial conversion
features was $1,346,625 and the unamortized balance of the warrant discounts
was $1,360,634. There was no unamortized balance related to deferred issuance
costs.

Due
to the characteristics of the convertible features within the instruments of
the above recapitalization, the Company may require the Board of Directors to
authorize another level of common shares subsequent to December 31, 2008.

CAPITALIZED SOFTWARE
DEVELOPMENT COSTS

The
Company has expended significant amounts for the development of software for
internal use. During 2008 and 2007, the Company expended $230,976 and
$1,126,508, respectively for capitalized software costs. The Company used one
vendor to develop this software.

During
the fourth quarter of 2008, the Company took an impairment charge of $1,352,446
for a NP Care business asset that was not considered to have any significant
future economic benefit, and this expense is included within SG&A Expense
in the accompanying statements of operations as of December 31, 2008.

39

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ACCOUNTS RECEIVABLE

As
of December 31, 2008 and 2007, the Companys accounts receivable aging by major
payers was as follows:

|                       |  |       |           |         |   |         |  |      |        |       |   |        |  |   |           | 
|---------------------- |  | ----- | --------- | ------- | - | ------- |  | ---- | ------ | ----- | - | ------ |  | - | --------- | 
|December 31,
 2008     |  |       |           |         |   |         |  |      |        |       |   |        |  |   |           | 
|                       |  |       |           |         |   |         |  |      |        |       |   |        |  |   |           | 
|                       |  | 0- 30 |           | 31 - 60 |   | 61 - 90 |  | > 90 |        | Total |  
|                       |  |       |           |         |   |         |  |      |        |       |   |        |  |   |           | 
|MEDICARE               |  | $     | 292,101   |         | $ | 18,145  |  | $    | 0      |       | $ | 0      |  | $ | 310,246   | 
|MEDICAID/STATE WELFARE |  |       | 9,648     |         |   | 2,394   |  |      | 0      |       |   | 0      |  |   | 12,042    | 
|BLUE CROSS/BLUE SHIELD |  |       | 15,686    |         |   | 3,572   |  |      | 0      |       |   | 0      |  |   | 19,258    | 
|HEALTH NET             |  |       | 13,859    |         |   | 3,763   |  |      | 0      |       |   | 0      |  |   | 17,622    | 
|OTHER PRIVATE          |  |       | 1,974,095 |         |   | 494,495 |  |      | 84,540 |       |   | 12,337 |  |   | 2,565,467 | 
|                       |  |       |           |         |   |         |  |      |        |       |   |        |  |   |           | 
|                       |  |       |           |         |   |         |  |      |        |       |   |        |  |   |           | 
|                       |  | $     | 2,305,389 |         | $ | 522,369 |  | $    | 84,540 |       | $ | 12,337 |  | $ | 2,924,635 | 
|                       |  |       |           |         |   |         |  |      |        |       |   |        |  |   |           | 
|                       |  |       |           |         |   |         |  |      |        |       |   |        |  |   |           | 

|                       |  |       |           |         |   |         |  |      |         |       |   |         |  |   |           | 
|---------------------- |  | ----- | --------- | ------- | - | ------- |  | ---- | ------- | ----- | - | ------- |  | - | --------- | 
|December 31, 2007      |  |       |           |         |   |         |  |      |         |       |   |         |  |   |           | 
|                       |  |       |           |         |   |         |  |      |         |       |   |         |  |   |           | 
|                       |  | 0- 30 |           | 31 - 60 |   | 61 - 90 |  | > 90 |         | Total |  
|                       |  |       |           |         |   |         |  |      |         |       |   |         |  |   |           | 
|MEDICARE               |  | $     | 381,268   |         | $ | 95,460  |  | $    | 76,711  |       | $ | 190,782 |  | $ | 744,221   | 
|MEDICAID/STATE WELFARE |  |       | 11,842    |         |   | 9,917   |  |      | 10,898  |       |   | 49,387  |  |   | 82,044    | 
|BLUE CROSS/BLUE SHIELD |  |       | 33,267    |         |   | 19,154  |  |      | 18,040  |       |   | 59,626  |  |   | 130,088   | 
|HEALTH NET             |  |       | 5,779     |         |   | 1,766   |  |      | 1,193   |       |   | 5,320   |  |   | 14,058    | 
|OTHER PRIVATE          |  |       | 1,055,844 |         |   | 87,374  |  |      | 62,563  |       |   | 39,867  |  |   | 1,245,648 | 
|                       |  |       |           |         |   |         |  |      |         |       |   |         |  |   |           | 
|                       |  |       |           |         |   |         |  |      |         |       |   |         |  |   |           | 
|                       |  | $     | 1,488,000 |         | $ | 213,672 |  | $    | 169,406 |       | $ | 344,981 |  | $ | 2,216,059 | 
|                       |  |       |           |         |   |         |  |      |         |       |   |         |  |   |           | 
|                       |  |       |           |         |   |         |  |      |         |       |   |         |  |   |           | 

Receivables
recorded at December 31, 2008 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, 2008 is recorded at the amount
ultimately expected to be received from these payers. For the year ended
December 31, 2008 there were $5,315,186 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. During the third
quarter of 2008 the Company took a charge related to 2007 and 2008
fee-for-services receivables which totaled approximately $540,000. There were
no other charges for uncollectible receivables during 2007 or 2008.

40

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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, 2008 are as follows:

|                              |  |   |           | 
|----------------------------- |  | - | --------- | 
|Years
 Ending December 31,    |  |   |           | 
|                              |  |   |           | 
|                              |  |   |           | 
|2009                          |  | $ | 502,365   | 
|                              |  |   |           | 
|2010                          |  |   | 335,368   | 
|                              |  |   |           | 
|2011                          |  |   | 98,859    | 
|                              |  |   |           | 
|2012                          |  |   | 58,908    | 
|                              |  |   |           | 
|2013                          |  |   | 50,190    | 
|                              |  |   |           | 
|                             
|Total minimum lease
 payments |  | $ | 1,045,690 | 
|                             
|                              |  |   |           | 

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.

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

41

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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, 2008 and 2007. Further, the Company does not expect the
reasonably possible effects of a change in estimate related to unsettled
December 31, 2008 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, 2008, 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 2009 when, and if, the amount is both determinable and
reasonably assured and is no longer subject to refund. Accordingly, the Company
has deferred approximately $13,000 of revenue as of December 31, 2008
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, 2008, the Company was unable to determine the
return on investment, and accordingly, deferred approximately $242,000 of
revenue as of December 31, 2008. The Company will realize this revenue in 2009
when, and if, the amount is both determinable and reasonably assured and is no
longer subject to refund. In addition, the Company deferred $776,876
related to the DOQ Care program as funds were received for services to be
performed in the first quarter of 2009 at which time the revenue will be
recognized.

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.

During
the fourth quarter of 2008, the Company took a charge of $1,352,446 for a NP
Care business asset that was not considered to have any significant future
economic benefit, and this expense is included within selling, general and
administrative expenses in the accompanying statements of operations as of
December 31, 2008.

42

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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 2008 and 2007.

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

43

---



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.

The
useful lives for all of the fixed asset categories range from 3 to 5 years.

STOCK-BASED
TRANSACTIONS

The
Company applies the provisions of Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share-Based Payment (SFAS 123R) to all share based
payment awards made to employees and directors. SFAS 123R establishes
accounting for equity instruments exchanged for employee services. Under the
provisions of SFAS 123R, share based compensation is measured at the grant
date, based upon the fair value of the award, and is recognized as an expense
over the holders requisite service period (generally the vesting period of the
equity award). The Company has expensed its share-based compensation for share
based payments under the ratable method, which treats each vesting tranche as
if it were an individual grant.

The
Company periodically grants stock options for a fixed number of shares of
common stock to its employees and directors. Stock options are granted with an
exercise price greater than or equal to the fair market value of the Companys
common stock at the date of the grant. The Company estimates the fair value of
stock options using a Black-Scholes valuation model. Key inputs used to
estimate the fair value of stock options include the exercise price of the
award, the expected post-vesting option life, the expected volatility of the
Companys stock over the options expected term, the risk free interest rate
over the options expected term, and the expected annual dividend yield.

The
Company recognizes stock-based compensation expense for the number of awards
that are ultimately expected to vest. As a result, recognized stock
compensation is reduced for estimated forfeitures prior to vesting. The
Companys estimate of annual forfeiture rates were approximately 7%. Estimated
forfeitures will be reassessed in subsequent periods and may change based on
new facts and circumstances.

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 2008
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.

44

---



ACCOUNTING STANDARDS
NOT YET ADOPTED

In
December 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (Revised 2007), Business
Combinations (SFAS 141R). Under SFAS 141R, an acquiring entity
will be required to recognize all assets acquired and liabilities assumed in a
transaction at fair value on the acquisition-date, with limited exceptions.
SFAS 141R changes the accounting treatment and disclosure requirements for
certain items in a business combination. For instance, acquisition-related
costs, with the exception of debt or equity issuances costs are to be
recognized as an expense in the period that the costs are incurred and the
services are received. Currently, these costs are included as part of the
purchase price and allocated to the assets required. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after December 15,
2008. Early adoption is prohibited.

In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS 161), which changes the disclosure
requirements for derivative instruments and hedging activities. SFAS 161
requires enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entitys financial position,
financial performance, and cash flows. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. Management has not yet completed its evaluation of the
potential effect of the adoption of SFAS 160 on the Companys consolidated
financial position, results of operations and cash flows.

45

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RECENTLY ADOPTED
ACCOUNTING STANDARDS

In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157), which defines fair value,
establishes a framework for measuring fair value in US GAAP and expands
disclosures about fair value measurements. SFAS 157 does not require any
new fair value measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements. In February 2008, the
FASB issued FASB Staff Position No. 157-2, which deferred the effective date
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis, until fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. These nonfinancial items
include assets and liabilities such as reporting units measured at fair value
in goodwill impairment tests and nonfinancial assets acquired and liabilities
assumed in a business combination. The Company adopted SFAS 157 for
financial assets and liabilities recognized at fair value on recurring bases effective
January 1, 2008. The partial adoption of SFAS 157 for financial assets and
liabilities did not have a material effect on the Companys consolidated
financial position, results of operations or cash flows.

In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). Under SFAS 159, companies may elect to measure certain
financial instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in operations. SFAS 159 was effective for
the Company beginning in the first quarter of 2008. The Company has not elected
to fair value any eligible items throughout 2008. Therefore, the adoption of
SFAS 159 did not affect the Companys consolidated financial position, results
of operations or cash flows.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.

Not
applicable.

ITEM 8. 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-K.

46

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

None.

ITEM 9A.   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 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 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 CFO concluded that our Disclosure Controls were
not effective as of the end of the period covered by this report.

Managements
conclusion is based on, among other things, the audit adjustments recorded for
fiscal years 2007 and 2006 and the restatement of the Form 10-Q for the period
ending March 31, 2008 relating to errors in accounting for stock-based
compensation.

As
of December 31, 2008, 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 of resources, 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.

Management
has engaged in remediation efforts to address the material weaknesses
identified in our disclosure controls and procedures and is committed to
improving and strengthening our overall control environment.

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 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.                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 2. | On March 21,
 2008, HC Innovations, Inc. (the Company) appointed four 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. Effective May 30, 2008 and September 9, 2008, Mr. Richard Rakowski
 and Mr. James Bigl resigned from the Board of Directors, respectively. On
 February 4, 2009, the Company appointed Mr. Richard E. DeLater and Mr. Kenneth
 D. Lamé as members of the Board.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 3. | In October
 and December of 2008, the Company hired a full time Chief Financial Officer
 and a Corporate Controller, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 4. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 5. | Established
 a detailed timeline for review and completion of financial reports to be
 included in our future filings Forms 10-Q and 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

47

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Limitations on the Effectiveness of Controls

Our
management, including our CEO and 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 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, 2008. 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, 2008, 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
Commission that permit us to provide only managements report in this annual
report.

ITEM 9B. OTHER INFORMATION.

None.

48

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PART III

ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCES.

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                                                 
|                    |  |     |  |                                                          
|Kenneth D.
 Lamé    |  | 67  |  | Chairman of
 the Board and Acting Chief Executive Officer
|                    |  |     |  |                                                          
|Tina
 Bartelmay     |  | 48  |  | President
 and Chief Operating Officer                   
|                    |  |     |  |                                                          
|R. Scott
 Walker    |  | 38  |  | Chief
 Financial Officer                                 
|                    |  |     |  |                                                          
|Brett Cohen         |  | 36  |  | Executive
 Vice-President, Operations                    
|                    |  |     |  |                                                          
|David Chess,
 M.D.  |  | 55  |  | Chief
 Medical Officer and Director                      
|                    |  |     |  |                                                          
|Jeffrey L.
 Zwicker |  | 65  |  | Director                                                 
|                    |  |     |  |                                                          
|Orlo L.
 Dietrich   |  | 62  |  | Director                                                 
|                    |  |     |  |                                                          
|Richard E.
 DeLater |  | 58  |  | Director                                                 

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

KENNETH
D. LAMÉ, appointed in February 2009 as Chairman of the Board and Acting Chief
Executive Officer and, has been, from 1997 to present, an Investment Partner
for Pacific Aerie Holdings, LLC, and the Managing Partner for Lamé Investments.
From 1997 until October, 2008, Mr. Lamé was a Managing Partner and Chairman of
the Board for HealthCare Insight, LLC (HealthCare), a healthcare fraud
detection company he founded in 1997.

TINA
BARTELMAY, formerly Executive Vice President and Chief Marketing Officer was
appointed to President and Chief Operating Officer in February 2009. Tina
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.

R.
SCOTT WALKER, Chief Financial Officer, has fifteen years of experience within
the financial services and insurance industry. From 2007 until October 2008,
Mr. Walker served as the Chief Financial Officer of National Accounts and
Business Alliances for Aetna, Inc., an insurance and employee benefits company.
From 2000 to 2007, Mr. Walker held several positions, including Vice President,
Controller and Chief Accounting Officer, and Director and Financial Controller
at Uniprise (a UnitedHealth Group Company), a health benefit delivery and
service solutions company. Mr. Walker received his B.A. from Saint Michaels
College in Colchester, Vermont and is a member of the American Institute of
Certified Public Accountants and the Connecticut Society of Certified Public
Accounts.

BRETT
COHEN, Executive Vice-President, Operations, brings more than fifteen years of
healthcare leadership to ECI. He has held several management positions at
UnitedHealth Group, most recently as the Senior Director of Operations and
Finance for the New England region of Evercare 2004-2007. Mr. Cohen also served
as Vice President of Business Development and Clinical Research Administration
for Clinical Research Consultants 1998-2002 and as a management consultant with
APM/CSC Healthcare 1995-1998. Mr. Cohen has sat on several boards including Big
Brothers/Big Sisters of Southwestern Connecticut, Clinical Research
Consultants, Inc. and Previva, Inc. Mr. Cohen 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.

49

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DAVID
CHESS, M.D., Founder, Vice Chairman and Chief Medical Officer is a
Geriatrician, Internist and Entrepreneur. Dr. Chess a practicing Internist and
Geriatrician till recently has over 25 experience years building health care
companies. Dr. Chess has built and run large medical groups. Was VP of Medical
Services for the Hewitt Organization from 1998 to 2002 a 500 bed long term care
company. David also serves as President of Project Patient Care (PPC), a
non-profit 501(c) 3 patient advocacy organization he founded in January 2000.
Dr. Chess has several publications on the impact of system changes on patient
care outcomes. David graduated from Creighton University School of Medicine and
is currently an Assistant professor of Medicine at Yale University School of
Medicine.

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.

ORLO
L. 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 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.

RICHARD
E. DeLATER,
appointed a Director in February 2009, is the founder of DeLater & Company
(DeLater). Since founding DeLater in 1994, Mr. DeLater has served as its
Principal in Charge, directing its real estate development, asset management,
and various investment and brokerage services. Mr. DeLater has overseen capital
investment into several private and public companies, including the acquisition
in 1998 of the Florida assets of Danis Properties Company, Inc. (Danis) that
formerly managed $125 million in real property assets. The Danis acquisition
led to the formation of Welwyn Management Company (Welwyn), a property
investment and operations management company which currently oversees the
DeLater portfolio of investments. Mr. DeLater received a Business
Administration Bachelors Degree in Economics from Miami University in 1974.

There
are no familiar relationships among the various members of the Companys Board.

Section 16(a) Beneficial Ownership Reporting
Compliance

Under
the securities laws of the United States, our directors, executive (and certain
other) officers, and any persons holding ten percent or more of our Common
Stock must report on their ownership of the Common Stock and any changes in
that ownership to the Securities and Exchange Commission. Specific due dates
for these reports have been established. During the fiscal year ended December
31, 2008, we believe that all reports required to be filed by such persons
pursuant to Section 16(a) were filed on a timely basis.

50

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ITEM 11. EXECUTIVE
COMPENSATION.

COMPENSATION OF EXECUTIVE OFFICERS

The
following table sets forth the aggregate cash compensation paid by the Company
for services rendered during the last two years to the Company by its Chief
Executive Officer and to each of the Companys other three executive officers.

|                              |  |              |  |             |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  |                               |  |           
|----------------------------- |  | ------------ |  | ----------- |  | ---------- |  | ------------------ |  | ------------------- |  | ------------------------------------------------ |  | ------------------------------------------------------ |  | ----------------------------- |  | ----------
|Name and 
 Principal Position |  | Fiscal
 Year |  | Salary
 ($) |  | Bonus
 ($) |  | Stock
 Awards
 ($) |  | Option
 Awards
 ($) |  | Non-
 Equity
 Incentive
 Plan
 Compensation
 ($) |  | Non-
 Qualified
 Deferred
 Compensation
 Earnings
 ($) |  | All
 Other
 Compensation
 ($) |  | Total
 ($)
|                              |  |              |  |             |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  |                               |  |           
|David Chess, Chief            |  |              |  |             |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  |                               |  |           
|Executive Officer and         |  | 2008         |  | 100,000     |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  | 200,000                       |  | 300,000   
|Chairman of the Board         |  | 2007         |  | 100,000     |  | N/A        |  | N/A                |  | N/A                 |  | N/A                                              |  | N/A                                                    |  | 200,000                       |  | 300,000   
|                              |  |              |  |             |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  |                               |  |           
|Tina Bartelmay, Executive     |  |              |  |             |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  |                               |  |           
|Vice President and Chief      |  | 2008         |  | 164,423     |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  | 2,077                         |  | 166,500   
|Marketing Officer             |  | 2007         |  | N/A         |  | N/A        |  | N/A                |  | N/A                 |  | N/A                                              |  | N/A                                                    |  | N/A                           |  | N/A       
|                              |  |              |  |             |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  |                               |  |           
|R. Scott Walker, Chief        |  | 2008         |  | 38,942      |  |            |  |                    |  | 45,069              |  |                                                  |  |                                                        |  | N/A                           |  | 84,011    
|Financial Officer             |  | 2007         |  | N/A         |  | N/A        |  | N/A                |  | N/A                 |  | N/A                                              |  | N/A                                                    |  | N/A                           |  | N/A       
|                              |  |              |  |             |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  |                               |  |           
|Brett Cohen, Executive        |  |              |  |             |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  |                               |  |           
|Vice-President of
 Operations |  | 2008         |  | 161,538     |  |            |  |                    |  |                     |  |                                                  |  |                                                        |  | 3,105                         |  | 164,643   
|Operations                    |  | 2007         |  | 85,000      |  | N/A        |  | N/A                |  | N/A                 |  | N/A                                              |  | N/A                                                    |  | N/A                           |  | 85,000    

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. 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.

51

---



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

The
following table sets forth as of March 26, 2009, 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                                 |  | 10,095,822                     |  |                           | 25.4 | %
|RUBIN FAMILY
 IRREVOCABLE STOCK TRUST            |  | 7,915,590                      |  |                           | 19.9 | %
|HEBRIDES LP                                      |  | 3,200,000                      |  |                           | 8.1  | %
|VINCENT
 PENRY                                   |  | 2,386,022                      |  |                           | 6.0  | %
|JEFFREY L
 ZWICKER                               |  | 1,000,130                      |  |                           | 2.5  | %
|                                                 |  |                                |  |                           |      |  
|Officers and
 Directors as a group (Two persons) |  | 11,095,952                     |  |                           | 27.9 | %

|                                                                                                              |                                                                                                                     
|------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------
|*                                                                                                             | Each
 shareholders address is c/o HC Innovations, Inc., 10 Progress Drive, Suite
 200, Shelton, Connecticut, 06484.
|                                                                                                              |                                                                                                                     
|(1) Based on
 an aggregate of 39,713,128 shares (on a fully diluted basis) outstanding as
 of March 26, 2009.
|                                                                                                              |                                                                                                                     

52

---



Compliance with Section 16(A) of the Exchange
Act

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, 2008,
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 13. 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 prohibition against
the 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, 2008 and 2007, the Company had obligations to Dr. Chess and his
brothers in the amounts of $388,097 and $235,000, respectively.

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

On
December 20, 2007, the Company entered into a Separation Agreement (the
Agreement) with Jeffrey L. Zwicker, a member of the 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 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. This obligation has been paid in full as of December 31, 2008.

On
January 15, 2008, Mr. James Bigl, former Chairman of the Board purchased
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. The Note provides a
conversion feature allowing the note holder to convert the debt into 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.

53

---



ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.

The
following is a summary of the fees billed to us by CCR, LLP for professional
services rendered for 2008 and 2007:

| |                     |  |           |         |           |   |        
| | ------------------- |  | --------- | ------- | --------- | - | -------
| | Fee
 Category       |  | 2008 Fees |         | 2007 Fees
| |                     |  |           |         |          
| | Audit Fees          |  | $         | 134,000 |           | $ | 169,600
| | Audit-Related
 Fees |  | $         | 117,514 |           | $ | 22,405 
| | Tax Fees            |  | $         |        |           | $ |       
| | All Other
 Fees     |  | $         |        |           | $ |       
| |                     |  |           |         |           |   |        
| | Total Fees          |  | $         | 251,514 |           | $ | 192,005
| |                     |  |           |         |           |   |        

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-K for December 31, 2008 and our Form 10-Q
filing for interim reviews in 2008, and services that are normally provided by
CCR, 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.

54

---



ITEM 15. 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, 2008 and 2007                                             
| |                                                                                                           
| | Consolidated
 Statements of Operations for the years ended December 31, 2008 and 2007                     
| |                                                                                                           
| | Consolidated
 Statements of Cash Flows for the years ended December 31, 2008 and 2007                     
| |                                                                                                           
| | Consolidated
 Statements of Stockholders Equity (Deficit) for the years ended December 31,
 2008 and 2007
| |                                                                                                           
| | Notes to
 Consolidated Financial Statements                                                               

(b) Reports on
Form 8-K

Three Reports
on Form 8-K have been filed during the last quarter of the period covered by
this report:

| |    |                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | October 21,
 2008 - On October 6, 2008, the Company entered into an Employment Agreement
 with Scott Walker, pursuant to which Mr. Walker shall serve as the Companys
 Chief Financial Officer, commencing on October 20, 2008.                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                
| | 2. | December 3,
 2008 - The Company entered into a Binding Term Sheet dated November 26, 2008
 pursuant to which certain holders of certain senior secured promissory notes
 (the Notes) agreed to extend the maturity of their Notes.                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                
| | 3. | December 31,
 2008 - The Company entered into a Securities Amendment and Purchase Agreement
 dated December 23, 2008 pursuant to which certain holders of certain senior
 secured promissory notes (the Notes) previously issued by the Company
 agreed to amend the Notes to provide for the extension of the maturity date.

(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.*

55

---



|                                                                                                                           |                                                                                                                                                                                                                                            
|-------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.*                                                                                                                                                                                                                    
|                                                                                                                           |                                                                                                                                                                                                                                            
|31.1                                                                                                                       | Certification
 of Chairman of the Board and Acting Chief
 Executive Officer pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002                                                                                                     
|                                                                                                                           |                                                                                                                                                                                                                                            
|31.2                                                                                                                       | Certification
 of Chief Financial Officer pursuant to
 Section 302 of the Sarbanes-Oxley
 Act of 2002                                                                                                                                      
|                                                                                                                           |                                                                                                                                                                                                                                            
|32.1                                                                                                                       | Certification
 of Chief Executive and Acting Chief
 Executive Officer pursuant to
 18 U.S.C. Section 1350                                                                                                                                  
|                                                                                                                           |                                                                                                                                                                                                                                            
|32.2                                                                                                                       | Certification
 of Chief Financial Officer 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-K, as amended.

56

---



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
26, 2009

|                                                          | 
|--------------------------------------------------------- | 
|By:                                                       | 
|                                                          | 
|/s/ Kenneth Lamé                                         
|                                                         
|                                                          | 
|Kenneth Lamé                                             
|Chairman of
 the Board and Acting Chief Executive Officer
|                                                         
|By:                                                      
|                                                         
|/s/ R. Scott Walker                                      
|                                                         
|                                                          | 
|R. Scott
 Walker                                         
|Chief
 Financial Officer                                 

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/ Orlo Dietrich            
|                                     |                               |  | 
|                                     |                               |  | 
|David Chess,
 Founder, Vice Chairman | Orlo
 Dietrich, Director     
|and Chief
 Medical Officer           | March 26, 2009               
|March 26,
 2009                      |                              
|                                     |                              
|/s/ Richard DeLater                  | /s/ Jeffrey L. Zwicker       
|                                     |                               |  | 
|                                     |                               |  | 
|Richard
 DeLater, Director           | Jeffrey L.
 Zwicker, Director
|March 26,
 2009                      | March 26,
 2009              

57

---



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 (Deficit) Equity | 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, 2008 and 2007, and the
related consolidated statements of operations, changes in stockholders
(deficit) equity, 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, 2008 and 2007, 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 $9.6 million as of December 31, 2008, has had net losses of
approximately $14.5 million and $10.7 million for the years ended December 31,
2008 and 2007, respectively, has an accumulated deficit of approximately $30.4
million as of December 31, 2008. 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/ CCR LLP

Glastonbury,
Connecticut
March 26, 2009

F-1

---



HC INNOVATIONS, INC. AND SUBSIDIARIESConsolidated Balance Sheets 
December 31, 2008 and 2007

|                                                               |  |      |             |      |   |             |  
|-------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                               |  | 2008 |             | 2007 |  
|                                                               |  |      |             |      |  
|Assets                                                         |  |      |             |      |   |             |  
|Current
 assets:                                               |  |      |             |      |   |             |  
|Cash and cash equivalents                                      |  | $    | 393,982     |      | $ | 3,442,290   |  
|Accounts receivable, net                                       |  |      | 2,924,635   |      |   | 2,216,059   |  
|Prepaid expenses                                               |  |      | 99,825      |      |   | 546,027     |  
|                                                               |  |      |             |      |   |             |  
|Total current assets                                           |  |      | 3,418,442   |      |   | 6,204,376   |  
|                                                               |  |      |             |      |   |             |  
|Fixed
 assets, net                                             |  |      | 982,378     |      |   | 1,030,920   |  
|Capitalized
 software development costs, net                   |  |      | 806,913     |      |   | 2,217,975   |  
|Deferred
 issuance costs, net                                  |  |      |            |      |   | 648,485     |  
|Other assets                                                   |  |      | 81,753      |      |   | 80,782      |  
|                                                               |  |      |             |      |   |             |  
|Total assets                                                   |  | $    | 5,289,486   |      | $ | 10,182,538  |  
|                                                               |  |      |             |      |   |             |  
|Liabilities and Stockholders (Deficit)
 Equity                |  |      |             |      |   |             |  
|Current
 liabilities:                                          |  |      |             |      |   |             |  
|Lines of credit                                                |  | $    |            |      | $ | 200,000     |  
|Current portion of notes payable                               |  |      |            |      |   | 388,414     |  
|Current portion of capital lease
 obligations                  |  |      | 283,655     |      |   | 284,943     |  
|Convertible debentures, net of discounts                       |  |      | 6,319,074   |      |   | 4,069,140   |  
|Accounts payable                                               |  |      | 3,685,317   |      |   | 1,770,358   |  
|Accrued expenses                                               |  |      | 1,654,317   |      |   | 1,196,882   |  
|Deferred revenue                                               |  |      | 1,041,293   |      |   | 317,128     |  
|                                                               |  |      |             |      |   |             |  
|Total current liabilities                                      |  |      | 12,983,656  |      |   | 8,226,865   |  
|                                                               |  |      |             |      |   |             |  
|Notes
 payable, net of current portion                         |  |      | 731,244     |      |   |            |  
|Capital
 lease obligations, net of current portion             |  |      | 275,022     |      |   | 530,717     |  
|                                                               |  |      |             |      |   |             |  
|Total liabilities                                              |  | $    | 13,989,922  |      | $ | 8,757,582   |  
|                                                               |  |      |             |      |   |             |  
|                                                               |  |      |             |      |   |             |  
|Stockholders
 equity (deficit):                               |  |      |             |      |   |             |  
|Preferred stock, $.001 par value, 5,000,000
 shares authorized |  |      |            |      |   |            |  
|Common stock, $.001 par value, 100,000,000
 shares authorized  |  |      | 39,386      |      |   | 38,601      |  
|Stock subscriptions receivable                                 |  |      |            |      |   | (21,671     | )
|Additional paid-in capital                                     |  |      | 21,684,055  |      |   | 17,377,800  |  
|Deficit                                                        |  |      | (30,423,877 | )    |   | (15,969,774 | )
|                                                               |  |      |             |      |   |             |  
|Total stockholders (deficit) equity                           |  |      | (8,700,436  | )    |   | 1,424,956   |  
|                                                               |  |      |             |      |   |             |  
|Total liabilities and stockholders equity
 (deficit)          |  | $    | 5,289,486   |      | $ | 10,182,538  |  
|                                                               |  |      |             |      |   |             |  

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, 2008 and 2007

|                                                                                                |  |      |             |      |   |             |  
|----------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                                |  | 2008 |             | 2007 |  
|                                                                                                |  |      |             |      |   |             |  
|Net revenues                                                                                    |  | $    | 27,883,239  |      | $ | 12,880,723  |  
|                                                                                                |  |      |             |      |   |             |  
|Cost of services                                                                                |  |      | 18,403,810  |      |   | 12,480,408  |  
|Selling, general and administrative
 expenses                                                   |  |      | 18,242,444  |      |   | 10,169,374  |  
|Depreciation and amortization                                                                   |  |      | 557,714     |      |   | 460,888     |  
|                                                                                                |  |      |             |      |   |             |  
|                                                                                                |  |      | 37,203,968  |      |   | 23,110,670  |  
|                                                                                                |  |      |             |      |   |             |  
|Loss from operations                                                                            |  |      | (9,320,729  | )    |   | (10,229,947 | )
|                                                                                                |  |      |             |      |   |             |  
|Other income (expense)                                                                          |  |      |             |      |   |             |  
|Interest income                                                                                 |  |      |            |      |   | 61,838      |  
|Other income                                                                                    |  |      |            |      |   | 200         |  
|Amortization  beneficial conversion
 feature, discount on warrants and deferred issuance costs |  |      | (4,248,588  | )    |   |            |  
|Interest expense                                                                                |  |      | (884,786    | )    |   | (554,901    | )
|                                                                                                |  |      |             |      |   |             |  
|                                                                                                |  |      | (5,133,374  | )    |   | (492,863    | )
|                                                                                                |  |      |             |      |   |             |  
|Loss before provision for income taxes                                                          |  |      | (14,454,103 | )    |   | (10,722,810 | )
|                                                                                                |  |      |             |      |   |             |  
|Provision for income taxes                                                                      |  |      |            |      |   |            |  
|                                                                                                |  |      |             |      |   |             |  
|                                                                                               
|Net loss                                                                                        |  | $    | (14,454,103 | )    | $ | (10,722,810 | )
|                                                                                                |  |      |             |      |   |             |  
|                                                                                               
|Basic and diluted net loss per share                                                            |  | $    | (0.37       | )    | $ | (0.29       | )
|                                                                                                |  |      |             |      |   |             |  
|                                                                                               
|Weighted average common shares outstanding                                                      |  |      | 38,759,941  |      |   | 36,976,232  |  
|                                                                                                |  |      |             |      |   |             |  

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, 2008 and 2007                      
|                                                                     

|                                                                                                           |  |                |            |                  |   |        |                           |   |            |   |   |                                        |   |   |             |   |   |             |  
|---------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | ---------------- | - | ------ | ------------------------- | - | ---------- | - | - | -------------------------------------- | - | - | ----------- | - | - | ----------- | -
|                                                                                                           |  | Common Stock   |            | Paid-In
 Capital |   |        |                           |   |            |   |   | Total
 Stockholders
 Equity (Deficit) |  
|                                                                                                           |  | Shares
 Issued |            | Amount           |   |        | Subscriptions
 Receivable |   | Deficit    |   |  
|                                                                                                           |  |                |            |                  |   |        |                           |   |            |   |   |                                        |  
|Balance, January 1, 2007                                                                                   |  |                | 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 11)    |  |                | 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 11) |  |                | 950,000    |                  |   | 950    |                           |   | 1,056,643  |   |   |                                       |   |   |            |   |   | 1,057,593   |  
|Common stock issued in connection with conversion of debentures (Note
 8)                                  |  |                | 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
11)                                      |  |                |           |                  |   |       |                           |   | 331,940    |   |   |                                       |   |   |            |   |   | 331,940     |  
|Issuance of common stock in connection with consulting services (Note
 11)                                 |  |                | 30,000     |                  |   | 30     |                           |   | 104,970    |   |   |                                       |   |   |            |   |   | 105,000     |  
|Common stock and warrants issued in connection with exercise of
 warrants, net of issuance costs (Note 11) |  |                | 550,000    |                  |   | 550    |                           |   | 618,140    |   |   |                                       |   |   |            |   |   | 618,690     |  
|Common stock and warrants issued in connection with private placement,
 net of issuance costs (Note 11)    |  |                | 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 11)    |  |                | 250,000    |                  |   | 250    |                           |   | 499,750    |   |   |                                       |   |   |            |   |   | 500,000     |  
|Issuance of common stock in connection with consulting services (Note
 11)                                 |  |                | 133,000    |                  |   | 133    |                           |   | 365,617    |   |   |                                       |   |   |            |   |   | 365,750     |  
|Beneficial conversion discount (Note 8)                                                                    |  |                |           |                  |   |       |                           |   | 2,166,000  |   |   |                                       |   |   |            |   |   | 2,166,000   |  
|Issuance of warrants to advisor in connection with convertible
 debentures (Note 8)                        |  |                |           |                  |   |       |                           |   | 281,279    |   |   |                                       |   |   |            |   |   | 281,279     |  
|Issuance of warrants to investors in connection with convertible
 debentures (Note 8)                      |  |                |           |                  |   |       |                           |   | 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   |  
|                                                                                                           |  |                |            |                  |   |        |                           |   |            |   |   |                                        |   |   |             |   |   |             |  
|Issuance of warrants in connection with consulting services (Note
11)                                      |  |                |           |                  |   |       |                           |   | 114,591    |   |   |                                       |   |   |            |   |   | 114,591     |  
|Issuance of common stock (Note 11)                                                                         |  |                | 285,000    |                  |   | 285    |                           |   | 117,465    |   |   |                                       |   |   |            |   |   | 117,750     |  
|Issuance of options to directors (Note 11)                                                                 |  |                |           |                  |   |       |                           |   | 421,364    |   |   |                                       |   |   |            |   |   | 421,364     |  
|Subscriptions receivable reversal                                                                          |  |                |           |                  |   |       |                           |   |           |   |   | 21,671                                 |   |   |            |   |   | 21,671      |  
|Issuance of common stock and warrants (Note 11)                                                            |  |                | 500,000    |                  |   | 500    |                           |   | 249,500    |   |   |                                       |   |   |            |   |   | 250,000     |  
|Issuance of options to employees (Note 11)                                                                 |  |                |           |                  |   |       |                           |   | 112,452    |   |   |                                       |   |   |            |   |   | 112,452     |  
|Issuance of options in connection with consulting services (Note
11)                                       |  |                |           |                  |   |       |                           |   | 7,463      |   |   |                                       |   |   |            |   |   | 7,463       |  
|Issuance of warrants to advisor in connection with convertible
 debentures (Note 8)                        |  |                |           |                  |   |       |                           |   | 45,435     |   |   |                                       |   |   |            |   |   | 45,435      |  
|Issuance of warrants issued for Senior Secured Note Holders (Note
8)                                       |  |                |           |                  |   |       |                           |   | 1,380,237  |   |   |                                       |   |   |            |   |   | 1,380,237   |  
|Beneficial conversion discount for Senior Secured Note Holders (Note
 8)                                   |  |                |           |                  |   |       |                           |   | 1,380,237  |   |   |                                       |   |   |            |   |   | 1,380,237   |  
|Beneficial conversion discount (Note 8)                                                                    |  |                |           |                  |   |       |                           |   | 359,000    |   |   |                                       |   |   |            |   |   | 359,000     |  
|Issuance of warrants in connection with convertible debentures (Note
 8)                                   |  |                |           |                  |   |       |                           |   | 118,511    |   |   |                                       |   |   |            |   |   | 118,511     |  
|Net loss                                                                                                   |  |                |           |                  |   |       |                           |   |           |   |   |                                       |   |   | (14,454,103 | ) |   | (14,454,103 | )
|                                                                                                           |  |                |            |                  |   |        |                           |   |            |   |   |                                        |   |   |             |   |   |             |  
|Balance, December 31, 2008                                                                                 |  |                | 39,385,407 |                  | $ | 39,386 |                           | $ | 21,684,055 |   | $ |                                       |   | $ | (30,423,877 | ) | $ | (8,700,436  | )
|                                                                                                           |  |                |            |                  |   |        |                           |   |            |   |   |                                        |   |   |             |   |   |             |  

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, 2008 and 2007

|                                                                                             |  |      |             |      |   |             |  
|-------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                             |  | 2008 |             | 2007 |  
|                                                                                             |  |      |             |      |  
|Cash flows from operating
 activities:                                                       |  |      |             |      |   |             |  
|Net loss                                                                                     |  | $    | (14,454,103 | )    | $ | (10,722,810 | )
|Adjustments to reconcile net loss to net cash used
in operating
 activities:                 |  |      |             |      |   |             |  
|Depreciation and amortization                                                                |  |      | 557,714     |      |   | 460,888     |  
|Impairment of capitalized software development
costs                                         |  |      | 1,352,446   |      |   |            |  
|Amortization of discount  convertible
debentures                                            |  |      |            |      |   | 213,233     |  
|Amortization of discount  warrants                                                          |  |      | 1,041,070   |      |   |            |  
|Amortization of beneficial conversion
discount                                               |  |      | 2,435,279   |      |   | 123,333     |  
|Amortization of deferred issuance costs                                                      |  |      | 772,237     |      |   |            |  
|Accrued interest  convertible
debentures                                                    |  |      | 826,568     |      |   |            |  
|Write off of subscription receivable                                                         |  |      | 21,671      |      |   |            |  
|Stock-based compensation                                                                     |  |      | 533,816     |      |   |            |  
|Consulting services expense- common stock                                                    |  |      | 117,750     |      |   | 196,438     |  
|Consulting services expense-warrants                                                         |  |      | 114,591     |      |   | 331,940     |  
|Consulting services expense-options                                                          |  |      | 7,463       |      |   |            |  
|Changes in operating assets and
liabilities:                                                 |  |      |             |      |   |             |  
|(Increase) decrease in:                                                                      |  |      |             |      |   |             |  
|Accounts
 receivable, net                                                                    |  |      | (708,576    | )    |   | (1,885,237  | )
|Prepaid
 expenses                                                                            |  |      | 446,202     |      |   | (129,441    | )
|Other
 assets                                                                                |  |      | (971        | )    |   | (15,516     | )
|Increase (decrease) in:                                                                      |  |      |             |      |   |             |  
|Accounts
 payable                                                                            |  |      | 1,914,959   |      |   | 272,142     |  
|Accrued
 expenses                                                                            |  |      | 457,437     |      |   | 1,342,728   |  
|Deferred
 revenue                                                                            |  |      | 724,165     |      |   | 241,187     |  
|                                                                                             |  |      |             |      |   |             |  
|Net cash used in operating
 activities                                                       |  |      | (3,840,282  | )    |   | (9,571,115  | )
|                                                                                             |  |      |             |      |   |             |  
|Cash flow from investing
 activities:                                                        |  |      |             |      |   |             |  
|Purchases of fixed assets, net                                                               |  |      | (219,580    | )    |   | (151,074    | )
|Expenditures for capitalized software development
costs                                      |  |      | (230,976    | )    |   | (1,126,508  | )
|                                                                                             |  |      |             |      |   |             |  
|Net cash used in investing
 activities                                                       |  |      | (450,556    | )    |   | (1,277,582  | )
|                                                                                             |  |      |             |      |   |             |  
|Cash flows from financing
 activities:                                                       |  |      |             |      |   |             |  
|Proceeds from issuance of common stock,
net                                                  |  |      | 250,000     |      |   | 8,346,283   |  
|Proceeds from issuance of convertible
debentures                                             |  |      | 1,185,000   |      |   | 5,000,000   |  
|Proceeds from notes payable                                                                  |  |      | 371,244     |      |   | 1,350,000   |  
|Payments on lines of credit                                                                  |  |      | (200,000    | )    |   |            |  
|Payments on convertible debentures                                                           |  |      |            |      |   | (50,000     | )
|Payments on notes payable                                                                    |  |      | (28,414     | )    |   | (82,174     | )
|Payments on capital lease obligations                                                        |  |      | (256,983    | )    |   | (151,731    | )
|Debt issuance costs paid                                                                     |  |      | (78,317     | )    |   | (272,925    | )
|                                                                                             |  |      |             |      |   |             |  
|Net cash provided by
 financing activities                                                   |  |      | 1,242,530   |      |   | 14,139,453  |  
|                                                                                             |  |      |             |      |   |             |  
|Net increase (decrease) in
 cash and cash equivalents                                        |  |      | (3,048,308  | )    |   | 3,290,756   |  
|Cash and cash equivalents -
 beginning of period                                             |  |      | 3,442,290   |      |   | 151,534     |  
|                                                                                             |  |      |             |      |   |             |  
|Cash and cash equivalents -
 end of period                                                   |  | $    | 393,982     |      | $ | 3,442,290   |  
|                                                                                             |  |      |             |      |   |             |  
|Supplemental cash flow
 information:                                                         |  |      |             |      |   |             |  
|Cash paid during the year for:                                                               |  |      |             |      |   |             |  
|Interest                                                                                     |  | $    | 14,624      |      | $ | 239,773     |  
|                                                                                             |  |      |             |      |   |             |  
|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   |  
|                                                                                             |  |      |             |      |   |             |  
|Discount on convertible debentures-
warrants                                                 |  | $    | 118,511     |      | $ |            |  
|                                                                                             |  |      |             |      |   |             |  
|Warrants issued for debt issuance costs                                                      |  | $    | 45,435      |      | $ | 281,278     |  
|                                                                                             |  |      |             |      |   |             |  
|Common stock issued in connection with conversion of
convertible
 debentures                 |  | $    |            |      | $ | 1,707,985   |  
|                                                                                             |  |      |             |      |   |             |  
|Common stock issued for prepaid consulting
services                                          |  | $    |            |      | $ | 274,312     |  
|                                                                                             |  |      |             |      |   |             |  
|Beneficial conversion discount on convertible
debentures-prior
 issuance                     |  | $    | 359,000     |      | $ | 2,166,000   |  
|                                                                                             |  |      |             |      |   |             |  
|Beneficial conversion discount on convertible
debentures-new issuance                        |  | $    | 1,380,236   |      | $ |            |  
|                                                                                             |  |      |             |      |   |             |  
|Discount on convertible debentures -
warrants                                                |  | $    | 1,380,236   |      | $ | 979,147     |  
|                                                                                             |  |      |             |      |   |             |  
|Computer equipment acquired through capital
lease                                            |  | $    |            |      | $ | 721,916     |  
|                                                                                             |  |      |             |      |   |             |  

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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 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, Illinois, Massachusetts
 and Tennessee and are managed exclusively by ECI. The LLCs also operated in
 New Jersey and Ohio, but exited these markets during 2008.                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 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, 2008 and 2007 of approximately $14.5 million and $10.7
 million, respectively. At December 31, 2008, the Company had a working
 capital deficiency of approximately $9.6 million and an accumulated deficit
 of approximately $30.4 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The
 cumulative losses to date are largely a result of business development and
 start up costs associated with expanding the Companys operations largely
 driven by new contracts as well as significant investment in building our
 corporate infrastructure to support the Companys expansion. The
 infrastructure expenses (selling, general and administrative) required to
 support these operations are a relatively fixed but significant. As we
 continue to expand our operation and grow our revenues the selling, general
 and administrative expenses are expected to remain relatively constant and we
 expect to become cash flow positive.                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | We will need
 additional financing and/or refinancing in the near term to fund our working
 capital needs and, therefore, are discussing potential financing alternatives
 with potential investors. Any financing that may be available to us is likely
 to be more expensive, and on less favorable terms, than previous financings
 and there is no assurance that future financings can be closed.                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Management
 believes that the Company will be successful in its efforts to adequately
 meet its capital needs and continue to grow its businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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 Emblem Health, Inc. (Emblem)
 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. As of December 31, 2008, the Company
 maintained these operations.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company
 has experienced growth in members under care within its Easy Care operations.
 During 2008, members under care increased by approximately 3,400 representing
 a 132% growth rate when compared to members under care at December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                 

F-8

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | 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 by the equity holders.

F-9

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Basis of
 Presentation (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | 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-10

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | 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. During the third quarter of 2008 the Company
 took a charge of $540,000 related to 2007 and 2008 fee-for-service
 receivables. Further, the Company does not expect the reasonably possible
 effects of a change in estimate related to unsettled December 31, 2008
 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, 2008, 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 2009 when, and if, the amount is both determinable
 and reasonably assured and is no longer subject to refund. Accordingly, the
 Company has deferred approximately $13,000 of revenue as of December 31, 2008
 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-11

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | 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, 2008, the
 Company was unable to determine the return on investment, and accordingly,
 deferred approximately $242,222 of revenue as of December 31, 2008. The
 Company will realize this revenue in 2009 when, and if, the amount is both
 determinable and reasonably assured and is no longer subject to refund.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | In addition,
 the Company deferred $776,876 related to the DOQ Care program as funds were
 received for services to be performed in the first quarter of 2009 at which
 time the revenue will be recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The useful
 lives for all of the fixed asset categories range from 3 to 5 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 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-12

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company
 accounts for 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 the Company may be required to
 recognize impairment charges in the future. No such impairments were
 identified in 2008 and 2007.

F-13

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Advertising                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Advertising
 costs are expensed as incurred. Advertising expense for the years ended
 December 31, 2008 and 2007 totaled approximately $96,000 and $28,000,
 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Stock-Based
 Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company
 applies the provisions of Statement of Financial Accounting Standards No. 123
 (Revised 2004), Share-Based Payment (SFAS 123R) to all share based
 payment awards made to employees and directors. SFAS 123R establishes
 accounting for equity instruments exchanged for employee services. Under the
 provisions of SFAS 123R, share based compensation is measured at the grant
 date, based upon the fair value of the award, and is recognized as an expense
 over the holders requisite service period (generally the vesting period of
 the equity award). The Company has expensed its share-based compensation for
 share based payments under the ratable method, which treats each vesting
 tranche as if it were an individual grant.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company
 periodically grants stock options for a fixed number of shares of common
 stock to its employees and directors. Stock options are granted with an
 exercise price greater than or equal to the fair market value of the
 Companys common stock at the date of the grant. The Company estimates the
 fair value of stock options using a Black-Scholes valuation model. Key inputs
 used to estimate the fair value of stock options include the exercise price
 of the award, the expected post-vesting option life, the expected volatility
 of the Companys stock over the options expected term, the risk free
 interest rate over the options expected term, and the expected annual
 dividend yield.                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company
 recognizes stock-based compensation expense for the number of awards that are
 ultimately expected to vest. As a result, recognized stock compensation is
 reduced for estimated forfeitures prior to vesting. The Companys estimate of
 annual forfeiture rates was approximately 7%. Estimated forfeitures will be
 reassessed in subsequent periods and may change based on new facts and
 circumstances.                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | 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-14

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 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 2008
 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 anti-dilutive.
 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 anti-dilutive
 and, as such, basic and diluted earnings (loss) per share are the same for
 the years ended December 31, 2008 and 2007.

F-15

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Recently
 Adopted Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In September
 2006, the FASB issued SFAS No. 157, Fair
 Value Measurements (SFAS 157), which defines fair value,
 establishes a framework for measuring fair value in US GAAP and expands
 disclosures about fair value measurements. SFAS 157 does not require any
 new fair value measurements but rather eliminates inconsistencies in guidance
 found in various prior accounting pronouncements. In February 2008, the
 FASB issued FASB Staff Position No. 157-2, which deferred the effective date
 for all nonfinancial assets and nonfinancial liabilities, except those that
 are recognized or disclosed at fair value in the financial statements on a
 recurring basis, until fiscal years beginning after November 15, 2008, and
 interim periods within those fiscal years. These nonfinancial items
 include assets and liabilities such as reporting units measured at fair value
 in goodwill impairment tests and nonfinancial assets acquired and liabilities
 assumed in a business combination. The Company adopted SFAS 157 for
 financial assets and liabilities recognized at fair value on recurring bases
 effective January 1, 2008. The partial adoption of SFAS 157 for
 financial assets and liabilities did not have a material effect on the
 Companys consolidated financial position, results of operations or cash
 flows.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In February
 2007, the FASB issued SFAS No. 159, The
 Fair Value Option for Financial Assets and Financial Liabilities
 (SFAS 159). Under SFAS 159, companies may elect to measure certain
 financial instruments and certain other items at fair value. The
 standard requires that unrealized gains and losses on items for which the
 fair value option has been elected be reported in operations. SFAS 159 was
 effective for the Company beginning in the first quarter of 2008. The Company
 has not elected to fair value any eligible items throughout 2008. Therefore,
 the adoption of SFAS 159 did not affect the Companys consolidated financial
 position, results of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-16

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Accounting
 Standards Not Yet Adopted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In December
 2007, the Financial Accounting Standards Board (FASB) issued Statement of
 Financial Accounting Standards No. 141 (Revised 2007), Business Combinations
 (SFAS 141R). Under SFAS 141R, an acquiring entity will be required to
 recognize all assets acquired and liabilities assumed in a transaction at
 fair value on the acquisition-date, with limited exceptions. SFAS 141R
 changes the accounting treatment and disclosure requirements for certain
 items in a business combination. For instance, acquisition-related costs,
 with the exception of debt or equity issuances costs are to be recognized as
 an expense in the period that the costs are incurred and the services are
 received. Currently, these costs are included as part of the purchase price
 and allocated to the assets required. SFAS 141R applies prospectively to
 business combinations for which the acquisition date is on or after the
 beginning of the first annual reporting period beginning after December 15,
 2008. Early adoption is prohibited.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In March
 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
 and Hedging Activities (SFAS 161), which changes the disclosure
 requirements for derivative instruments and hedging activities. SFAS 161
 requires enhanced disclosures about (a) how and why an entity uses derivative
 instruments, (b) how derivative instruments and related hedged items are
 accounted for under SFAS No. 133, Accounting for Derivative Instruments and
 Hedging Activities and its related interpretations, and (c) how derivative
 instruments and related hedged items affect an entitys financial position,
 financial performance, and cash flows. This Statement is effective for
 financial statements issued for fiscal years and interim periods beginning
 after November 15, 2008. Management has not yet completed its evaluation of
 the potential effect of the adoption of SFAS 160 on the Companys
 consolidated financial position, results of operations and cash flows.                                                

F-17

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Certain
 prior year amounts have been reclassified to conform to the current year
 presentation.                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   
|3. | 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, 2008, the Company had cash and cash equivalent balances on
 deposit that exceeded federal depository insurance limits by approximately
 $100,000.

F-18

---



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

|   |                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | 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, 2008 and 2007 is as follows:

|         |  |      |           |      |   |           | 
|-------- |  | ---- | --------- | ---- | - | --------- | 
|         |  | 2008 |           | 2007 |  
|         |  |      |           |      |  
|Medicare |  | $    | 310,246   |      | $ | 744,221   | 
|Medicaid |  |      | 12,042    |      |   | 82,044    | 
|Private  |  |      | 2,602,347 |      |   | 1,389,794 | 
|         |  |      |           |      |   |           | 
|         |  | $    | 2,924,635 |      | $ | 2,216,059 | 
|         |  |      |           |      |   |           | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. During
 the third quarter of 2008 the Company took a charge related to 2008 and 2007
 fee-for-services receivables. For the years ended December 31, 2008 and 2007,
 the direct write-offs totaled approximately $540,000 and $0, 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
 carrying value due to the use of market interest rates. The Companys
 financial instruments are held for other than trading purposes.

F-19

---



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

|   |                                                        
|-- | -------------------------------------------------------
|4. | Fixed Assets                                           
|   |                                                        
|   | At December
 31, 2008 and 2007 fixed assets consist of:

| |                                                  |  |      |           |      |   |           |  
| | ------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | -
| |                                                  |  | 2008 |           | 2007 |  
| |                                                  |  |      |           |      |  
|
| | Medical and
 office equipment                    |  | $    | 108,447   |      | $ | 95,734    |  
| | Furniture
 and fixtures                          |  |      | 96,143    |      |   | 93,172    |  
| | Computer
 equipment                              |  |      | 1,227,529 |      |   | 1,049,228 |  
| | Leasehold
 improvements                          |  |      | 88,525    |      |   | 88,525    |  
| | Computer
 software                               |  |      | 25,595    |      |   |          |  
| |                                                  |  |      |           |      |   |           |  
| |                                                  |  |      | 1,546,239 |      |   | 1,326,659 |  
| | Less:
 accumulated depreciation and amortization |  |      | (563,861  | )    |   | (295,739  | )
| |                                                  |  |      |           |      |   |           |  
| |                                                  |  | $    | 982,378   |      | $ | 1,030,920 |  
| |                                                  |  |      |           |      |   |           |  

| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation
 and amortization expense related to fixed assets totaled approximately
 $268,122 and $135,000 for the years ended December 31, 2008 and 2007,
 respectively.

F-20

---



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

|   |                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------
|5. | Capitalized Software Development Costs                                                               
|   |                                                                                                      
|   | Capitalized
 software development costs as of December 31, 2008, and 2007 are summarized
 as follows:

|                                        |  |      |           |      |   |           |  
|--------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                        |  | 2008 |           | 2007 |  
|                                        |  |      |           |      |  
|                                        |  |      |           |      |   |           |  
|Capitalized
 software development costs |  | $    | 1,491,622 |      | $ | 2,613,092 |  
|Less:
 accumulated amortization         |  |      | (684,709  | )    |   | (395,117  | )
|                                        |  |      |           |      |   |           |  
|                                        |  |      |           |      |   |           |  
|                                        |  | $    | 806,913   |      | $ | 2,217,975 |  
|                                        |  |      |           |      |   |           |  

|   |                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Amortization
 expense related to capitalized software development costs for the years ended
 December 31, 2008 and 2007 totaled approximately $289,592 and $219,000
 respectively.                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                         
|   | During the
 fourth quarter of 2008, the Company took an impairment charge of $1,352,446
 for the NP Care internally developed software asset that was not considered
 to have any significant future economic benefit. This expense is included
 within the selling, general and administrative line in the accompanying
 consolidated statements of operations as of December 31, 2008.
|   |                                                                                                                                                                                                                                                                                                                                                                                         
|6. | Lines of Credit                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                         
|   | At December
 31, 2008 and 2007, the Company had the following line-of-credit facilities
 outstanding:                                                                                                                                                                                                                                                                                   

|                                                                                                                                                                                                                                   |  |      |   |      |   |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | ---- | - | ------- | 
|                                                                                                                                                                                                                                   |  | 2008 |   | 2007 |  
|                                                                                                                                                                                                                                   |  |      |   |      |  
|Revolving line-of-credit dated January 29,
 2003 with interest at the rate of prime plus 1% (4.25% at December 31, 2008).
 The amount outstanding is due on demand and is collateralized by the assets
 of ECI.                    |  | $    |  |      | $ | 50,000  | 
|Revolving line-of-credit dated February 23,
 2004 with interest at prime plus 1.75% (5% at December 31, 2008). The amount
 outstanding is due on demand is secured by the personal assets of the
 managing member of NP Care, LLC. |  | $    |  |      | $ | 150,000 | 
|                                                                                                                                                                                                                                   |  |      |   |      |   |         | 
|                                                                                                                                                                                                                                   |  |      |   |      |   |         | 
|                                                                                                                                                                                                                                   |  | $    |  |      | $ | 200,000 | 
|                                                                                                                                                                                                                                   |  |      |   |      |   |         | 

F-21

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7. | 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, 2008 and 2007 was
 $558,677 and $642,757, respectively. Depreciation expense related to capital
 lease assets totaled approximately $82,252 and $120,000 for the years ended
 December 31, 2008 and 2007 respectively. The future minimum lease payments
 and the present value of the payments at December 31, 2008 are as follows:

|                                            |  |   |          |   | 
|------------------------------------------- |  | - | -------- | - | 
|                                            |  |   |          |   | 
|Years
 Ending 
 December 31,                |  |   |          |   | 
|                                            |  |   |          |   | 
|                                            |  |   |          |  
|2009                                        |  | $ | 322,825  |  
|2010                                        |  |   | 251,668  |  
|2011                                        |  |   | 32,279   |  
|2012                                        |  |   | 14,370   |  
|                                            |  |   |          |  
|                                            |  |   |          |  
|Total minimum lease payments                |  |   | 621,142  |  
|                                            |  |   |          |  
|Less: amount representing interest          |  |   | (62,465  | )
|                                            |  |   |          |  
|                                            |  |   |          |  
|Present value of net minimum lease payments |  |   | 558,677  |  
|                                            |  |   |          |  
|Less: current portion of principal          |  |   | (283,655 | )
|                                            |  |   |          |  
|                                            |  | $ | 275,022  |  
|                                            |  |   |          |  

F-22

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. | Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Note Payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company
 had a Small Business Administration loan dated September 4, 2003. The
 original principal balance of the loan was $150,000 and was intended to be
 used to fund general operations. The loan agreement provided for sixty
 monthly principal and interest installments of $2,924 and beared interest at
 6.25% per annum. The loan matured on October 1, 2008 and was secured by the
 personal residence of the Companys Chief Executive Officer. At December 31,
 2008 and 2007, the principal balance due on the loan was $0 and $28,414,
 respectively.

F-23

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|   |                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |                                                                                                                                                                                                 
|8. | Debt (continued)                                                                                                                                                                                
|   |                                                                                                                                                                                                 
|   | Notes
 payable  related parties                                                                                                                                                                
|   |                                                                                                                                                                                                 
|   | The Company
 has promissory notes payable to the Companys Chief Executive Officer as of
 December 31, 2008 and his relative which are intended as bridge loans until
 HCI financing is secured.
|   |                                                                                                                                                                                                 
|   | Accrued
 interest on the notes payable to the Chief Executive Officer and his
 relatives, as of December 31, 2008 and 2007, was approximately $62,903 and
 $32,000, respectively.               

|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | 
|                                                                                                                                                                                                                                                                                   |  | December 31, |        
|                                                                                                                                                                                                                                                                                   |  | 2008         |         | 2007 |  
|                                                                                                                                                                                                                                                                                   |  |              |         |      |  
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|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 May 31, 2010. Interest accrues at the
 rate of 10% per annum.                                                         |  | $            | 107,134 |      | $ | 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 May 31, 2010. Interest accrues at the
 rate of 10% per annum.                                                          |  |              | 61,528  |      |   | 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 May 31, 2010. Interest accrues at the
 rate of 10% per annum.                                                        |  |              | 115,937 |      |   | 95,000  | 
|On May 27, 2008, the Company entered into a
 promissory note with an original due date of May 31, 2009. The original due
 date was extended through May 31, 2010. Interest accrues at the rate of 10%
 per annum through January 31, 2009 and then at an annual rate of 12%.       |  |              | 103,498 |      |   |        | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|                                                                                                                                                                                                                                                                                   |  | $            | 388,097 |      | $ | 235,000 | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|Notes payable  other                                                                                                                                                                                                                                                              |  |              |         |      |   |         | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|On May 27, 2008, the Company entered into
 four promissory notes with an original due date of May 31, 2009. The original
 due date was extended through May 31, 2010. Interest accrues at the rate of
 10% per annum through January 31, 2009 and then at an annual rate of 12%.   |  | $            | 181,072 |      | $ |        | 
|On February 20, 2006, the Company entered
 into a promissory note with an original due date of May 20, 2006. The
 original due date was extended through May 31, 2010. Interest accrues at the
 rate of 10% per annum through January 31, 2009 and then at an annual rate of
 12%. |  |              | 162,075 |      |   | 125,000 | 
|On September 4, 2003, the Company entered
 into a Small Business Administration loan with a due date of October 1, 2008.
 Interest accrues at the rate of 6.25% per annum.                                                                                                         |  |              |        |      |   | 28,414  | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|                                                                                                                                                                                                                                                                                   |  | $            | 343,147 |      | $ | 153,414 | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 
|Total Notes Payable                                                                                                                                                                                                                                                                |  | $            | 731,244 |      | $ | 388,414 | 
|                                                                                                                                                                                                                                                                                   |  |              |         |      |   |         | 

Notes payable of $731,244 as of December 31,
2008 are all due in 2010 with no principal payments due in 2009.

F-24

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|   |                 
|-- | ----------------
|  
|   |                 
|8. | 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 was approximately $35,000, and 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 have been fully amortized at December 31, 2007 due to a refinancing
activity on the convertible debentures. Amortization expense relating to
deferred issuance costs totaled approximately $8,500 for the year ended
December 31, 2007.

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 was approximately $101,000, 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
costs have been fully amortized at December 31, 2007 due to a refinancing
activity on the convertible debentures. Amortization expense relating to the
deferred issuance costs totaled approximately $43,000 for the year ended
December 31, 2007.

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.

F-25

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|   |                 
|-- | ----------------
|  
|  
|8. | Debt (continued)

Convertible
Debentures (continued)

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 as of December 31, 2007. 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, 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 Company
incurred $671,278 in 2007 in deferred issuance costs relating to the issuance
of the convertible notes.

At December
31, 2007, the unamortized balance of the beneficial conversion features was
$2,042,667, the unamortized balance of the warrant discounts was $902,958, and
the unamortized balance of deferred issuance costs was $648,485.

The Company
issued $985,000 in twelve month, 10% interest, senior secured convertible notes
to ten private investors during the first six months of 2008. The Company
issued $250,000 of the $985,000 convertible notes to its non-executive
Chairman. Each of the investors have represented in writing that they are
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% 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 (as defined below) 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. In connection with the sale of $985,000 of convertible notes
the Company issued 98,500 warrants which are exercisable at any time prior to
expiration at a strike price equal to the strike price per share 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 consecutive trading days prior
to the expire date per share.

The warrants
had a fair value of $118,511 on the commitment date and were treated as a
discount on the debentures. 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 ranging from 165% to 168% and an expected life
equal to the contractual life of the warrants.

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 totaled $359,000
and was to be amortized as interest expense over the life of the debentures.

In connection
with the issuance of the $985,000 in convertible notes, the Company issued
48,665 warrants to purchase its common stock to a financial advisor. The
warrants had a fair value of $45,435 on the commitment date and were treated as
a deferred issuance cost to be amortized to expense over the life of the
debentures. 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 ranging from 152% to 168% and an expected life equal to the
contractual life of the warrants.

The warrants
have a five year maturity date from the date of the debenture 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 (the Securities) generating gross
proceeds to the Company (excluding the principal amount of any notes tendered
in connection therewith) of at least $10,000,000.

The features
of the convertible notes 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 notes should be separately accounted for as derivatives and that
the warrants meet the tests for equity classification.

F-26

---



|   |                 
|-- | ----------------
|8. | Debt (continued)

Convertible
Debentures (continued)

The
Company entered into a Securities Amendment and Purchase Agreement dated
December 23, 2008 (the Agreement) pursuant to which certain holders (the
Holders) of certain senior secured promissory notes (the Notes) previously
issued by the Company agreed to amend the Notes (Amended Notes) to provide
for the extension of the maturity date. The Amended Notes shall mature on
either (a) the earlier of (x) May 31, 2009, or (y) the closing date of a
Qualifying Transaction; (b) in the event no Markman Group Transaction (as such
term is defined in the Agreement) closes by the earliest maturity date
currently in effect of any of the Markman Group Notes, then the New Maturity
Date shall mean the same date as such earliest maturity date of any of the
Markman Group Notes; or (c) in the event no Qualifying Transaction closes by
May 31, 2009, then the New Maturity Date shall mean May 30, 2010, subject to
the terms of the Agreement. The Agreement further provided that payment of the
Amended Notes shall be secured by a first ranking security interest over all
assets of the Company and its subsidiaries. The Amended Notes shall carry
compounding interest of 1% per month (the Interest). Interest shall be
payable at the New Maturity Date of the Amended Notes.

The
Agreement also provided that in the event that a Qualifying Transaction does
not close by May 31, 2009, at any time after such date, the Holders may convert
their Amended Notes plus accrued interest into the Companys common stock at a
conversion rate of $0.20 per share. The Amended Notes also provided for 100%
warrant coverage of the face value of the Amended Notes, plus Interest,
exercisable at $0.30 per share (the Warrants). The Warrants shall be
exercisable after May 31, 2009 (in the event a Qualifying Transaction does not
close) for a period of five years. The Company shall endeavor to seek
shareholder approval for an increase in its authorized shares of common stock,
sufficient to permit the exercise of the Warrants.

Further,
pursuant to certain provisions in the Agreement, the Company and all of its
subsidiaries also entered into a Guarantee and Amended and Restated Security
Agreement dated December 23, 2008 (the Guarantee and Security Agreement)
wherein the Company and all of its subsidiaries guaranteed the payment of the
Amended Notes, subject to certain conditions set forth in the Guarantee and
Security Agreement. The Company also agreed to register the common stock
underlying the securities issued to the Holders under the Agreement.

The
Company had previously issued to the Noteholders certain secured convertible
promissory notes in the aggregate principal amount of $7,999,765 as of December
22, 2008, plus accrued interest of $826,568, plus a balance on a previously
held line of credit of $200,000, with a total obligation of $9,026,333 as of
December 31, 2008. The Notes have an interest rate of 12% effective December
23, 2008.

The
Company also included warrants within the above transaction for rights to
purchase an aggregate of 25,817,057 shares of Common Stock of the Company at
$0.30 per share. The warrants had a fair value of $1,679,544 on the commitment
date, each warrant option having a value of $0.13 per share and a probability
of vesting of 50%. The fair value of the warrants was determined by using the
Black-Scholes model assuming a stock price of $0.20, a risk free interest rate
of 1.53%, volatility of 89% and an expected life of 5.44 years, which is equal
to the contractual life of the warrants.

Based
upon the above fair value of the warrants as a percentage of the sum of total
value of debt issued with the warrants plus the fair value of the warrants, the
beneficial conversion discount was calculated to be $1,380,237 and is included
within the accompanying consolidated statements of changes in stockholders
equity (deficit) as of December 31, 2008. In addition, the fair value of the
warrants recorded by the Company was calculated to be $1,380,237 and is
included within the accompanying consolidated statements of changes in
stockholders equity (deficit) as of December 31, 2008. This is in accordance
with EITF 00-27, Application of Issue 98-5 to Certain Convertible Instruments.

At
December 31, 2008, the unamortized balance of the beneficial conversion
features was $1,346,625 and the unamortized balance of the warrant discounts
was $1,360,634. Amortization related to the discounts for the beneficial
conversion features and warrants totaled $2,435,279 and $1,041,070 for the year
ended December 2008, respectively.

Due
to the characteristics of the convertible features within the instruments of
the above recapitalization, the Company may require the Board of Directors to
authorize another level of common shares subsequent to December 31, 2008.

F-27

---



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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|9. | 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, 2008 and 2007:                                                                                                                                                                                                                                                                                                             

|                                           |  |      |            |      |   |            |  
|------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | -
|                                           |  | 2008 |            | 2007 |  
|                                           |  |      |            |      |  
|Gross patient service revenue              |  | $    | 14,194,479 |      | $ | 11,561,755 |  
|Less: provision for contractual allowances |  |      | (5,315,186 | )    |   | (4,565,333 | )
|                                           |  |      |            |      |   |            |  
|Net patient service revenue                |  |      | 8,879,293  |      |   | 6,996,422  |  
|Capitated contract revenue                 |  |      | 19,003,946 |      |   | 5,884,301  |  
|                                           |  |      |            |      |   |            |  
|Total net revenue                          |  | $    | 27,883,239 |      | $ | 12,880,723 |  
|                                           |  |      |            |      |   |            |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10. | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | As of
 December 31 2008 and 2007, the Company had net operating loss carry forwards
 for federal and state income tax purposes of approximately $22.6 million and
 $9.3 million respectively, which is available to offset future taxable
 income, if any, through 2028. The available net operating loss carry forwards
 resulted in a deferred tax asset of approximately $9.7 million and $3.8
 million at December 31, 2008 and 2007, respectively. Management has
 established a 100% valuation allowance against the deferred tax asset created
 by the available net operating loss carry forwards at December 31, 2008. In
 assessing the need for a valuation allowance, the Company estimates future
 taxable income, considering the feasibility of ongoing tax planning

F-28

---



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

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10. | Income Taxes (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | strategies
 and the realizability of tax loss carry forwards. 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 $5.9 million and $2.2
 million during the years ended December 31, 2008 and 2007, 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, |       
|                                          |  |              |       
|                                          |  | 2008         |        | 2007 | 
|                                          |  |              |        |      | 
|Statutory
 federal tax rate               |  |              | (34.00 | )%   |  | (34.00 | )%
|State income
 tax, net of federal benefit |  |              | (7.32  | )    |  | (5.59  | ) 
|Permanent
 differences                    |  |              | 4.39   |      |  | 1.48   |   
|Deferred tax
 state rate change           |  |              | (6.52  | )    |  | (5.54  | ) 
|Deferred tax
 asset valuation allowance   |  |              | 43.45  |      |  | 43.65  |   
|                                          |  |              |        |      |  |        |   
|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 December 31, 2008 remain open to examination by the U.S.
 Internal Revenue Service and state authorities.                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The Company
 recognizes interest accrued related to unrecognized tax benefits and
 penalties, if incurred, as a component of income tax expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-29

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

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11. | 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-30

---



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

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11. | 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-31

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

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11. | 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 statements 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | During 2008,
 the Company issued 500,000 shares of common stock with a fair value totaling
 $250,000 along with 500,000 warrants in a private placement. The warrants
 have a 5 year maturity life and were issued with a strike price of $0.50.                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | During 2008,
 the Company issued 15,000, 250,000 and 20,000 shares to consultants for
 services rendered. The Company valued the services at $117,750 based on the
 fair value of the Companys stock price on the measurement date.                                                                                                                                                                                                                

F-32

---



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

|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|11. | Stockholders Equity (Deficit) (continued)                                                   
|    |                                                                                              
|    | Warrants                                                                                     
|    |                                                                                              
|    | A summary of
 warrant activity for the years ended December 31, 2008 and 2007 is as
 follows:

|                                  |  |            |   |       |      |                          |   |                                |  |     | 
|--------------------------------- |  | ---------- | - | ----- | ---- | ------------------------ | - | ------------------------------ |  | --- | 
|                                  |  | Warrants   |   | Price |      | Weighted
 Average
 Price |   | Weighted
 Average Life (Years) | 
|                                  |  |            |   |       |      |                          |   |                                | 
|                                  |  |            |   |       |      |                          |   |                                |  |     | 
|Balance
 January 1, 2007          |  | 1,956,400  |   | $     | 1.25 |                          | $ | 1.25                           |  | 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    |   |       | 0.85 |                          |   | 0.85                           |  |     | 
|Exercised                         |  | (1,500,000 | ) |       | 1.25 |                          |   | 1.25                           |  |     | 
|                                  |  |            |   |       |      |                          |   |                                |  |     | 
|                                 
|Balance
 December 31, 2007        |  | 5,068,210  |   |       |      |                          | $ | 1.88                           |  | 3.0 | 
|                                  |  |            |   |       |      |                          |   |                                |  |     | 
|                                  |  |            |   |       |      |                          |   |                                |  |     | 
|Issued                            |  | 147,165    |   |       | 0.85 |                          |   | 0.85                           |  |     | 
|Issued                            |  | 40,000     |   |       | 1.10 |                          |   | 1.10                           |  |     | 
|Issued                            |  | 20,000     |   |       | 1.35 |                          |   | 1.35                           |  |     | 
|Issued                            |  | 40,000     |   |       | 1.20 |                          |   | 1.20                           |  |     | 
|Issued                            |  | 500,000    |   |       | 0.50 |                          |   | 0.50                           |  |     | 
|Issued                            |  | 180,000    |   |       | 1.35 |                          |   | 1.35                           |  |     | 
|Issued                            |  | 25,817,057 |   |       | 0.30 |                          |   | 0.30                           |  |     | 
|                                  |  |            |   |       |      |                          |   |                                |  |     | 
|                                  |  |            |   |       |      |                          |   |                                |  |     | 
|Balance
 December 31, 2008        |  | 31,812,432 |   |       |      |                          | $ | 0.57                           |  | 5.0 | 
|                                  |  |            |   |       |      |                          |   |                                |  |     | 
|Exercisable
 at December 31, 2008 |  | 5,995,375  |   |       |      |                          | $ | 0.33                           |  | 0.6 | 
|                                  |  |            |   |       |      |                          |   |                                |  |     | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In February
 of 2008, the Company entered into a consulting agreement with an investment
 advisor whereby the investment advisor would provide management consulting
 services in addition to investment advisory services. The consulting
 agreement had an initial six month term with terms requiring monthly cash
 payments of $15,000 and monthly awards of 20,000 warrants to purchase the
 Companys common stock and was terminated in June 2008. During 2008, the
 Company incurred cash expenses of $60,000 related to this consulting
 agreement. The Company and advisor mutually agreed to forgo the cash payment
 of $15,000 due in June. The Company issued 100,000 common stock warrants to
 this financial advisor in connection with this agreement. The Company valued
 the warrants using the Black-Scholes model at $112,014 assuming exercise
 prices ranging from $1.10 and $1.35 from February through June 2008,
 respectively, a risk free interest rate of 5%, volatility of 168% and a term
 equal to the contractual life of the warrants. These transactions resulted in
 charges to additional paid in capital.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In 2008, the
 Company issued 180,000 warrants for consulting services. The fair value of
 the warrants were determined using the Black-Sholes model assuming an
 exercise price of $1.35, risk free interest rate of 1.76%, volatility of 89%
 and a 2 year term. The Company valued the services at $9,477 and recorded an
 expense of $2,580 for the year ended December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 aggregate intrinsic value of warrants outstanding and exercisable at December
 31, 2008 totaled $-0-. 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, 2008, which would have
 been received by the warrant holders had those warrant holders exercised
 their warrants as of that date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Stock
 Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | On March 25,
 2008, the Company adopted the 2008 Stock Incentive Plan (the Plan). The
 purpose of the Plan is to promote the long-term growth and profitability of
 the Company by enabling the Company to attract, retain and reward the best
 available persons for positions of substantial responsibility within the
 Company or certain affiliates of the Company. Under the Plan, eligible
 participants may be awarded options to purchase common stock of the Company.
 The Board has authority to administer the Plan and has delegated this
 authority to the Compensation Committee of the Board. In addition, the Board
 or the Compensation Committee may delegate duties to the Companys chief
 executive officer of other senior officers of the Company, to the extent
 permitted by law and the Companys Bylaws. Employees, officers, directors and
 consultants of the Company, or of certain affiliates of the Company, are
 eligible to participate in the Plan. However, the actual recipients of awards
 under the Plan are selected by the Board or the Compensation Committee. The Plan
 authorizes the granting of awards for up to a maximum of six million nine
 hundred forty eight thousand seventy three (6,948,073) shares of common stock
 of the Company. If any award granted under the Plan expires, terminates or is
 forfeited, surrendered or canceled, without delivery (or, in the case of
 restricted shares, vesting) of common stock or other consideration, the
 common stock of the Company that were underlying the award shall again be
 available under the Plan.

F-33

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11. | Stockholders Equity (Deficit) (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Stock
 Options (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On March 28,
 2008, the Board of Directors of the Company granted 1,050,000 nonqualified
 stock options to certain non-employee directors of the Company (collectively,
 the Non-Employee Director Options). The Non-Employee Director Options were
 granted pursuant to the Companys Plan. A portion of the Non-Employee
 Director Options vested at grant with the balance vesting over a four-year
 period beginning on the first anniversary of the initial grant date and will
 expire on March 28, 2012. The exercise price per share payable upon the
 exercise of each of the Non-Employee Director Options is $1.22 which is equal
 to the fair market value as of March 28, 2008 of the Companys common stock
 as determined by the March 28, 2008 closing price of the Companys common
 stock. The fair value of the stock options were determined using the
 Black-Scholes model assuming an exercise price of $1.22, risk free interest
 rate of 5%, volatility of 165% and a term equal to the contractual life of
 the stock options. As the result of the resignation of one of the Companys
 non-executive directors in the three month period ending June 30, 2008,
 200,000 options were forfeited.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | In the third
 quarter of 2008, the Chairman and non-executive director of the Company
 resigned, and with that resignation forfeited 200,000 options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Also, in the
 third quarter of 2008, the Board approved a stock option grant for several
 employees of the Company. The fair value of the stock options were determined
 using the Black-Sholes model assuming an exercise price of $1.01, risk free
 interest rate of 3.3%, volatility of 89% and a 6 year term. The total stock
 option grant was for 775,000 options. Subsequent to the grant certain
 individuals resigned from employment, forfeiting 100,000 options. Within this
 same issuance was an additional 75,000 shares approved for consulting
 services, which was valued using the same Black-Sholes model assumptions as
 was described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Additionally,
 in the third quarter of 2008, the Board approved a stock option grant for
 consulting services for the Company. The fair value of the stock options were
 determined using the Black-Sholes model assuming an exercise price of $0.75,
 risk free interest rate of 3.3%, volatility of 89% and a 3 year term. The
 total stock option grant was for 24,000 options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | In the
 fourth quarter of 2008, the Board approved stock option grants to additional
 employees of the Company. The fair value of the stock options were determined
 using the Black-Sholes model assuming an exercise price ranging from $0.44 to
 $1.01, risk free interest rate ranging from 1.8% to 3.3%, volatility of 89%
 and a 6 year term. The total stock option grant was for 1,040,000 options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Share
 information related to options granted under the above issuances is as
 follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                   |  |                  |           |                |   |      | 
|---------------------------------- |  | ---------------- | --------- | -------------- | - | ---- | 
|                                   |  | Weighted Average |          
|                                   |  | Options Granted  |           | Exercise Price |  
|                                   |  |                  |           |                |  
|                                   |  |                  |           |                |   |      | 
|Outstanding
 at January 1, 2008    |  |                  | 0         |                | $ | 0    | 
|                                   |  |                  |           |                |   |      | 
|Granted Q1                         |  |                  | 1,050,000 |                | $ | 1.22 | 
|Granted Q3                         |  |                  | 874,000   |                | $ | 1.00 | 
|Granted Q4                         |  |                  | 1,040,000 |                | $ | 0.63 | 
|Forfeited Q2                       |  |                  | (200,000  | )              | $ | 1.22 | 
|Forfeited Q3                       |  |                  | (300,000  | )              | $ | 1.15 | 
|Forfeited Q4                       |  |                  | (75,000   | )              | $ | 1.01 | 
|Exercised                          |  |                  | 0         |                | $ | 0    | 
|                                   |  |                  |           |                |   |      | 
|Outstanding
 at December 31, 2008  |  |                  | 2,389,000 |                | $ | 0.90 | 
|                                   |  |                  |           |                |   |      | 
|                                   |  |                  |           |                |   |      | 
|Available
 for future grant        |  |                  | 4,559,073 |                |   |      | 
|                                   |  |                  |           |                |   |      | 
|Average
 remaining term (years)    |  |                  | 9.61      |                |   |      | 
|                                   |  |                  |           |                |   |      | 
|Exercisable
 at December 31, 2008: |  |                  | 360,000   |                | $ | 1.05 | 
|                                   |  |                  |           |                |   |      | 
|Intrinsic
 Value:                  |  |                  |           |                |   |      | 
|Outstanding                        |  |                  | 0         |                |   |      | 
|Exercisable                        |  |                  | 0         |                |   |      | 
|                                   |  |                  |           |                |   |      | 

F-34

---



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|11. | Stockholders Equity (Deficit) (continued)                                                                                                                   
|    |                                                                                                                                                              
|    | Stock
Options (continued)                                                                                                                                    
|    |                                                                                                                                                              
|    | The
 following table summarizes the components and classification of stock-based
 compensation expense included in the consolidated statements of operations.

|                                                                    |  |             |  |                  |  |                            |           |                 |         |              |   |          |  |      | 
|------------------------------------------------------------------- |  | ----------- |  | ---------------- |  | -------------------------- | --------- | --------------- | ------- | ------------ | - | -------- |  | ---- | 
|Stock
 options
 granted pursuant
 to the 2008
 Stock Incentive Plan |  | Grant
 Date |  | Options
 Granted |  | Fair Value
 on
 Grant Date |           | Vested
 Options |         | Compensation |   | Category | 
|                                                                    |  |             |  |                  |  |                            |           |                 |         |              |   |          | 
|Non-executive
 Directors                                            |  | 3/27/2008   |  | 1,050,000        |  | $                          | 1,271,953 |                 | 250,000 |              | $ | 421,634  |  | SG&A | 
|                                                                    |  |             |  |                  |  |                            |           |                 |         |              |   |          |  |      | 
|Stock
 options
 granted pursuant
 to the Third
 Quarter 2008        |  | Grant
 Date |  | Options
 Granted |  | Fair Value
 on
 Grant Date |           | Vested
 Options |         | Compensation |   | Category | 
|                                                                    |  |             |  |                  |  |                            |           |                 |         |              |   |          | 
|Employees                                                           |  | 7/18/2008   |  | 775,000          |  | $                          | 587,743   |                 |        |              | $ | 58,371   |  | SG&A | 
|Consultants                                                         |  | 7/18/2008   |  | 75,000           |  | $                          | 56,878    |                 |        |              | $ | 6,320    |  | SG&A | 
|Consultants                                                         |  | 8/01/2008   |  | 24,000           |  | $                          | 10,455    |                 | 10,000  |              | $ | 1,742    |  | SG&A | 
|                                                                    |  |             |  |                  |  |                            |           |                 |         |              |   |          |  |      | 
|Stock
 options
 granted pursuant
 to the Fourth
 Quarter 2008       |  | Grant
 Date |  | Options
 Granted |  | Fair Value
 on
 Grant Date |           | Vested
 Options |         | Compensation |   | Category | 
|                                                                    |  |             |  |                  |  |                            |           |                 |         |              |   |          | 
|Employees                                                           |  | 7/18/2008   |  | 10,000           |  | $                          | 7,584     |                 |        |              | $ | 790      |  | SG&A | 
|Employees                                                           |  | 10/6/2008   |  | 1,000,000        |  | $                          | 450,685   |                 | 100,000 |              | $ | 45,069   |  | SG&A | 
|Employees                                                           |  | 12/8/2008   |  | 30,000           |  | $                          | 7,697     |                 |        |              | $ | 160      |  | SG&A | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Additional
 compensation expense (net of estimated forfeitures of approximately $765,000)
 related to the unvested portion of stock options granted pursuant to the
 issuances totaled $1,094,593 as of December 31, 2008. Unvested compensation
 expense related to stock options granted pursuant to the 2008 Stock Incentive
 Plan is expected to be recognized over a remaining vesting period of 5 years.                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | As the
 Company has not achieved profitable operations, management has determined
 that it is more likely than not that the future benefits arising from any
 stock-based compensation will not be realized and has accordingly recorded a
 valuation allowance for the full amount of any resulting deferred tax assets.                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12. | 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 is not to exceed the employees deferral amount.
 Employer contributions are generally vested after 1 year of service with the
 Company. During 2008 and 2007, the Company contributed to the Plan for
 employees approximately $121,606 and $77,000, respectively.

F-35

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|    |                                                                                                               
|    |                                                                                                               
|13. | Business Segments                                                                                             
|    |                                                                                                               
|    | The
 Companys operations by business segment for the years ended December 31,
 2008 and 2007 were as follows:

|                             |  |                                        |            |                                          |   |            |   |   |             |  
|---------------------------- |  | -------------------------------------- | ---------- | ---------------------------------------- | - | ---------- | - | - | ----------- | -
|2008                         |  | Medical
 Management
 Systems -Facility |            | Specialty
 Care
 Management -
 Community |   | Total      |  
|                             |  |                                        |            |                                          |   |            |  
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|Net revenues                 |  | $                                      | 10,164,949 |                                          | $ | 17,718,290 |   | $ | 27,883,239  |  
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|Business
 Unit profit/(loss) |  |                                        | (2,787,668 | )                                        |   | 2,193,008  |   |   | (594,660    | )
|Corporate
 Overhead          |  |                                        |            |                                          |   |            |   |   | (8,726,069  | )
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|Operating
 profit/(loss)     |  |                                        |            |                                          |   |            |   |   | (9,320,729  | )
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|Identifiable
 assets         |  |                                        | 1,557,630  |                                          |   | 3,731,855  |   |   | 5,289,485   |  
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|2007                         |  | Medical
 Management
 Systems -Facility |            | Specialty
 Care
 Management -
 Community |   | Total      |  
|                             |  |                                        |            |                                          |   |            |  
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|Net revenues                 |  | $                                      | 7,449,034  |                                          | $ | 5,431,689  |   | $ | 12,880,723  |  
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|Business
 Unit profit/(loss) |  |                                        | (4,031,339 | )                                        |   | (958,054   | ) |   | (4,989,393  | )
|Corporate
 Overhead          |  |                                        |            |                                          |   |            |   |   | (5,240,554  | )
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|Operating
 profit/(loss)     |  |                                        |            |                                          |   |            |   |   | (10,229,947 | )
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|                             |  |                                        |            |                                          |   |            |   |   |             |  
|Identifiable
 assets         |  |                                        | 2,005,751  |                                          |   | 8,176,787  |   |   | 10,182,538  |  

F-36

---



HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|    |                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                      
|14. | Commitments and Contingencies                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                      
|    | 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, 2008 are as follows:

|                              |   |           |         | 
|----------------------------- | - | --------- | ------- | 
|Years
 Ending December 31,    |   |           |         | 
|                              |   |           |         | 
|                              |   |           |         | 
|2009                          |   | $         | 502,365 | 
|2010                          |   |           | 335,368 | 
|2011                          |   |           | 98,859  | 
|2012                          |   |           | 58,908  | 
|2013                          |   |           | 50,190  | 
|                              |   |           |         | 
|Total
 minimum lease payments | $ | 1,045,690 |        
|                              |   |           |         | 

Rent
expense for the years ended December 31, 2008 and 2007 totaled approximately
$497,153 and $448,000 respectively.

F-37

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HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|14. | Commitments and Contingencies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Accounts
 Payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company
 has entered into work out agreements with certain of its vendors in the
 normal course of operations. The work out agreements vary in terms of payment
 dates with interest ranging from 0% to 30%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|15. | Risks and Uncertainties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Patient
 Service Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Approximately
 84% and 47% of net patient services revenue in 2008 and 2007 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, 2008, no known malpractice
 claims have been asserted against the Company which, either individually or
 in the aggregate, are in excess of insurance coverage.                                                                                                                                                                                                                                                                                                                                                                                                         

F-38

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HC INNOVATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|16. | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On January
 25, 2009, the Company received notice from David Chess, M.D., Chief Executive
 Officer and Chairman of the Board of Directors, of his intention to resign
 from the position of Chief Executive Officer, effective January 25, 2009. Dr.
 Chess will continue as Chief Medical Officer of the Company. He will remain
 as a director of the Company. Dr. Chess will continue to focus on the
 long-term growth objectives of the Company and will remain intimately
 involved in business and product development, clinical protocols and investor
 relations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On February
 4, 2009, the Board of Directors (the Board) of the Company appointed Mr.
 Richard E. DeLater and Mr. Kenneth D. Lamé as members of the Board. The Board
 simultaneously accepted the resignation of Dr. David Chess, the Companys
 founder and Chief Medical Officer, from his position as Chairman of the
 Board, and appointed Mr. Lamé as the new Chairman of the Board and Acting
 CEO, and Dr. Chess as Vice-Chairman of the Board.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On February
 9, 2009, the Company executed three year employment agreements which set for
 the terms of Ms. Tina Bartelmays appointment as the Companys President and
 Chief Operating Officer and the terms of Mr. Brett Cohens appointment as the
 Companys Executive Vice-President.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Under the
 terms of the employment agreement, Ms. Bartelmay and Mr. Cohen are to receive
 annual compensation in the amount of $225,000 and $200,000, respectively, as
 well as an annual incentive compensation award, the amount of which shall be
 based upon performance targets, with earnings being a key performance target,
 and award levels determined by the Companys Chief Executive Officer, in
 accordance with the Companys annual incentive compensation plan or other
 incentive arrangements in effect from time to time. In addition, each of Ms.
 Bartelmay and Mr. Cohen are eligible to participate in the Companys
 Incentive Compensation Plan, in accordance with its terms as may be in effect
 from time to time. Further, Ms. Bartelmay was granted options to purchase
 1,700,000 shares of the Companys common stock, while Mr. Cohen was granted
 options to purchase 1,350,000 shares of the Companys common stock. The
 options granted to Ms. Bartelmay and Mr. Cohen vest over a period of three
 years and are exercisable at the rate of 1/3 for every year of service at a
 price of $0.20 per share.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | In March
 2009 the Company exited select markets related to its NP Care business. Those
 specific markets were Connecticut, Massachusetts, and Florida. The Company
 maintains NP Care business in Tennessee and Illinois. The Company will
 continue to evaluate these markets as well as entry into other markets as
 appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | In March 2009
 the Company entered into a $510,000 Line of Credit Agreement with certain
 secured noteholders. The purpose and sole use of this Line of Credit is to
 satisfy the Companys bi-weekly payroll obligations due to timing of receipts
 from customers and the Companys payroll obligation. The Line of Credit
 Agreement matures on May 31, 2009 and carries monthly interest rate of 5/12%
 for access to the funds as well as 5/12% interest rate for the number of days
 that the funds are utilized by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-39

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