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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

Commission File Number 1-9927

COMPREHENSIVE CARE CORPORATION

(Exact name of registrant as specified in its charter)



| |  |                                                                |  |  |  |                                  
| |  | -------------------------------------------------------------- |  |  |  | ---------------------------------
| |  | Delaware                                                       |  |  |  | 95-2594724                       
| |  | (State or other jurisdiction of incorporation or organization) |  |  |  | (IRS Employer Identification No.)

3405
W. Dr. Martin Luther King Jr. Blvd, Suite 101, Tampa, FL 33607

(Address of principal executive offices and zip
code)

(813)
288-4808

(Registrants telephone number, including area code)



| |  |  |  | 
| |  |  |  | 
| |  |  |  | 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or 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 þ  No  ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).

Yes  ̈  No  ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



| |  |                                                   |  |                                                
| |  | ------------------------------------------------- |  | -----------------------------------------------
| |  | Large Accelerated Filer  ̈ Non-Accelerated Filer  ̈ |  | Accelerated Filer  ̈ Smaller reporting company þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ̈  No þ

As of November 10, 2010, there were 54,259,803 shares of registrants common stock, $0.01 par value, outstanding.



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##### Table of Contents



COMPREHENSIVE CARE
CORPORATION AND SUBSIDIARIES



TABLE OF CONTENTS



|                                                                                                                              |  |  |       | 
|----------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|PART I  FINANCIAL INFORMATION                                                                                                |  |  |       | 
|                                                                                                                              | 
|ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS                                                                                   |  |  | PAGE  | 
|                                                                                                                              | 
|Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009                                        |  |  | 3     | 
|                                                                                                                              | 
|Consolidated Statements of Operations for the three and nine months ended September 30, 2010 (unaudited) and 2009 (unaudited) |  |  | 4     | 
|                                                                                                                              | 
|Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 (unaudited) and 2009 (unaudited)           |  |  | 5     | 
|                                                                                                                              | 
|Notes to Consolidated Financial Statements                                                                                    |  |  | 6-24  | 
|                                                                                                                              | 
|ITEM 2 -- MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                               |  |  | 24-35 | 
|                                                                                                                              | 
|ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                          |  |  | 35    | 
|                                                                                                                              | 
|ITEM 4 -- CONTROLS AND
PROCEDURES                                                                                             |  |  | 35    | 
|                                                                                                                              | 
|PART II  OTHER INFORMATION                                                                                                   |  |  |       | 
|                                                                                                                              | 
|ITEM 1 -- LEGAL PROCEEDINGS                                                                                                   |  |  | 35-37 | 
|                                                                                                                              | 
|ITEM 1A -- RISK FACTORS                                                                                                       |  |  | 37    | 
|                                                                                                                              | 
|ITEM 2 -- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                         |  |  | 37-38 | 
|                                                                                                                              | 
|ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES                                                                                     |  |  | 38    | 
|                                                                                                                              | 
|ITEM 6 -- EXHIBITS                                                                                                            |  |  | 38    | 
|                                                                                                                              | 
|SIGNATURES                                                                                                                    |  |  | 39    | 
|                                                                                                                              | 
|CERTIFICATIONS                                                                                                                |  |  |       | 



2



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COMPREHENSIVE CARE
CORPORATION AND SUBSIDIARIES

PART I -- FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)



|                                                                                                                             |  |                   |              |  |                  |  |               | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ |  | ---------------- |  | ------------- | 
|                                                                                                                             |  | September 30,2010 |              |  | December 31,2009 | 
|                                                                                                                             |  |                  
|                                                                                                                             |  | (unaudited)       |              |  |                  | 
|ASSETS                                                                                                                       |  |                   |              |  |                  |  |               | 
|Current assets:                                                                                                              |  |                   |              |  |                  |  |               | 
|Cash and cash equivalents                                                                                                    |  |                   | $      1,023 |  |                  |  | $         694 | 
|Accounts receivable                                                                                                          |  |                   | 3            |  |                  |  | 5             | 
|Other current assets                                                                                                         |  |                   | 506          |  |                  |  | 741           | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Total current assets                                                                                                         |  |                   | 1,532        |  |                  |  | 1,440         | 
|                                                                                                                             |  |                  
|Property and equipment, net                                                                                                  |  |                   | 733          |  |                  |  | 311           | 
|Intangible assets, net                                                                                                       |  |                   | 662          |  |                  |  | 1,042         | 
|Goodwill                                                                                                                     |  |                   | 12,150       |  |                  |  | 12,175        | 
|Other assets                                                                                                                 |  |                   | 222          |  |                  |  | 255           | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Total assets                                                                                                                 |  |                   | 15,299       |  |                  |  | 15,223        | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|                                                                                                                             |  |                  
|LIABILITIES AND DEFICIT                                                                                                      |  |                   |              |  |                  |  |               | 
|Current liabilities:                                                                                                         |  |                   |              |  |                  |  |               | 
|Accounts payable and accrued liabilities                                                                                     |  |                   | 6,674        |  |                  |  | 5,721         | 
|Accrued claims payable                                                                                                       |  |                   | 5,534        |  |                  |  | 4,679         | 
|Accrued pharmacy payable                                                                                                     |  |                   | 15           |  |                  |  | 23            | 
|Note obligations due within one year                                                                                         |  |                   | 3,189        |  |                  |  | 4,721         | 
|Income taxes payable                                                                                                         |  |                   | 103          |  |                  |  | 118           | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Total current liabilities                                                                                                    |  |                   | 15,515       |  |                  |  | 15,262        | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|                                                                                                                             |  |                  
|Long-term liabilities:                                                                                                       |  |                   |              |  |                  |  |               | 
|Long-term debt                                                                                                               |  |                   | 1,309        |  |                  |  | 200           | 
|Other liabilities                                                                                                            |  |                   | 3,490        |  |                  |  | 2,584         | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Total long-term liabilities                                                                                                  |  |                   | 4,799        |  |                  |  | 2,784         | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Total liabilities                                                                                                            |  |                   | 20,314       |  |                  |  | 18,046        | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|                                                                                                                             |  |                  
|Stockholders equity:                                                                                                        |  |                   |              |  |                  |  |               | 
|Preferred stock, $50.00 par value; authorized shares: 974,260 shares; none issued                                            |  |                   | --           |  |                  |  | --            | 
|Preferred stock, Series C, $50.00 par value; 14,400 shares authorized, issued and outstanding                                |  |                   | 720          |  |                  |  | 720           | 
|Preferred stock, Series D, $50.00 par value; 7,000 shares authorized; none issued                                            |  |                   | --           |  |                  |  | --            | 
|Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 54,259,803 and 39,869,089,
respectively |  |                   | 542          |  |                  |  | 399           | 
|Additional paid-in capital                                                                                                   |  |                   | 20,847       |  |                  |  | 14,814        | 
|Accumulated deficit                                                                                                          |  |                   | (27,124)     |  |                  |  | (19,078)      | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Total stockholders deficit                                                                                                  |  |                   | (5,015)      |  |                  |  | (3,145)       | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Non-controlling interest                                                                                                     |  |                   | --           |  |                  |  | 322           | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Total deficit                                                                                                                |  |                   | (5,015)      |  |                  |  | (2,823)       | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 
|Total liabilities and deficit                                                                                                |  |                   | $    15,299  |  |                  |  | $    15,223   | 
|                                                                                                                             |  |                   |              |  |                  |  |               | 

See accompanying notes to condensed consolidated financial statements.



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COMPREHENSIVE CARE
CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share amounts)



|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|-------------------------------------------------------------- |  | ---------------------------------- | ------------ | - | ---------------------------------- |  | ------------ | --------------------------------- |  |  | --------------------------------- | - |  |  | -------------- | -
|                                                               |  | Three MonthsEndedSeptember 30,2010 |              |   | Three MonthsEndedSeptember 30,2009 |  |              | Nine MonthsEndedSeptember 30,2010 |  |  | Nine MonthsEndedSeptember 30,2009 |  
|Revenues:                                                      |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Managed care revenues                                          |  |                                    | $      7,898 |   |                                    |  | $      3,559 |                                   |  |  | $      17,315                     |   |  |  | $      10,411  |  
|Other revenues                                                 |  |                                    | 3            |   |                                    |  | 9            |                                   |  |  | 29                                |   |  |  | 18             |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Total revenues                                                 |  |                                    | 7,901        |   |                                    |  | 3,568        |                                   |  |  | 17,344                            |   |  |  | 10,429         |  
|                                                               |  |                                    |              |  
|Costs of services and sales:                                   |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Cost of care                                                   |  |                                    | 7,548        |   |                                    |  | 3,507        |                                   |  |  | 15,514                            |   |  |  | 9,961          |  
|Other costs of services and sales                              |  |                                    | 5            |   |                                    |  | 5            |                                   |  |  | 28                                |   |  |  | 9              |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Total costs of services and sales                              |  |                                    | 7,553        |   |                                    |  | 3,512        |                                   |  |  | 15,542                            |   |  |  | 9,970          |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|                                                               |  |                                    |              |  
|Gross margin                                                   |  |                                    | 348          |   |                                    |  | 56           |                                   |  |  | 1,802                             |   |  |  | 459            |  
|                                                               |  |                                    |              |  
|Expenses:                                                      |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|General and administrative expenses                            |  |                                    | 2,259        |   |                                    |  | 2,224        |                                   |  |  | 6,506                             |   |  |  | 4,994          |  
|Provision for doubtful accounts                                |  |                                    | --           |   |                                    |  | --           |                                   |  |  | --                                |   |  |  | 4              |  
|Depreciation and amortization                                  |  |                                    | 201          |   |                                    |  | 187          |                                   |  |  | 553                               |   |  |  | 498            |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Total operating expenses                                       |  |                                    | 2,460        |   |                                    |  | 2,411        |                                   |  |  | 7,059                             |   |  |  | 5,496          |  
|Merger transaction costs                                       |  |                                    | --           |   |                                    |  | --           |                                   |  |  | --                                |   |  |  | 589            |  
|Equity based expenses                                          |  |                                    | 1,127        |   |                                    |  | 212          |                                   |  |  | 2,031                             |   |  |  | 8,813          |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Total expenses                                                 |  |                                    | 3,587        |   |                                    |  | 2,623        |                                   |  |  | 9,090                             |   |  |  | 14,898         |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|                                                               |  |                                    |              |  
|Operating loss                                                 |  |                                    | (3,239       | ) |                                    |  | (2,567       | )                                 |  |  | (7,288                            | ) |  |  | (14,439        | )
|                                                               |  |                                    |              |  
|Other income (expense):                                        |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Loss from extinguishment of debt                               |  |                                    | (13          | ) |                                    |  | --           |                                   |  |  | (102                              | ) |  |  | --             |  
|Other non-operating income                                     |  |                                    | 35           |   |                                    |  | 1            |                                   |  |  | 15                                |   |  |  | 1              |  
|Interest income                                                |  |                                    | --           |   |                                    |  | 2            |                                   |  |  | 1                                 |   |  |  | 3              |  
|Interest expense                                               |  |                                    | (442         | ) |                                    |  | (102         | )                                 |  |  | (1,163                            | ) |  |  | (207           | )
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Loss before income taxes                                       |  |                                    | (3,659       | ) |                                    |  | (2,666       | )                                 |  |  | (8,537                            | ) |  |  | (14,642        | )
|Income tax expense                                             |  |                                    | 31           |   |                                    |  | 28           |                                   |  |  | 94                                |   |  |  | 159            |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Net loss before pre-acquisition loss                           |  |                                    | (3,690       | ) |                                    |  | (2,694       | )                                 |  |  | (8,631                            | ) |  |  | (14,801        | )
|Add back pre-acquisition loss                                  |  |                                    | --           |   |                                    |  | --           |                                   |  |  | --                                |   |  |  | 721            |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Net loss after pre-acquisition adjustments                     |  |                                    | (3,690       | ) |                                    |  | (2,694       | )                                 |  |  | (8,631                            | ) |  |  | (14,080        | )
|Add back: Net loss attributable to non-controlling interest    |  |                                    | --           |   |                                    |  | 116          |                                   |  |  | 44                                |   |  |  | 161            |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|Net loss attributable to stockholders                          |  |                                    | $    (3,690  | ) |                                    |  | $    (2,578  | )                                 |  |  | $    (8,587                       | ) |  |  | $    (13,919   | )
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|                                                               |  |                                    |              |  
|Basic and diluted loss per share                               |  |                                    | $      (0.07 | ) |                                    |  | $      (0.06 | )                                 |  |  | $      (0.20                      | ) |  |  | $        (0.47 | )
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|                                                               |  |                                    |              |  
|Weighted average common shares outstanding:                    |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|                                                               |  |                                    |              |  
|Basic                                                          |  |                                    | 52,150       |   |                                    |  | 39,762       |                                   |  |  | 43,414                            |   |  |  | 29,738         |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|                                                               |  |                                    |              |  
|Diluted                                                        |  |                                    | 52,150       |   |                                    |  | 39,762       |                                   |  |  | 43,414                            |   |  |  | 29,738         |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  
|                                                               |  |                                    |              |  
|Dilutive common shares without respect to anti-dilutive effect |  |                                    | 67,727       |   |                                    |  | 52,720       |                                   |  |  | 58,055                            |   |  |  | 52,808         |  
|                                                               |  |                                    |              |   |                                    |  |              |                                   |  |  |                                   |   |  |  |                |  

See accompanying notes to condensed consolidated financial statements.



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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)



|                                                                            |  |                                   |               |   |                                   |  |                |  
|--------------------------------------------------------------------------- |  | --------------------------------- | ------------- | - | --------------------------------- |  | -------------- | -
|                                                                            |  | Nine MonthsEndedSeptember 30,2010 |               |   | Nine MonthsEndedSeptember 30,2009 | 
|                                                                            |  |                                   |               |  
|Cash flows from operating activities:                                       |  |                                   |               |   |                                   |  |                |  
|Net loss                                                                    |  |                                   | $      (8,587 | ) |                                   |  | $      (13,919 | )
|                                                                            |  |                                  
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                   |               |   |                                   |  |                |  
|Depreciation and amortization                                               |  |                                   | 553           |   |                                   |  | 492            |  
|Provision for doubtful accounts                                             |  |                                   | --            |   |                                   |  | 4              |  
|Non-controlling interest                                                    |  |                                   | (44           | ) |                                   |  | (161           | )
|Discount amortization on notes payable                                      |  |                                   | 402           |   |                                   |  | --             |  
|Loss from extinguishment of debt                                            |  |                                   | 31            |   |                                   |  | --             |  
|Equity based expenses                                                       |  |                                   | 2,118         |   |                                   |  | 8,736          |  
|                                                                            |  |                                  
|Changes in assets and liabilities:                                          |  |                                   |               |   |                                   |  |                |  
|Accounts receivable                                                         |  |                                   | 1             |   |                                   |  | 602            |  
|Other current assets and other non-current assets                           |  |                                   | (58           | ) |                                   |  | (116           | )
|Accounts payable and accrued liabilities                                    |  |                                   | 1,386         |   |                                   |  | 146            |  
|Accrued claims payable                                                      |  |                                   | 855           |   |                                   |  | (1,454         | )
|Accrued pharmacy payable                                                    |  |                                   | (8            | ) |                                   |  | 35             |  
|Income taxes payable                                                        |  |                                   | (15           | ) |                                   |  | 146            |  
|Other liabilities                                                           |  |                                   | 598           |   |                                   |  | 31             |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Net cash used in operating activities                                       |  |                                   | (2,768        | ) |                                   |  | (5,458         | )
|                                                                            |  |                                   |               |   |                                   |  |                |  
|                                                                            |  |                                  
|Cash flows from investing activities:                                       |  |                                   |               |   |                                   |  |                |  
|Cash paid for the acquisition of a business, net of cash acquired           |  |                                   | --            |   |                                   |  | (978           | )
|Cash paid for the acquisition of non-controlling interest                   |  |                                   | (135          | ) |                                   |  | --             |  
|Payment received on notes receivable                                        |  |                                   | --            |   |                                   |  | 14             |  
|Additions to property and equipment, net                                    |  |                                   | (154          | ) |                                   |  | (118           | )
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Net cash used in investing activities                                       |  |                                   | (289          | ) |                                   |  | (1,082         | )
|                                                                            |  |                                   |               |   |                                   |  |                |  
|                                                                            |  |                                  
|Cash flows from financing activities:                                       |  |                                   |               |   |                                   |  |                |  
|Net proceeds from the issuance of common stock                              |  |                                   | 1,450         |   |                                   |  | 4,796          |  
|Capital contribution from non-controlling interest                          |  |                                   | --            |   |                                   |  | 490            |  
|Net proceeds from the issuance of note obligations                          |  |                                   | 3,553         |   |                                   |  | 2,000          |  
|Long-term financing                                                         |  |                                   | 82            |   |                                   |  | --             |  
|Redemption of note obligations                                              |  |                                   | (1,614        | ) |                                   |  | --             |  
|Repayment of debt                                                           |  |                                   | (85           | ) |                                   |  | (50            | )
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Net cash provided by financing activities                                   |  |                                   | 3,386         |   |                                   |  | 7,236          |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Net increase in cash and cash equivalents                                   |  |                                   | 329           |   |                                   |  | 696            |  
|Cash and cash equivalents at beginning of period                            |  |                                   | 694           |   |                                   |  | 503            |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Cash and cash equivalents at end of period                                  |  |                                   | $      1,023  |   |                                   |  | $      1,199   |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|                                                                            |  |                                  
|Supplemental disclosures of cash flow information:                          |  |                                   |               |   |                                   |  |                |  
|Cash paid during the period for:                                            |  |                                   |               |   |                                   |  |                |  
|Interest                                                                    |  |                                   | 154           |   |                                   |  | 110            |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Income taxes                                                                |  |                                   | 109           |   |                                   |  | 14             |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Non-cash operating, financing and investing activities:                     |  |                                   |               |   |                                   |  |                |  
|Property acquired under capital leases                                      |  |                                   | 419           |   |                                   |  | --             |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Conversion of Series B-1 to Series C Preferred Stock                        |  |                                   | --            |   |                                   |  | 720            |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Conversion of Series B-2 Preferred Stock to common stock                    |  |                                   | --            |   |                                   |  | 133            |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Conversion of notes payable and accrued interest to common stock            |  |                                   | 2,200         |   |                                   |  | --             |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Common stock issued for outside services                                    |  |                                   | 112           |   |                                   |  | 480            |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Common stock issued in lieu of cash interest payment                        |  |                                   | 87            |   |                                   |  | --             |  
|                                                                            |  |                                   |               |   |                                   |  |                |  
|Net gain credited to deficit from sale of subsidiary                        |  |                                   | 541           |   |                                   |  | --             |  
|                                                                            |  |                                   |               |   |                                   |  |                |  

See accompanying notes to condensed consolidated financial statements.



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NOTE 1  DESCRIPTION OF THE
COMPANYS BUSINESS AND BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements for Comprehensive Care Corporation (referred to herein as the Company, CompCare, we,
us or our) and its subsidiaries have been prepared in accordance with the Securities and Exchange Commission (SEC) rules for interim financial information and do not include all information and notes required for
complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results
that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the consolidated financial statements and the notes thereto in our most recent annual report on Form 10-K.

Our consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries,
Comprehensive Behavioral Care, Inc. (CBC) and Core Corporate Consulting Group, Inc. (Core), each with their respective subsidiaries. Through CBC we provide managed care services in the behavioral health and psychiatric
fields. We manage the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, Medicaid and Childrens Health Insurance Program (CHIP) members on behalf of employers, health plans, government
organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. We also provide prior and concurrent authorization for physician-prescribed psychotropic medications and behavioral
pharmaceutical management services for a number of health plans. The managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. Through Core we market a variety of health related
products, insurance, and discount plans to targeted markets such as the uninsured, the underinsured, and underserved ethnic groups.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Our managed care activities are performed under the terms of agreements with health maintenance organizations, preferred provider organizations, and other health plans or payers to provide contracted
behavioral healthcare services to subscribing members. Revenue under at-risk, behavioral healthcare and pharmacy agreements is earned monthly based on the number of qualified members regardless of services actually provided or pharmacy benefits
actually used (generally referred to as at-risk or capitated arrangements). The information regarding eligible qualified members is supplied by our clients and we review member eligibility records and other reported
information to verify its accuracy to determine the amount of revenue to be recognized. Such capitated, behavioral healthcare and pharmacy agreements accounted for 90.5%, or $15.7 million, and 89.8%, or $8.7 million, of revenue for the nine months
ended September 30, 2010 and 2009, respectively. The remaining balance of our managed care revenues is not capitated and is earned based on the number of qualified members included under our administrative services only (ASO)
agreements.

During the nine months ended September 30, 2010, we entered into a contract to provide autism treatment
services to a health plans membership for which there was no historical claims data. In the absence of data upon which to base pricing, we included cost sharing/cost savings provisions in the agreement with the health plan whereby we share in
the additional cost or cost savings when comparing actual claims costs to the estimated claims costs incorporated into the contracts pricing. Accordingly, we may adjust our revenue periodically as claims data becomes available to permit a
comparison of actual claims costs to targeted claims costs. Such adjustments are made when we believe such adjustments are probable and reasonably estimable, but are subject to the effects of unforeseen fluctuations in utilization, among other
factors.

Cost of Care Recognition

Cost of care is recognized in the period in which an eligible member actually receives services and includes an estimate of the cost of behavioral health services that have been incurred but not yet
reported. See Accrued Claims Payable below for a discussion of claims incurred but not yet reported. We contract with various healthcare providers, including hospitals, physician groups and other licensed behavioral healthcare
professionals either on a fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the healthcare
provider. We then determine whether (1) the member is eligible to receive the service, (2) the service provided is medically necessary



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and is covered by the benefit plans certificate of coverage, and (3) the service is pre-authorized (if applicable). If all of these requirements are met, the claim is entered into our
claims system for payment.

Goodwill

Goodwill represents the cost in excess of the fair value of net assets acquired in purchase transactions. Pursuant to Accounting Standards Codification (ASC) 350-20, Intangibles 
Goodwill and Other, goodwill is not amortized but is periodically evaluated for impairment to carrying amount, with decreases in carrying amount recognized immediately. We review goodwill for impairment annually, or more frequently if changes
in circumstances or the occurrence of events suggest impairment exists. The tests for impairment of goodwill require us to make estimates about fair value, which are based on discounted projected future cash flows and the quoted market price of our
common stock.

Accrued Claims Payable

The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated
amounts for claims incurred but not yet reported (IBNR) to us. The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses and is continually reviewed and adjusted, if
necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. However, actual claims incurred could differ from the estimated claims payable amount reported.
Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate.

Premium Deficiencies

We accrue losses under our managed care contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We perform this loss accrual analysis on a
contract-by-contract basis by taking into consideration various factors such as future contractual revenue, projected future healthcare and maintenance costs, and each contracts specific terms related to future revenue increases as compared to
expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate of future cost increases.

We generally have the ability to cancel a contract with 60 to 90 days written notice or request a renegotiation of terms under certain
circumstances, if a managed care contract is not meeting our financial goals. Prior to a cancellation, we typically submit a request for a rate increase accompanied by supporting utilization data. Although our clients have historically been
generally receptive to such requests, no assurance can be given that such requests will be fulfilled in our favor in the future. If a rate increase is not granted, we have the ability, in some cases, to terminate the contract and limit our risk to a
short-term period.

We perform a review of our portfolio of contracts on a quarterly basis to identify loss contracts (as
defined in the American Institute of Certified Public Accountants Audit and Accounting Guide  Health Care Organizations) and develop a contract loss reserve, if applicable, for succeeding periods. At September 30, 2010, no contract loss
reserve for future periods was necessary in managements opinion.

Fair Value Measurements

ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10), defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820-10 also establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques and
creates the following three broad levels, with Level 1 being the highest priority:



| | Level 1: | Observable inputs that reflect quoted (unadjusted) market prices in active markets for identical assets or liabilities that are accessible at the measurement date;
| | -------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Level 2: | Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
| | -------- | --------------------------------------------------------------------------------------------------------------------------------------------



| | Level 3: | Unobservable inputs that reflect a reporting entitys own assumptions in pricing an asset or liability.
| | -------- | -------------------------------------------------------------------------------------------------------



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ASC 820-10 requires
us to segregate our assets and liabilities measured at fair value in accordance with the above hierarchy. At September 30, 2010 and 2009, we had no assets or liabilities required to be measured at fair value on a recurring basis. Therefore, no
disclosure concerning assets or liabilities measured at fair value on a recurring basis is necessary. Other non-financial assets that are measured at fair value on a nonrecurring basis for the purposes of determining impairment include goodwill and
identifiable intangible assets. See Fair Value of Nonfinancial Assets below.

ASC 825-10, Financial
Instruments (ASC 825-10), provides that companies may elect to measure many financial instruments and certain other items at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each
reporting period. The election, called the fair value option, will enable some companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently. We chose not to measure at fair value
our eligible financial assets and liabilities existing at September 30, 2010. Consequently, ASC 825-10 has had no impact on our consolidated financial statements.

Fair Value of Financial Instruments

ASC 825-10 requires disclosure
of fair value information about financial instruments for which it is practical to estimate fair value.

For cash and cash
equivalents and restricted cash, our carrying amount approximates fair value. Our financial assets and liabilities other than cash are not traded in an open market and therefore require us to estimate their fair value. Pursuant to the disclosure
requirements prescribed by ASC 825-10, we use a present value technique, which is a type of income approach, to measure the fair value of these financial instruments. The rate used for discounting expected cash flows is a risk-free rate adjusted for
systematic and unsystematic risk.

The carrying amounts and fair values of our financial instruments at September 30,
2010 and December 31, 2009 are as follows:



|                                            |  |                        |          |  |                   |  |          |                |  |  |           |  |  |  |        | 
|------------------------------------------- |  | ---------------------- | -------- |  | ----------------- |  | -------- | -------------- |  |  | --------- |  |  |  | ------ | 
|                                            |  | September 30, 2010     |          |  | December 31, 2009 | 
|                                            |  | CarryingAmount         |          |  | FairValue         |  |          | CarryingAmount |  |  | FairValue | 
|                                            |  | (Amounts in thousands) |         
|Assets                                      |  |                        |          |  |                   |  |          |                |  |  |           |  |  |  |        | 
|Cash and cash equivalents                   |  |                        | $  1,023 |  |                   |  | $  1,023 |                |  |  | $  694    |  |  |  | $  694 | 
|Restricted cash                             |  |                        | --       |  |                   |  | --       |                |  |  | 1         |  |  |  | 1      | 
|Liabilities                                 |  |                        |          |  |                   |  |          |                |  |  |           |  |  |  |        | 
|Promissory notes                            |  |                        | 2,790    |  |                   |  | 2,900    |                |  |  | 350       |  |  |  | 334    | 
|Callable promissory notes                   |  |                        | --       |  |                   |  | --       |                |  |  | 2,500     |  |  |  | 2,588  | 
|Zero coupon promissory notes                |  |                        | 280      |  |                   |  | 275      |                |  |  | --        |  |  |  | --     | 
|Debentures                                  |  |                        | 609      |  |                   |  | 593      |                |  |  | 2,244     |  |  |  | 2,256  | 
|Senior promissory notes                     |  |                        | 1,696    |  |                   |  | 1,650    |                |  |  | --        |  |  |  | --     | 
|Less: Unamortized discount on notes payable |  |                        | (877)    |  |                   |  | --       |                |  |  | (173)     |  |  |  | --     | 
|                                            |  |                        |          |  |                   |  |          |                |  |  |           |  |  |  |        | 
|Net liabilities                             |  |                        | $4,498   |  |                   |  | $5,418   |                |  |  | $4,921    |  |  |  | $5,178 | 
|                                            |  |                        |          |  |                   |  |          |                |  |  |           |  |  |  |        | 

Income Taxes

Under the asset and liability method of ASC 740-10, Income Taxes (ASC 740-10), deferred tax assets and liabilities are recognized for the future tax consequences attributable to
net operating loss carryforwards and to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10, the effect of a change in tax rates on deferred tax assets or liabilities is recognized in the
consolidated statements of operations in the period that included the enactment. A valuation allowance is established for deferred tax assets unless their realization is considered more likely than not.

Prior to being acquired by CompCare, Core purchased in January 2009 a 49% ownership interest in CompCare from Hythiam, Inc.
(Hythiam). This purchase resulted in a change in control of CompCare. As a result, our ability to carryforward and deduct losses incurred prior to January 20, 2009 on current federal tax returns is subject to a limitation of
approximately $361,000 per year. Any unused portion of such limitation can be carried



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forward to the following year. We may be subject to further loss carryforward limitations in the event that we issue or agree to issue substantial amounts of additional equity. At
September 30, 2010, our estimated net operating loss carryforwards totaled $27.7 million.

ASC 740-10 also clarifies the
accounting for uncertainty in income taxes and requires that companies recognize in their consolidated financial statements the impact of a tax position, if that position is more likely than not to be sustained on audit based on the technical merits
of the position. ASC 740-10 additionally provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of ASC 740-10 are effective for fiscal years beginning after
December 15, 2006. Our adoption of ASC 740-10 had no impact on our consolidated financial statements.

Stock Ownership Plans

We grant stock options to our employees, non-employee directors and certain consultants (grantees) which
allow grantees to purchase shares of our common stock pursuant to stock option plans. We currently maintain three such incentive plans: our 1995 Incentive Plan, our 2002 Incentive Plan and our 2009 Equity Compensation Plan (collectively, the
Plans). The Plans provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, restricted preferred stock, and common stock grants to grantees. Grants issued under the Plans may qualify as
incentive stock options (ISOs) under Section 422A of the Internal Revenue Code of 1986, as amended. Options for ISOs may be granted for terms of up to ten years. The vesting of options issued under the 1995 and 2002 plans generally
occurs after six months for one-half of the options and after 12 months for the remaining options. Under the 2009 Equity Compensation Plan, the vesting period is determined by the Board of Directors Compensation and Stock Option Committee. The
exercise price for ISOs must equal or exceed the fair market value of the shares on the date of grant. The Plans also provide for the full vesting of all outstanding options under certain change of control events. The maximum number of shares
authorized for issuance is 10,000,000 under the 2009 Equity Compensation Plan, 1,000,000 under the 2002 Incentive Plan, and 1,000,000 under the 1995 Incentive Plan. As of September 30, 2010, there were 8,335,000 options available for grant and
1,665,000 options outstanding under the 2009 Equity Compensation Plan. Under the 2002 Incentive Plan, there were 375,000 options available for grant and 585,000 options outstanding and exercisable as of September 30, 2010. Additionally, as of
September 30, 2010, there were 70,500 options outstanding and exercisable under the 1995 Incentive Plan. There are no further options available for grant under the 1995 Incentive Plan.

Under our Non-employee Directors Stock Option Plan, we are authorized to issue 1,000,000 shares of our common stock pursuant to
non-qualified stock options to our non-employee directors. Each non-qualified stock option is exercisable at a price equal to the average of the closing bid and asked prices of our common stock in the over-the-counter market for the most recent day
prior to the grant date on which there was a sale of the stock. Option grants vest in accordance with vesting schedules established by our Board of Directors Compensation and Stock Option Committee. Upon joining our Board of Directors,
directors receive an initial grant of 25,000 options. Annually, directors are granted 15,000 options on the date of our annual meeting. As of September 30, 2010, there were 801,668 shares available for option grants and 100,000 options
outstanding under the Non-employee Directors Stock Option Plan, 20,000 of which were exercisable.

A summary of our
option activity for the three months ended September 30, 2010 is as follows:



|                                  |  |        |           |  |                               |  |           |                                           |  |  |                          |  |  |  |    | 
|--------------------------------- |  | ------ | --------- |  | ----------------------------- |  | --------- | ----------------------------------------- |  |  | ------------------------ |  |  |  | -- | 
|Options                           |  | Shares |           |  | Weighted-AverageExercisePrice |  |           | Weighted-AverageRemainingContractual Term |  |  | AggregateIntrinsic Value | 
|Outstanding at June 30, 2010      |  |        | 2,440,500 |  |                               |  | $    0.52 |                                           |  |  | 8.39 years               |  |  |  |    | 
|Granted                           |  |        | --        |  |                               |  | --        |                                           |  |  |                          |  |  |  |    | 
|Exercised                         |  |        | --        |  |                               |  | --        |                                           |  |  |                          |  |  |  |    | 
|Forfeited or expired              |  |        | (20,000)  |  |                               |  | $    0.38 |                                           |  |  |                          |  |  |  |    | 
|                                  |  |        |           |  |                               |  |           |                                           |  |  |                          |  |  |  |    | 
|Outstanding at September 30, 2010 |  |        | 2,420,500 |  |                               |  | $    0.52 |                                           |  |  | 8.13 years               |  |  |  |    | 
|                                  |  |        |           |  |                               |  |           |                                           |  |  |                          |  |  |  |    | 
|Exercisable at September 30, 2010 |  |        | 675,500   |  |                               |  | $    0.87 |                                           |  |  | 5.53 years               |  |  |  | -- | 



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The following
table summarizes information about options granted, exercised, and vested for the three and nine months ended September 30, 2010 and 2009:



|                                               |  |                                 |    |  |                                |  |    |      |  |  |        |  |  |  |         | 
|---------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ |  | -- | ---- |  |  | ------ |  |  |  | ------- | 
|                                               |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, | 
|                                               |  | 2010                            |    |  | 2009                           |  |    | 2010 |  |  | 2009   | 
|Options granted                                |  |                                 | 0  |  |                                |  | 0  |      |  |  | 0      |  |  |  | 150,000 | 
|Weighted-average grant-date fair value ($)     |  |                                 | -- |  |                                |  | -- |      |  |  | --     |  |  |  | 0.51    | 
|                                               |  |                                 |    | 
|Options exercised                              |  |                                 | -- |  |                                |  | -- |      |  |  | --     |  |  |  | 1,000   | 
|Total intrinsic value of exercised options ($) |  |                                 | -- |  |                                |  | -- |      |  |  | --     |  |  |  | 287     | 
|                                               |  |                                 |    | 
|Fair value of vested options ($)               |  |                                 | -- |  |                                |  | -- |      |  |  | 10,078 |  |  |  | 139,270 | 

We recognized
approximately $41,000 in compensation costs related to stock options during the three months ended September 30, 2010. No options were granted during the three and nine months ended September 30, 2010. At September 30, 2010,
unrecognized expense related to unvested stock options totaled approximately $493,000, which we expect to recognize over 2.23 years.

The following table lists the assumptions utilized in applying the Black-Scholes valuation model to our options. We use historical data and management judgment to estimate the expected term of the option.
Expected volatility is based on the historical volatility of our traded stock. We have not declared dividends in the past nor do we expect to do so in the near future and as such we assume no expected dividend. The risk-free rate is based on the
U.S. Treasury yield curve with the same expected term as that of the option at the time of grant.



|                                                                             |  |                                 |    |  |                                 |  |    |      |  |  |      |  |  |  |            | 
|---------------------------------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------- |  | -- | ---- |  |  | ---- |  |  |  | ---------- | 
|                                                                             |  | Three Months EndedSeptember 30, |    |  | Nine Months Ended
September 30, | 
|                                                                             |  | 2010                            |    |  | 2009                            |  |    | 2010 |  |  | 2009 | 
|Volatility factor of the expected market price of the Companys common stock |  |                                 | -- |  |                                 |  | -- |      |  |  | --   |  |  |  | 225%       | 
|Expected life (in years) of the options                                      |  |                                 | -- |  |                                 |  | -- |      |  |  | --   |  |  |  | 5-6        | 
|Risk-free interest rate                                                      |  |                                 | -- |  |                                 |  | -- |      |  |  | --   |  |  |  | 1.54-1.60% | 
|Dividend yield                                                               |  |                                 | -- |  |                                 |  | -- |      |  |  | --   |  |  |  | 0%         | 

Warrants - Employees and
Non-employee Directors

We periodically issue warrants to purchase shares of our common stock, and have in the past
issued warrants to purchase shares of our preferred stock in exchange for the services of employees and non-employee directors.

Warrants
to Purchase Series D Convertible Preferred Stock

At September 30, 2010, there were outstanding warrants to purchase
up to 290 shares of our Series D Convertible Preferred Stock, par value $50.00 per share (Series D Convertible Preferred Stock). These warrants were issued to members of our Board of Directors and certain members of management as an
equity incentive to further align the interests of our directors and management with those of our stockholders. Each warrant has a three year term and may be exercised at any time to purchase shares of Series D Convertible Preferred Stock at an
exercise price of $25,000 per share. If the market value of a share of Series D Convertible Preferred Stock exceeds the exercise price for a share of Series D Convertible Preferred Stock, then the holder may exercise the warrant by a cashless
exercise and receive the number of shares of Series D Convertible Preferred Stock representing the net value of the warrant. The market value of a share of Series D Convertible Preferred Stock is equal to the product of (a) the per share market
price of our common stock multiplied by (b) the number of shares of our common stock into which a share of Series D Convertible Preferred Stock is then convertible.

The number of shares of Series D Convertible Preferred Stock for which a warrant is exercisable is subject to adjustment in the event of any stock dividend, stock split, combination or other similar
recapitalization affecting the Series D Convertible Preferred Stock. In the event of a Change of Control (as defined in the warrants) of CompCare,



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the holder has the right to require us to redeem the warrant in exchange for an amount equal to the value of the warrant determined using the Black-Scholes pricing model.

Each holder of shares of Series D Convertible Preferred Stock is entitled to notice of any stockholders meeting and to vote on any
matters on which our common stock may be voted. Each share of Series D Convertible Preferred Stock is entitled to the number of votes that the holder of 500,000 shares of our common stock would be entitled to by virtue of holding such shares of
common stock. Unless otherwise required by applicable law, holders of Series D Convertible Preferred Stock will vote together with holders of common stock as a single class on all matters submitted to a vote of our stockholders.

Each share of Series D Convertible Preferred Stock acquired through exercise of a warrant is convertible into 100,000 shares of our
common stock at any time. For the presentation below, warrants to purchase shares of Series D Convertible Preferred Stock are stated in common shares, as if the warrant was exercised and the resulting Series D Convertible Preferred Stock was
converted. The exercise price of the warrant has been similarly adjusted to an as-converted to common stock equivalent. A summary of our warrant activity for the three months ended September 30, 2010 is as follows:



|                                  |  |            |            |  |                          |           |                           |            |                 |  |    | 
|--------------------------------- |  | ---------- | ---------- |  | ------------------------ | --------- | ------------------------- | ---------- | --------------- |  | -- | 
|                                  |  | Underlying |            |  | Weighted-AverageExercise |           | Weighted-AverageRemaining |            | Aggregate       | 
|Warrants                          |  | Shares     |            |  | Price                    |           | Contractual Term          |            | Intrinsic Value | 
|Outstanding at June 30, 2010      |  |            | 29,000,000 |  |                          | $    0.25 |                           | 1.79 years |                 |  |    | 
|Granted                           |  |            | --         |  |                          | --        |                           |            |                 |  |    | 
|Exercised                         |  |            | --         |  |                          | --        |                           |            |                 |  |    | 
|Forfeited or expired              |  |            | --         |  |                          | --        |                           |            |                 |  |    | 
|                                  |  |            |            |  |                          |           |                           |            |                 |  |    | 
|Outstanding at September 30, 2010 |  |            | 29,000,000 |  |                          | $    0.25 |                           | 1.54 years |                 |  |    | 
|                                  |  |            |            |  |                          |           |                           |            |                 |  |    | 
|Exercisable at September 30, 2010 |  |            | 29,000,000 |  |                          | $    0.25 |                           | 1.54 years |                 |  | -- | 

The following table
summarizes information about warrants granted, exercised and vested for the three and nine months ended September 30, 2010 and 2009:



|                                                |  |                                 |    |  |                                |  |    |      |  |  |      |  |  |  |            | 
|----------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ |  | -- | ---- |  |  | ---- |  |  |  | ---------- | 
|                                                |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, | 
|                                                |  | 2010                            |    |  | 2009                           |  |    | 2010 |  |  | 2009 | 
|Warrants granted                                |  |                                 | 0  |  |                                |  | 0  |      |  |  | 0    |  |  |  | 39,000,000 | 
|Weighted-average grant-date fair value ($)      |  |                                 | -- |  |                                |  | -- |      |  |  | --   |  |  |  | 0.21       | 
|                                                |  |                                 |    | 
|Warrants exercised                              |  |                                 | -- |  |                                |  | -- |      |  |  | --   |  |  |  | --         | 
|Total intrinsic value of exercised warrants ($) |  |                                 | -- |  |                                |  | -- |      |  |  | --   |  |  |  | --         | 
|                                                |  |                                 |    | 
|Fair value of vested warrants ($)               |  |                                 | -- |  |                                |  | -- |      |  |  | --   |  |  |  | 8,071,900  | 

No warrants to
purchase shares of Series D Convertible Preferred Stock were issued during the three months ended September 30, 2010.

We
use historical data and management judgment to estimate the expected term of the warrant. Expected volatility is based on the historical volatility of our traded stock. We have not declared dividends in the past nor do we expect to do so in the near
future and as such we assume no dividend yield. The risk-free rate is based on the U.S. Treasury yield curve with the same expected term as that of the warrant at the time of grant. We adjusted our quoted stock price in the valuation to
appropriately reflect trading restrictions on the warrants underlying asset. Valuation of our warrants using the Black-Scholes pricing model was based on the following information:



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|                                                                            |  |                                 |    |  |                                 |  |    |      |  |  |      |  |  |  |            | 
|--------------------------------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------- |  | -- | ---- |  |  | ---- |  |  |  | ---------- | 
|                                                                            |  | Three Months EndedSeptember 30, |    |  | Nine Months Ended
September 30, | 
|                                                                            |  | 2010                            |    |  | 2009                            |  |    | 2010 |  |  | 2009 | 
|Volatility factor of the expected market price of theCompanys common stock |  |                                 | -- |  |                                 |  | -- |      |  |  | --   |  |  |  | 142-175%   | 
|Expected life (in years) of the warrants                                    |  |                                 | -- |  |                                 |  | -- |      |  |  | --   |  |  |  | 3          | 
|Risk-free interest rate                                                     |  |                                 | -- |  |                                 |  | -- |      |  |  | --   |  |  |  | 1.15-1.31% | 
|Dividend yield                                                              |  |                                 | -- |  |                                 |  | -- |      |  |  | --   |  |  |  | 0%         | 

Warrants to Purchase Common Stock

During 2010, we have issued warrants to purchase common stock to key employees. Shares acquirable pursuant to the
warrants vest at the warrant grant date and/or specified dates throughout the 36 or 60 month term of the warrants, or upon achieving a specified performance condition. A summary of warrant activity for the three months ended September 30, 2010
is as follows:



|                                  |  |                  |            |  |                               |   |      |                                          |  |                          |  |  |    | 
|--------------------------------- |  | ---------------- | ---------- |  | ----------------------------- | - | ---- | ---------------------------------------- |  | ------------------------ |  |  | -- | 
|Warrants                          |  | UnderlyingShares |            |  | Weighted-AverageExercisePrice |   |      | Weighted-AverageRemainingContractualTerm |  | AggregateIntrinsic Value | 
|Outstanding at June 30, 2010      |  |                  | 8,675,000  |  |                               | $ | 0.50 |                                          |  | 4.86 years               |  |  |    | 
|Granted                           |  |                  | 1,600,000  |  |                               | $ | 0.81 |                                          |  |                          |  |  |    | 
|Exercised                         |  |                  | --         |  |                               |   | --   |                                          |  |                          |  |  |    | 
|Forfeited or expired              |  |                  | --         |  |                               |   | --   |                                          |  |                          |  |  |    | 
|                                  |  |                  |            |  |                               |   |      |                                          |  |                          |  |  |    | 
|Outstanding at September 30, 2010 |  |                  | 10,275,000 |  |                               | $ | 0.55 |                                          |  | 4.65 years               |  |  |    | 
|                                  |  |                  |            |  |                               |   |      |                                          |  |                          |  |  |    | 
|Exercisable at September 30, 2010 |  |                  | 8,325,000  |  |                               | $ | 0.50 |                                          |  | 4.69 years               |  |  | -- | 

The following table
summarizes information about warrants granted, exercised and vested for the three and nine months ended September 30, 2010 and 2009:



|                                                |  |                                 |           |  |                                |  |         |      |  |  |           |  |  |  |         | 
|----------------------------------------------- |  | ------------------------------- | --------- |  | ------------------------------ |  | ------- | ---- |  |  | --------- |  |  |  | ------- | 
|                                                |  | Three Months EndedSeptember 30, |           |  | Nine Months EndedSeptember 30, | 
|                                                |  | 2010                            |           |  | 2009                           |  |         | 2010 |  |  | 2009      | 
|Warrants granted                                |  |                                 | 1,600,000 |  |                                |  | 600,000 |      |  |  | 9,600,000 |  |  |  | 600,000 | 
|Weighted-average grant-date fair value ($)      |  |                                 | 0.18      |  |                                |  | 0.46    |      |  |  | 0.08      |  |  |  | 0.46    | 
|                                                |  |                                 |           | 
|Warrants exercised                              |  |                                 | --        |  |                                |  | --      |      |  |  | --        |  |  |  | --      | 
|Total intrinsic value of exercised warrants ($) |  |                                 | --        |  |                                |  | --      |      |  |  | --        |  |  |  | --      | 
|                                                |  |                                 |           | 
|Fair value of vested warrants ($)               |  |                                 | 38,108    |  |                                |  | 32,685  |      |  |  | 502,908   |  |  |  | 32,685  | 

We recognized
approximately $29,000 of compensation expense during the three months ended September 30, 2010. At September 30, 2010, unrecognized expense related to unvested warrants totaled approximately $341,000, which we expect to recognize over 3.69
years.

We recognized approximately $11,000 of tax benefits attributable to equity-based expense recorded for warrants during
the three months ended September 30, 2010. This benefit was fully offset by a valuation allowance of the same amount due to the uncertainty of future realization.



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Valuation of our
warrants using the Black-Scholes pricing model was based on the following information:



|                                                                            |  |                                 |            |  |                                 |  |            |      |  |  |            |  |  |  |            | 
|--------------------------------------------------------------------------- |  | ------------------------------- | ---------- |  | ------------------------------- |  | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                                                                            |  | Three Months EndedSeptember 30, |            |  | Nine Months Ended
September 30, | 
|                                                                            |  | 2010                            |            |  | 2009                            |  |            | 2010 |  |  | 2009       | 
|Volatility factor of the expected market price of theCompanys common stock |  |                                 | 160%       |  |                                 |  | 160%       |      |  |  | 160%       |  |  |  | 160%       | 
|Expected life (in years) of the warrants                                    |  |                                 | 5          |  |                                 |  | 3-5        |      |  |  | 5          |  |  |  | 3-5        | 
|Risk-free interest rate                                                     |  |                                 | 1.43-1.85% |  |                                 |  | 1.57-2.37% |      |  |  | 1.43-1.85% |  |  |  | 1.57-2.37% | 
|Dividend yield                                                              |  |                                 | 0%         |  |                                 |  | 0%         |      |  |  | 0%         |  |  |  | 0%         | 

Warrants  Nonemployees

We periodically issue warrants to purchase shares of our common stock to nonemployees such as consultants, note
holders, and customers. In accordance with ASC 505-50, Equity (ASC 505-50), such transactions are measured at the fair value of the goods and services received or the fair value of the warrants issued, whichever is more
reliably measurable. We estimate the fair value of warrants issued using the Black-Scholes pricing model.

For warrants that
are fully vested and non-forfeitable at the date of issuance, the estimated fair value is recorded in additional paid-in capital and expensed when the services are performed and benefit is received as prescribed by ASC 505-50. For unvested warrants
of which fair value is more reliably measurable than the fair value of the goods and services received, we expense the change in fair value during each reporting period using the graded vesting method.

We also issue warrants in conjunction with our debt financing, which warrants are also measured using the Black-Scholes pricing model. A
portion of the proceeds from debt financing is allocated to warrants and accounted for as additional paid-in capital based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of
issuance.

A summary of the activity of our warrants issued to non-employees for the three months ended September 30,
2010 is as follows:



|                                  |  |                   |            |  |                                |          
|--------------------------------- |  | ----------------- | ---------- |  | ------------------------------ | ---------
|Warrants                          |  | Underlying Shares |            |  | Weighted-AverageExercise Price
|Outstanding at June 30, 2010      |  |                   | 10,502,000 |  |                                | $    0.28
|Granted                           |  |                   | 6,158,250  |  |                                | $    0.25
|Exercised                         |  |                   | --         |  |                                | --       
|Forfeited or expired              |  |                   | (75,000)   |  |                                | $    0.50
|                                  |  |                   |            |  |                                |          
|Outstanding at September 30, 2010 |  |                   | 16,585,250 |  |                                | $    0.27
|                                  |  |                   |            |  |                                |          

We recognized approximately $974,000 in expense related to warrants granted to nonemployees during
the three months ended September 30, 2010. Valuation of such warrants was based on the following information:



|                                                                             |  |                                 |            |  |                                |  |            |      |  |  |            |  |  |  |            | 
|---------------------------------------------------------------------------- |  | ------------------------------- | ---------- |  | ------------------------------ |  | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                                                                             |  | Three Months EndedSeptember 30, |            |  | Nine Months EndedSeptember 30, | 
|                                                                             |  | 2010                            |            |  | 2009                           |  |            | 2010 |  |  | 2009       | 
|Volatility factor of the expected market price of the Companys common stock |  |                                 | 160%       |  |                                |  | 160%       |      |  |  | 160%       |  |  |  | 156-160%   | 
|Expected life (in years) of the warrants                                     |  |                                 | 3          |  |                                |  | 3          |      |  |  | 3          |  |  |  | 3          | 
|Risk-free interest rate                                                      |  |                                 | 0.81-0.99% |  |                                |  | 1.46-1.56% |      |  |  | 0.81-1.65% |  |  |  | 1.21-2.00% | 
|Dividend yield                                                               |  |                                 | 0%         |  |                                |  | 0%         |      |  |  | 0%         |  |  |  | 0%         | 



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Per Share Data

In calculating basic loss per share, net loss is divided by the weighted average number of common shares outstanding
for the period. For the periods presented, diluted loss per share is equivalent to basic loss per share. The following table sets forth the computation of basic and diluted loss per share in accordance with ASC 260-10, Earnings Per Share
(amounts in thousands, except per share data):



|                                   |  |                                      |             |  |                                      |  |             |                                     |  |  |                                     |  |  |  |             | 
|---------------------------------- |  | ------------------------------------ | ----------- |  | ------------------------------------ |  | ----------- | ----------------------------------- |  |  | ----------------------------------- |  |  |  | ----------- | 
|                                   |  | Three Months Ended September 30,2010 |             |  | Three Months Ended September 30,2009 |  |             | Nine Months Ended September 30,2010 |  |  | Nine Months Ended September 30,2009 | 
|Numerator:                         |  |                                      |             |  |                                      |  |             |                                     |  |  |                                     |  |  |  |             | 
|Net loss                           |  |                                      | $  (3,690)  |  |                                      |  | $  (2,578)  |                                     |  |  | $  (8,587)                          |  |  |  | $  (13,919) | 
|Denominator:                       |  |                                      |             |  |                                      |  |             |                                     |  |  |                                     |  |  |  |             | 
|Weighted average shares  basic    |  |                                      | 52,150      |  |                                      |  | 39,762      |                                     |  |  | 43,414                              |  |  |  | 29,738      | 
|Effect of dilutive securities:     |  |                                      |             |  |                                      |  |             |                                     |  |  |                                     |  |  |  |             | 
|Employee stock options             |  |                                      | --          |  |                                      |  | --          |                                     |  |  | --                                  |  |  |  | --          | 
|Warrants                           |  |                                      | --          |  |                                      |  | --          |                                     |  |  | --                                  |  |  |  | --          | 
|                                   |  |                                      |             |  |                                      |  |             |                                     |  |  |                                     |  |  |  |             | 
|Weighted average shares  diluted  |  |                                      | 52,150      |  |                                      |  | 39,762      |                                     |  |  | 43,414                              |  |  |  | 29,738      | 
|                                   |  |                                      |             |  |                                      |  |             |                                     |  |  |                                     |  |  |  |             | 
|                                   |  |                                      |             | 
|Loss per share  basic and diluted |  |                                      | $    (0.07) |  |                                      |  | $    (0.06) |                                     |  |  | $    (0.20)                         |  |  |  | $    (0.47) | 
|                                   |  |                                      |             |  |                                      |  |             |                                     |  |  |                                     |  |  |  |             | 



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Capitalization Table

As of September 30, 2010



|                                                                  |  |        |            |  |          |  |            |       |  |  |             | 
|----------------------------------------------------------------- |  | ------ | ---------- |  | -------- |  | ---------- | ----- |  |  | ----------- | 
|Common Stock (Authorized 100 million shares)                      |  | Issued |            |  | Reserved |  |            | Total | 
|                                                                  |  |        |           
|Common Stock issued and outstanding                               |  |        | 54,259,803 |  |          |  | --         |       |  |  | 54,259,803  | 
|Reserved for convertible debentures(a)                            |  |        | --         |  |          |  | 13,448     |       |  |  | 13,448      | 
|Reserved for convertible promissory notes(b)                      |  |        | --         |  |          |  | 10,980,000 |       |  |  | 10,980,000  | 
|Reserved for outstanding stock options(c)                         |  |        | --         |  |          |  | 2,420,500  |       |  |  | 2,420,500   | 
|Reserved for outstanding warrants(d)                              |  |        | --         |  |          |  | 26,860,250 |       |  |  | 26,860,250  | 
|Reserved for Series C Convertible Preferred Stock(e)              |  |        | --         |  |          |  | 4,554,379  |       |  |  | 4,554,379   | 
|Reserved for Series D Convertible Preferred Stock(f)              |  |        | --         |  |          |  | 29,000,000 |       |  |  | 29,000,000  | 
|Reserved for future issuance under stock option plans             |  |        | --         |  |          |  | 9,511,668  |       |  |  | 9,511,668   | 
|                                                                  |  |        |            |  |          |  |            |       |  |  |             | 
|                                                                  |  |        |           
|Total shares issued or reserved for issuance                      |  |        | 54,259,803 |  |          |  | 83,340,245 |       |  |  | 137,600,048 | 
|                                                                  |  |        |            |  |          |  |            |       |  |  |             | 
|                                                                  |  |        |           
|Preferred Stock (Authorized 995,660 shares)                       |  | Issued |            |  | Reserved |  |            | Total | 
|Series C Convertible Preferred Stock(g)                           |  |        | 14,400     |  |          |  | --         |       |  |  | 14,400      | 
|Reserved for warrants for Series D Convertible Preferred Stock(h) |  |        | --         |  |          |  | 290        |       |  |  | 290         | 
|                                                                  |  |        |            |  |          |  |            |       |  |  |             | 
|Total Preferred Stock issued or reserved for issuance             |  |        | 14,400     |  |          |  | 290        |       |  |  | 14,690      | 
|                                                                  |  |        |            |  |          |  |            |       |  |  |             | 



| | (a) | At September 30, 2010, the remaining debentures are convertible into an aggregate of 13,448 shares of common stock at a conversion price of $45.29
per share. For further information regarding our
71/2% convertible subordinated debentures see Note
8 Subordinated Debentures.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Promissory notes convertible into shares of our common stock totaled $2,770,000 at September 30, 2010. Such notes are convertible at any time at conversion prices
ranging from $0.25 to $0.50. See Note 7 Note Obligations Due within One Year.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Options to purchase shares of common stock have been issued to employees and non-employee Board of Director members with exercise prices ranging from $0.25 to $2.16,
with an average price of $0.52.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Warrants to purchase shares of our common stock have been issued to the following:
| | --- | ----------------------------------------------------------------------------------

| |  |  | key employees, and
| | - |  | ------------------

| |  |  | individuals or companies in exchange for consulting, financial advisory, or investment banking services in lieu of cash compensation.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

| | (e) | The Series C Convertible Preferred Stock is convertible directly into 4,554,379 shares of our common stock. This class of preferred stock controls five out of the nine
seats on our Board of Directors.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | Once issued, shares of Series D Convertible Preferred Stock are convertible into shares of common stock at any time.
| | --- | --------------------------------------------------------------------------------------------------------------------

| | (g) | The Series C Convertible Preferred Stock was issued in June 2009 as a result of the conversion of the Series B-1 Convertible Preferred Stock.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (h) | During 2009, our directors and senior management were issued warrants to purchase an aggregate of 390 shares of Series D Convertible Preferred Stock. One warrant for
the purchase of 100 shares of Series D Convertible Preferred Stock was cancelled in July 2009. Warrants outstanding at September 30, 2010 may be exercised to purchase 290 shares of Series D Convertible Preferred Stock, which convert into
29,000,000 shares of common stock at a strike price of $25,000 per share (equal to $0.25 per common share). Each share of Series D Convertible Preferred Stock is entitled to 500,000 votes per share in a stockholder vote.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 3  LIQUIDITY

During the nine months ended September 30, 2010, cash and cash equivalents increased by a net of approximately $0.3 million, attributable primarily to $1.5 million in cash provided by the sale of our
stock in private placements and $1.9 million in net proceeds from the issuance of note obligations, offset primarily by $2.8 million in cash used in operating activities, $135,000 paid to acquire the remaining outstanding stock of one of our
subsidiaries held by a third party, and $154,000 in investments in equipment and software.



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At
September 30, 2010, cash and cash equivalents were approximately $1.0 million. We had a working capital deficit of $14.0 million at September 30, 2010 and an operating loss of $7.3 million for the nine months ended September 30, 2010.
We believe that with our existing contracts plus the possible addition of new contracts we are seeking and the expected continued financial support from our major shareholders, that we will be able to reduce our operating losses and sustain our
current operations over the next 12 months. We are looking at various sources of financing if operations cannot support our ongoing plan; however, there are no assurances that we will be able to find such financing in the amounts or on terms
acceptable to us, if at all. Failure to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during 2010, would adversely affect our ability to achieve our business
objectives and continue as a going concern. There can be no assurance as to the availability of any additional debt or equity financing, the ability or likelihood of obtaining the new contracts we are seeking, or that we will be able to achieve
profitable operations and positive cash flows. These conditions raise doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this
uncertainty.

Although management believes that our current cash position plus the expected continued support of our major
stockholders will be sufficient to meet our current levels of operations, additional cash resources may be required should we wish to accelerate sales or complete one or more acquisitions. Additional cash resources may be needed if we do
not meet our sales targets, cannot refinance our debt obligations, exceed our projected operating costs, or incur unanticipated expenses. We do not currently maintain a line of credit or term loan with any commercial bank or other financial
institution and have not made any arrangements to obtain such additional financing. We can provide no assurance that we will not require additional financing or that we will be able to refinance our existing debt obligations in the event such
refinancing should be needed or advisable. Likewise, we can provide no assurance that if we need additional financing that it will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional
funds when they are needed, or if such funds cannot be obtained on terms favorable to us, we may be unable to execute our business plan or pay our costs and expenses as they are incurred, which could have a material adverse effect on our business,
financial condition and results of operations.

Our unpaid claims liability is estimated using an actuarial paid completion
factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare
operating expenses and may impact our ability to achieve and sustain profitability and positive cash flow. Although considerable variability is inherent in such estimates and no assurances can be given that such variability will not be significant,
we believe that our unpaid claims liability is adequate. However, actual results could differ from the $5.5 million claims payable amount reported as of September 30, 2010.

NOTE 4  GOODWILL AND INTANGIBLE ASSETS

On January 20, 2009, CompCare acquired Core, a privately held company, through a merger and in exchange for CompCare common and convertible preferred stock. As a result of the merger, the former Core
stockholders as a collective group obtained voting control of CompCare. Consequently, the transaction was accounted for as a reverse acquisition with Core designated as the accounting acquirer and CompCare as the predecessor.

The assets acquired by Core included identifiable intangible assets, such as CompCares customer contracts, provider network, and
its accreditation from the National Committee for Quality Assurance (NCQA). Identifiable intangible assets were valued using either an income or cost approach, while the other assets acquired and liabilities assumed were recorded at
their carrying values, which approximated their fair values.

Customer contracts

We valued customer contracts with an income approach based on a discounted cash flow analysis utilizing managements best estimates
of inherent assumptions such as the discount rate and expected life of the contract.

Provider network

We used a cost approach that estimated the average cost to recruit a provider derived from historical external costs and
multiplied by the number of providers existing at acquisition.



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NCQA
accreditation

Utilizing a cost approach, we estimated the value of CompCares NCQA accreditation as the sum of
the fee charged by the NCQA plus the estimated internal and external costs of preparing for the review.

In January 2009,
prior to acquiring CompCare, Core purchased a 49% interest in CompCare for $1,500,000, yielding an implied purchase price of $3,071,000 for the entire company. In accordance with ASC 805-10, Business Combinations, the implied purchase
price of CompCare was first allocated to the fair value of CompCares assets and liabilities, including identifiable intangible assets. The excess of implied purchase price over the fair value of net assets acquired was assigned to goodwill.
Goodwill related to this acquisition is not deductible for tax purposes and in accordance with ASC 350-20, Intangibles  Goodwill and Other, is not amortized, but instead is subject to periodic impairment tests. Identifiable
intangible assets with definite useful lives are amortized on a straight-line basis over three years, which approximates their remaining lives. Deferred tax liabilities resulting from the difference between the assigned values and tax bases of
identifiable intangible assets were not recorded due to net operating loss carryforwards.

The following table summarizes the
allocation of implied purchase price to the assets acquired and liabilities assumed at the acquisition date (amounts in thousands):



|                                                                                  |  |  |        |   |                 |  |             |  
|--------------------------------------------------------------------------------- |  |  | ------ | - | --------------- |  | ----------- | -
|                                                                                  |  |  |        |   | January 20,2009 | 
|Implied purchase price                                                            |  |  |        |   |                 |  | $    3,071  |  
|Less: recognized amounts of identifiable assets acquired
and liabilities assumed: |  |  |        |   |                 |  |             |  
|Cash and cash equivalents                                                         |  |  | 522    |   |                 |  |             |  
|Trade accounts receivable                                                         |  |  | 616    |   |                 |  |             |  
|Other current assets                                                              |  |  | 325    |   |                 |  |             |  
|Intangible assets:                                                                |  |  |        |   |                 |  |             |  
|Customer contracts                                                                |  |  | 800    |   |                 |  |             |  
|NCQA accreditation                                                                |  |  | 500    |   |                 |  |             |  
|Provider networks                                                                 |  |  | 434    |   |                 |  |             |  
|Property and equipment                                                            |  |  | 230    |   |                 |  |             |  
|Other non-current assets                                                          |  |  | 322    |   |                 |  |             |  
|Accounts payable and accrued liabilities                                          |  |  | (2,156 | ) |                 |  |             |  
|Accrued claims payable                                                            |  |  | (5,637 | ) |                 |  |             |  
|Long-term debt                                                                    |  |  | (2,444 | ) |                 |  |             |  
|Other liabilities and non-controlling interest                                    |  |  | (2,591 | ) |                 |  |             |  
|                                                                                  |  |  |        |   |                 |  |             |  
|Total identifiable net assets                                                     |  |  |        |   |                 |  | (9,079      | )
|                                                                                  |  |  |        |   |                 |  |             |  
|Goodwill from acquisition of CompCare                                             |  |  |        |   |                 |  | $    12,150 |  
|                                                                                  |  |  |        |   |                 |  |             |  

NOTE 5  SOURCES OF REVENUE

Our revenue can be segregated into the following significant categories (amounts in thousands):



|                                       |  |                                 |            |  |                                |  |            |      |  |  |             |  |  |  |             | 
|-------------------------------------- |  | ------------------------------- | ---------- |  | ------------------------------ |  | ---------- | ---- |  |  | ----------- |  |  |  | ----------- | 
|                                       |  | Three Months EndedSeptember 30, |            |  | Nine Months EndedSeptember 30, | 
|                                       |  | 2010                            |            |  | 2009                           |  |            | 2010 |  |  | 2009        | 
|Capitated contracts                    |  |                                 | $    6,020 |  |                                |  | $    2,757 |      |  |  | $    13,946 |  |  |  | $    8,143  | 
|Administrative services only contracts |  |                                 | 591        |  |                                |  | 600        |      |  |  | 1,642       |  |  |  | 1,696       | 
|Pharmacy contracts                     |  |                                 | 1,287      |  |                                |  | 202        |      |  |  | 1,727       |  |  |  | 572         | 
|Other                                  |  |                                 | 3          |  |                                |  | 9          |      |  |  | 29          |  |  |  | 18          | 
|                                       |  |                                 |            |  |                                |  |            |      |  |  |             |  |  |  |             | 
|Sub total                              |  |                                 | $    7,901 |  |                                |  | $    3,568 |      |  |  | $    17,344 |  |  |  | $    10,429 | 
|Less: Pre-acquisition revenues         |  |                                 | --         |  |                                |  | --         |      |  |  | --          |  |  |  | 710         | 
|                                       |  |                                 |            |  |                                |  |            |      |  |  |             |  |  |  |             | 
|Total                                  |  |                                 | $    7,901 |  |                                |  | $    3,568 |      |  |  | $    17,344 |  |  |  | $    9,719  | 
|                                       |  |                                 |            |  |                                |  |            |      |  |  |             |  |  |  |             | 

Under our capitated contracts, we assume the financial risk for the costs of member behavioral healthcare
services in exchange for a fixed, per member per month fee. Under our ASO only contracts, we may manage behavioral healthcare programs or perform various managed care functions, such as clinical care management,



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provider network development and claims processing without assuming financial risk for member behavioral healthcare costs. Under our pharmacy contracts, we manage behavioral pharmaceutical
services for the members of health plans on a capitated or ASO basis. Other revenues represent commissions earned through the sale of durable goods.

NOTE 6  MAJOR CUSTOMERS/CONTRACTS

(1) We currently provide behavioral healthcare services to approximately 224,000 members of a health plan providing Medicaid and Medicare benefits. Services are provided on a capitated and ASO basis. The
contract accounted for 16.9% of our revenues for the nine month period ended September 30, 2010 and 22.4% of our revenues for the nine months ended September 30, 2009. The health plan has been a customer since June of 2002. The initial
contract was for a one-year period and has been automatically renewed on an annual basis. Either party may terminate upon 90 days written notice to the other party.

(2) We currently contract with a health plan to provide behavioral healthcare services to approximately 231,000 Medicaid and Medicare members on a capitated and ASO basis. Our contract with the health
plan accounted for 20.9% of our operating revenues for the nine months ended September 30, 2010 and 27.1% of our operating revenues for the nine months ended September 30, 2009. The initial contract was for a one-year term and has been
automatically renewed on an annual basis since 2003. In September 2010, the client provided notice that one of its affiliates would manage its behavioral health care benefits and, as a result, will discontinue contracting with us effective
December 31, 2010.

(3) We currently furnish behavioral healthcare services to approximately 91,000 CHIP and Medicaid members on a
capitated basis under a contract that began in April 2010. This contract accounted for 15.6% of our operating revenues during the nine months ended September 30, 2010. The term of the contract is for one year and nine months and will
automatically renew at the end of the initial term and annually thereafter unless either party provides written notice of termination to the other party at least 90 days in advance of the then current termination date.

(4) On September 18, 2010, we began providing mental health and substance abuse services and pharmacy prescription drugs management services to
approximately 185,000 members of a health plan in Puerto Rico on a capitated basis. The contract accounted for 20.5% of our revenues for the three months ended September 30, 2010 and 9.3% of our revenues for the nine months ended
September 30, 2010. The contract has an initial two year term with automatic renewals for additional one year terms unless either party provides 90 days prior written notice of its intention not to renew the agreement.

In general, our contracts with our customers have one or two year initial terms, with automatic annual extensions. Such contracts generally provide for
cancellation by either party upon 60 to 90 days written notice or the right to request a renegotiation of terms under certain circumstances. No assurance can be given that we will be able to renegotiate any such terms if we make such a request.



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NOTE 7 
NOTE OBLIGATIONS DUE WITHIN ONE YEAR

Note obligations due within one year consist of the following (amounts in thousands):



|                                                                                                                  |  |                   |  |                 
|----------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | ----------------
|                                                                                                                  |  | September 30,2010 |  | December 31,2009
|71/2% convertible subordinated debentures due April 2010, interest payable semi-annually in April and October (1) |  | $    609          |  | 2,244           
|10% callable convertible promissory note due June 2010 (2)                                                        |  | --                |  | 2,000           
|10% callable promissory notes/zero coupon promissory notes due May 2010 (3)                                       |  | --                |  | 200             
|10% convertible promissory notes due November 2010 (4)                                                            |  | 90                |  | 150             
|10% callable convertible promissory notes issued with detachable warrants and no specified maturity date (5)      |  | --                |  | 300             
|7% convertible promissory notes due March 2011 (6)                                                                |  | 150               |  | --              
|24% convertible promissory notes issued with detachable warrants due April and June 2011 (7)                      |  | 2,100             |  | --              
|Zero coupon convertible promissory note due November 2010 (8)                                                     |  | 230               |  | --              
|9% promissory note due December 2010 (9)                                                                          |  | 250               |  | --              
|8% promissory note due October 2010 (10)                                                                          |  | 50                |  | --              
|                                                                                                                  |  |                   |  |                 
|Total note obligations due within one year before discount                                                        |  | 3,479             |  | 4,894           
|Less: Unamortized discount on notes payable                                                                       |  | (290)             |  | (173)           
|                                                                                                                  |  |                   |  |                 
|Total note obligations due within one year                                                                        |  | $    3,189        |  | 4,721           
|                                                                                                                  |  |                   |  |                 

(1) At September 30, 2010, the outstanding debentures were
convertible into 13,448 shares of common stock at a conversion price of $45.29 per share. Approximately 74%, or $1.7 million, of the debentures outstanding at the maturity date of April 15, 2010 were exchanged for senior promissory notes due
April 2012, with an annual interest rate of 10% payable semi-annually in April and October. For further information on the debentures, see Note 8 Subordinated Debentures.

(2) In June 2009, we issued a callable convertible promissory note to an existing investor. The note accrued interest at an annual rate of 10% per annum and matured June 24, 2010. On the
maturity date, the principal plus accrued interest was converted into 6,285,714 shares of our common stock at a conversion price of $0.35 as payment in full of the outstanding principal balance of the note and all accrued interest thereon.

(3) In October 2009, we issued a $100,000 promissory note to each of two individuals. At issuance the notes bore interest at an annual rate
of 10% with interest payable at maturity. In March 2010, the notes plus accrued interest of approximately $8,000 were exchanged for zero coupon notes, each with a face value of $115,000. Both notes were repaid in May 2010. The effective return to
each investor on the zero coupon notes was 56.2% and we recognized approximately $22,000 in interest expense for each note during the nine months ended September 30, 2010.

(4) In November 2009, we issued convertible promissory notes in the amounts of $100,000 and $50,000 to two individuals, respectively. The notes bear interest at an annual rate of 10% with interest payable
quarterly in arrears. At the option of the note holders, all or a portion of the principal and accrued but unpaid interest may be converted into shares of our common stock at maturity or at any time prior to maturity at a conversion price of $0.25
per share. At maturity, the balance of the notes and accrued but unpaid interest not converted into shares of our common stock will be repaid. As of September 30, 2010, we had partially redeemed $60,000 of the $100,000 convertible promissory
note.

(5) In December 2009, we issued $100,000 convertible promissory notes to each of three individuals. The notes had no stated maturity
date but were callable by the note holder with five days notice. We repaid two of the notes in January 2010 and the remaining note in May 2010. The notes each bore interest at an annual rate of 10% and were convertible into our shares of common
stock at any time at a conversion price of $0.25 per share. In conjunction with the loans, each note holder received a warrant to purchase 200,000 shares of our common stock at $0.25 per share. The warrants were vested upon issuance and have terms
of three years. We allocated the proceeds from the notes into two components, debt and warrants, based on their relative fair values. The warrants were valued at approximately $89,000 in the aggregate using the Black-Scholes option valuation model.
We also determined that the convertible



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promissory notes contained beneficial conversion features valued at $84,000 in the aggregate. The values of the warrants and beneficial conversion features were recorded as a discount on notes
payable. At the stated interest rate of 10%, we recognized approximately $4,000 of interest expense for the nine months ended September 30, 2010. For accounting purposes we also recognized approximately $173,000 of interest expense attributable
to the amortization of the discount recorded on the notes. The overall theoretical return to the investor, computed taking into account the coupon, the beneficial conversion feature and the warrants, was 2,179.2%.

(6) In March 2010, we issued two one-year convertible promissory notes: $100,000 to one individual and $50,000 to one entity. The notes bear interest at
an annual rate of 7%, payable quarterly in arrears. At the option of the note holders, the principal and accrued but unpaid interest may be converted into common stock of the Company at a conversion price of $0.25 and $0.50 per share, respectively.
In conjunction with the loans, the note holders received warrants to purchase an aggregate of 75,000 shares of our common stock at $0.75 per share. The warrants were vested upon issuance and have a three-year term. We allocated the proceeds from the
notes into two components, debt and warrants, based on their relative fair values. The warrants were valued at approximately $14,000 using the Black-Scholes option valuation model. We also determined that the convertible promissory note contained
beneficial conversion features valued at $13,000. The values of the warrants and beneficial conversion features were recorded as discount on notes payable. At the stated interest rate of 7%, we recognized approximately $2,600 and $5,800 of interest
expense for the three and nine months ended September 30, 2010, respectively. For accounting purposes we also recognized approximately $6,500 and $13,900 of interest expense for the three and nine months ended September 30, 2010,
respectively, which is attributable to the amortization of the discount recorded on the notes. The overall theoretical return to the investor, computed taking into account the coupon, the beneficial conversion feature and the warrants, is 28.1%.

(7) In April and June 2010, we issued two one-year convertible promissory notes: $100,000 and $2,000,000 to two of our shareholders. The
notes bear interest at the annual rate of 24%, payable quarterly in arrears. The principal and accrued interest may be converted at any time prior to maturity into our common stock at a conversion price of $0.25 per share. In conjunction with the
loans, the note holders received warrants to purchase an aggregate of 1,050,000 shares of our common stock at $0.25 per share. The warrants were vested upon issuance and have a five-year term. We allocated the proceeds from the notes into two
components, debt and warrants, based on their relative fair values. The warrants were valued at approximately $220,000 using the Black-Scholes option valuation model. We also determined that the convertible promissory notes contained beneficial
conversion features valued at $168,000. The allocated value of the warrants and the value of beneficial conversion features were recorded as a discount on notes payable. At the stated interest rate of 24%, we recognized approximately $127,000 and
$166,000 of interest expense for the three and nine months ended September 30, 2010. For accounting purposes we also recognized approximately $80,000 and $103,000 of interest expense for the three and nine months ended September 30, 2010,
which is attributable to the amortization of the discount recorded on the notes. As of September 30, 2010, interest of approximately $143,000 was due and not yet paid. The overall theoretical return to the investors, computed taking into
account the coupon, the beneficial conversion feature and the warrants, is 46.1%.

(8) In February 2010, we issued a zero coupon convertible
promissory note with a face value of $220,000 for net proceeds of $200,000 and a maturity date in April 2010. The net proceeds of $200,000 included an issuance fee of $6,000 plus a yield of 24%. The original note was replaced with new notes in April
and August 2010. The note holder may elect to convert all or a portion of the face value of the note into our common stock at a conversion price of $0.25 per share. For the nine months ended September 30, 2010, approximately $69,000 of interest
expense was recognized related to the accretion to its carrying value. The overall return to the investor inclusive of the issuance fee was 51.8%. At the notes maturity in August 2010, it was replaced by a new note of similar terms with a face
value of $230,000 and a maturity date in November 2010.

(9) In March 2010, we issued to an individual a zero coupon convertible promissory
note with a face value of $250,000 for net proceeds of $200,000 and a maturity date in May 2010. The net proceeds of $200,000 include an issuance fee of $42,000 plus a yield of 24%. In May 2010, the notes maturity was extended to July 2010 for
an additional fee of 200,000 shares of our common stock, which were issued on July 9, 2010. In July 2010, the notes maturity was further extended to September 2010 for a fee of 300,000 shares of our common stock, issued on
September 15, 2010. The note due in September 2010 was again extended to December 2010 in exchange for a monthly interest payment of 9% per annum. For the nine months ended September 30, 2010, we accreted its carrying value
approximately $8,000 to interest expense with an overall return to the investor of 14.9%, exclusive of the value of our common stock which approximates $87,000.



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(10) On July 8, 2010, we
entered into a settlement agreement with MDwise, Inc. (MDwise) whereby MDwise would relinquish all claims against us in exchange for four payments of $50,000 to be paid by us during the remainder of 2010. As security for our obligation
to make the payments, we issued to MDwise a promissory note in the amount of $350,000 bearing interest at the rate of 8% per annum. If the four installments of $50,000 are paid as scheduled, the promissory note will be cancelled and all
disputes between the parties will be considered resolved. The last payment of $50,000 was made in October 2010. As a result, the note was later cancelled with no interest payment.

NOTE 8  SUBORDINATED DEBENTURES

We were unable to repay our 71/2% convertible subordinated debentures in the amount of $2,244,000 of principal or to pay the final interest installment of $84,150 on the debentures maturity date of April 15, 2010. However, we
have reached agreement with certain owners of the debentures representing approximately 74%, or $1.7 million, of the debentures to cancel such debentures in exchange for the issuance by us of senior promissory notes, warrants to purchase our common
stock, and cash payments of approximately $86,000 in the aggregate. The senior promissory notes bear interest at a rate of 10% per annum, payable semiannually on April 15 and October 15 of each year through April 15, 2012, the
maturity date of the senior promissory notes. The warrants allow for the purchase of an aggregate of approximately 6.8 million shares of our common stock at an exercise price of $0.25 per share. All of the warrants have five year terms and are
currently exercisable. We are not able to estimate the financial effect resulting from a state of default with respect to the debentures held by the remaining bond holders.

NOTE 9  SALE OF SUBSIDIARY

On February 28, 2010, Core sold Direct Ventures International, Inc. (DVI), a Core subsidiary, to its former owner in exchange for 2.1 million shares of CompCare common stock. The
former owner took possession of all assets and assumed certain liabilities as of February 28, 2010. We canceled the reacquired shares and recorded a gain on the sale of approximately $0.5 million, which was credited directly to the retained
earnings of Core.

NOTE 10  COMMON STOCK

During the three months ended September 30, 2010, the number of our shares of common stock outstanding changed due to the following
activity:



| |  |  | On July 9, 2010, we issued 200,000 shares of our common stock to a note holder of the Company in lieu of cash paid for interest.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

| |  |  | On July 27, 2010 we sold 4,600,000 shares of our common stock to an existing investor in the Company for aggregate proceeds of $1,150,000.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | On August 12, 2010, we sold 1,000,000 shares of our common stock in a private placement transaction to one accredited investor for aggregate
proceeds of $250,000.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | On September 12, 2010, we issued 80,000 shares of our common stock to a consultant who accepted the shares in lieu of $20,000 of cash
compensation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | On September 15, 2010, we issued 300,000 shares of our common stock to a note holder of the Company in lieu of cash paid for interest.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

NOTE 11  PREFERRED STOCK

We are authorized to issue shares of preferred stock, $50.00 par value (Preferred Stock), in one or more series, each series
to have such designation and number of shares as the Board of Directors may determine prior to the issuance of any shares of such series. Each series may have such preferences and relative participation, optional or special rights with such
qualifications, limitations or restrictions stated in the resolution or resolutions providing for the issuance of such series as may be adopted from time to time by our Board of Directors prior to the issuance of any such series.

As of September 30, 2010, 995,660 shares of our Preferred Stock were authorized and 14,400 shares were issued and outstanding. The
outstanding shares consist of Series C Convertible Preferred Stock, $50.00 par value (Series C Convertible Preferred Stock), which are convertible into our common stock at the initial rate of



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approximately 316.28 shares of common stock for each share of Series C Convertible Preferred Stock. The conversion rate is adjustable for any dilutive issuances of common stock occurring in the
future. The rights and preferences of the Series C Convertible Preferred Stock include, among other things, the following:



| |  |  | liquidation preferences;
| | - |  | ------------------------

| |  |  | dividend preferences;
| | - |  | ---------------------

| |  |  | the right to vote with the common stockholders on matters submitted to the Companys stockholders; and
| | - |  | ------------------------------------------------------------------------------------------------------

| |  |  | the right, voting as a separate class, to elect five directors of the Company.
| | - |  | ------------------------------------------------------------------------------

In March 2009, we designated 7,000 shares of Series D Convertible Preferred Stock. No shares of Series D Convertible Preferred Stock are
outstanding as of September 30, 2010. Of the 7,000 designated shares, 290 are presently acquirable through the exercise of warrants issued to members of our Board of Directors and certain members of management during 2009. Once issued, a share
of Series D Convertible Preferred Stock is convertible at any time after the date of issuance and without the payment of additional consideration into 100,000 shares of common stock, subject to adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization. Each holder of a share of Series D Convertible Preferred Stock is entitled to notice of any stockholders meeting and to vote on any matters on which the shares of our common stock may be
voted. In a stockholder vote, a share of Series D Convertible Preferred Stock is entitled to the number of votes that the holder of 500,000 shares of common stock would be entitled to by virtue of holding such shares of common stock. Holders of
Series D Convertible Preferred Stock also have certain liquidation and dividend preferences.

NOTE 12 
COMMITMENTS AND CONTINGENCIES



|(1) | A complaint entitled MDwise, Inc. vs. Comprehensive Behavioral Care, Inc. was filed against us in April 2009 in the Marion County Superior Court in Indiana
by MDwise, a former client located in Indiana. The complaint sought unspecified damages and a declaratory judgment requiring us to pay outstanding provider claims that are allegedly our responsibility under the expired contract. On July 8,
2010, we entered into a settlement agreement with MDwise whereby MDwise would relinquish all claims against us in exchange for four payments of $50,000 to be paid by us during the remainder of 2010. As security for our obligation to make the
payments, we issued to MDwise a promissory note in the amount of $350,000 bearing interest at the rate of 8% per annum. During the three months ended September 30, 2010, we paid three installments of $50,000 as scheduled. The last payment
was made in October 2010. As a result, the promissory note was cancelled and the complaint was dismissed with prejudice.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | We initiated an action against Jerry Katzman in July 2009 in the U.S. District Court for the Middle District of Florida alleging that Mr. Katzman, a former
director, fraudulently induced us to enter into an employment agreement and, alternatively, that Mr. Katzman breached that alleged employment agreement. In December 2009, Mr. Katzman filed an answer and counterclaim. The counterclaim
requested judgment in Mr. Katzmans favor and compensatory damages to remedy alleged breaches of contract by us. The matter was tried before a jury on September 27, 2010, and a verdict was rendered by the jury on October 1, 2010.
The jury found that Mr. Katzman did not fraudulently induce CompCare to enter into the contract. The jury also found that Mr. Katzman was entitled to no award on his counterclaim. Mr. Katzman and the Company have filed post trial
motions. Mr. Katzman also simultaneously initiated litigation in the Delaware Court of Chancery seeking indemnification for his fees and costs incurred, in part, in the litigation described above. The company is vigorously opposing the Delaware
litigation and seeking sanctions against Mr. Katzman for frivolous litigation and forum shopping.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
April, 2010, the Company initiated litigation against Mr. Katzman and his domestic partner, Margaret Peggy Husted (the Defendants), relating to shares of Company stock that the Company contends were improperly issued.
The Company asserted claims against the Defendants for violation of various provisions of the Securities Exchange Act, conversion, and breach of fiduciary duty as to Mr. Katzman, only. Discovery in this matter has just begun and the Company
will continue to vigorously pursue the recovery of the disputed stock and damages, as appropriate.



|(3) | On April 5, 2010 a complaint entitled Inspira Mental Health Management, Inc. v. Comprehensive Behavioral Care, Inc., John Hill, Clark
Marcus, Giuseppe Crisafi was filed in the Court of First Instance, Superior Court of Puerto Rico by Inspira Mental Health Management, Inc. (Inspira). The complaint claimed breach of contract and bad faith on the part of CBC with
respect to the terms and conditions of the Shareholders Agreement, dated December 8, 2008, between Inspira and CBC and a Memorandum of Understanding, executed July 24, 2008,
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | between Inspira and CBC, each relating to CompCare de Puerto Rico, Inc. (CCPR). CBC and Inspira owned 51% and 49%, respectively, of the capital stock of CCPR. On July 2, 2010,
Inspira and CBC entered into a settlement agreement whereby CBC would, among other things, pay $135,000 to acquire Inspiras 49% equity interest in CCPR. As part of the acquisition, Inspira would dismiss all claims against CBC and Messrs. Hill,
Marcus, and Crisafi. All actions contemplated by the settlement agreement were completed by July 22, 2010 resulting in CCPR becoming a 100% owned subsidiary of CBC.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | On September 21, 2010, a complaint entitled InfoMc, Inc. v. Comprehensive Behavioral Care, Inc. and CompCare de Puerto Rico, Inc. was filed against us
in the U.S. District Court for the Eastern District of Pennsylvania alleging, among other things, that we improperly used InfoMC, Inc.s trademarks in connection with CompCare de Puerto Rico, Incs. proposal to obtain a managed behavioral
healthcare services contract in Puerto Rico. The complaint asserts claims for federal trademark infringement, false advertising, unfair competition, conversion, promissory estoppel and unjust enrichment. InfoMC, Inc. is seeking monetary damages in
an unspecified amount and certain injunctive relief. We will vigorously defend ourselves against the allegations asserted. However, until the complaint is withdrawn or settled, we will incur legal fees in defending against this action and may be
subject to awards of compensatory and other damages, including attorneys fees.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | In connection with an agreement with a new client to provide mental health and substance abuse services and pharmacy prescription drugs management services in Puerto
Rico, we obtained a letter of credit from a bank in the amount of $4,000,000 for the benefit of the client to secure our compliance with our obligations under the agreement. The client may draw on all or part of the letter of credit under certain
circumstances, including our lack of compliance with certain of our obligations under the agreement. Collateral for the letter of credit was provided by a major stockholder of the Company. If the client draws upon the letter of credit, we may be
liable to our major stockholder for the amount of collateral accessed by the bank to fulfill its obligations under the letter of credit.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally in relation to this Puerto Rico agreement, certain of our companies, specifically, the parent Comprehensive Care Corporation (CCC) and principal operating subsidiary, CBC, have
executed guarantees of the payment and performance obligations of our subsidiary that is party to the agreement, CCPR. Should CCPR default on its obligations, the client will be able to seek satisfaction under the contract from CCC and CBC.

NOTE 13  RELATED PARTY TRANSACTIONS

In connection with employment agreements executed with our Chairman and Chief Executive Officer, our former President and Co-Chief
Executive Officer, and our Chief Financial Officer, we have deferred compensation owing to these individuals of approximately $368,077, $65,438 and $177,272, respectively, as of September 30, 2010.

On September 24, 2010, we entered into a consulting agreement with our former Co-Chief Executive Officer, John M. Hill, in
conjunction with his resignation effective of the same date. The agreement states that in exchange for payments aggregating $250,000 to be paid over the next twelve months, Mr. Hill will perform consulting services to improve the efficiency of
our clinical operations. Mr. Hill is a related party to the Company by virtue of the position he held as Co-Chief Executive Officer and his ownership of more than five per cent of our common stock, calculated on a beneficial ownership basis.



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NOTE 14 
SEGMENT INFORMATION

Summary financial information for our two reportable segments and
Corporate and other is as follows:



|                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                            |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Managed Care                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Revenues                                    |  | $                               | 7,898  |   |                                | $ | 3,559  |      |  | $ | 17,315 |   |  | $ | 10,411  |  
|Gross Margin                                |  |                                 | 350    |   |                                |   | 52     |      |  |   | 1,801  |   |  |   | 450     |  
|Loss before income taxes                    |  |                                 | (1,428 | ) |                                |   | (905   | )    |  |   | (1,667 | ) |  |   | (1,608  | )
|                                            |  |                                 |        |  
|Consumer Marketing                          |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Revenues                                    |  |                                 | 3      |   |                                |   | 9      |      |  |   | 29     |   |  |   | 18      |  
|Gross Margin                                |  |                                 | (2     | ) |                                |   | 4      |      |  |   | 1      |   |  |   | 9       |  
|Loss before income taxes                    |  |                                 | (53    | ) |                                |   | (214   | )    |  |   | (353   | ) |  |   | (606    | )
|                                            |  |                                 |        |  
|Corporate and Other                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Revenues                                    |  |                                 | --     |   |                                |   | --     |      |  |   | --     |   |  |   | --      |  
|Gross Margin                                |  |                                 | --     |   |                                |   | --     |      |  |   | --     |   |  |   | --      |  
|Loss before income taxes                    |  |                                 | (2,178 | ) |                                |   | (1,547 | )    |  |   | (6,517 | ) |  |   | (12,428 | )
|                                            |  |                                 |        |  
|Consolidated Operations                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Revenues                                    |  |                                 | 7,901  |   |                                |   | 3,568  |      |  |   | 17,344 |   |  |   | 10,429  |  
|Gross Margin                                |  |                                 | 348    |   |                                |   | 56     |      |  |   | 1,802  |   |  |   | 459     |  
|Loss before income taxes                    |  |                                 | (3,659 | ) |                                |   | (2,666 | )    |  |   | (8,537 | ) |  |   | (14,642 | )
|                                            |  |                                 |        |  
|Pre-acquisition loss before income taxes    |  |                                 | --     |   |                                |   | --     |      |  |   | --     |   |  |   | (720    | )
|                                            |  |                                 |        |  
|Loss before income taxes  post-acquisition |  |                                 | (3,659 | ) |                                |   | (2,666 | )    |  |   | (8,537 | ) |  |   | (13,922 | )

NOTE 15 
SUBSEQUENT EVENTS

For the purpose of this disclosure we have evaluated potential subsequent
events through the date these financial statements were issued, November 12, 2010. Other than the events previously disclosed in the preceding footnotes, there were no reportable subsequent events.

ITEM2. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, the following information contains forward-looking statements as defined under federal securities
laws. Such statements include, but are not limited to, statements concerning the integration of the operations of Core into our business, the impact on revenues and profits that Core is expected to have in marketing its products, the potential
represented by ethnic markets and the overall performance of the healthcare market, our anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, growth and expansion, the ability to obtain
new and maintain existing behavioral healthcare contracts and the profitability, if any, of such behavioral healthcare contracts. These statements are based on current expectations, estimates and projections about the industry and markets in which
we operate, the customers we serve and managements beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to
differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, changes in local, regional, and national economic and political conditions, the effect of governmental regulation,
competitive market conditions, varying trends in member utilization, our ability to manage healthcare operating expenses, our ability to achieve expected results from new business, the profitability of our capitated contracts, cost of care,
seasonality, our ability to obtain additional financing, and other risks detailed herein and from time to time in our



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filings with the SEC. The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto of CompCare appearing elsewhere in this
report.

OVERVIEW

GENERAL

The Company is a Delaware corporation organized in 1969 that provides health care services and products through its primary
operating subsidiaries, CBC and Core.

Primarily through CBC and its subsidiaries, we provide managed healthcare services in
the behavioral health and psychiatric fields. Recent federal and state legislation provides a new focus for CBC in specialty behavioral health care areas such as Autism Spectrum Disorders (ASD) and Attention Deficit Disorder
(ADD). Additionally, CBC provides pharmacy and analytic services for its health plan customers to integrate medical claims data and pharmacy data into actionable information so patient care can be coordinated cost effectively. We
coordinate and manage the delivery of a continuum of psychiatric and substance abuse services and products to:

 commercial members;

 Medicare
members;

 Medicaid members; and

 CHIP members.

on behalf of:

 health plans;

 government organizations;

 third-party claims administrators;

 commercial purchasers; and

 other group purchasers of behavioral healthcare services.

Our customer base includes both private and governmental entities. We provide services primarily through a network of contracted
providers that includes:

 psychiatrists;

 psychologists;

 therapists;

 other licensed healthcare professionals;

 psychiatric hospitals;

 general medical facilities with psychiatric beds;

 residential treatment centers; and

 other treatment facilities.

The services provided through our provider network include outpatient programs (such as counseling or therapy), intermediate care
programs (such as intensive outpatient programs and partial hospitalization services), inpatient programs and crisis intervention services. We do not directly provide treatment or own any provider of treatment services or treatment facility.

We typically enter into contracts on an annual basis to provide managed behavioral healthcare and substance abuse treatment
to our clients members. Our arrangements with our clients fall into two broad categories:

 at-risk or capitation arrangements where our clients pay us a fixed fee per member in exchange for our assumption of the financial risk of providing services; and

 ASO arrangements where we manage behavioral healthcare programs or perform various
managed care services, such as clinical care management, provider network development, and claims processing without assuming financial risk for member behavioral healthcare costs.



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Under capitation
arrangements, the number of covered members as reported to us by our clients determines the amount of premiums we receive, which amount is independent of the cost of services rendered to members. The amount of premiums we receive for each member is
fixed at the beginning of our contract term. These premiums under certain circumstances may be subsequently adjusted up or down, generally at the commencement of each renewal period.

Our largest expense is the cost of the behavioral health services that we provide, which is based primarily on our arrangements with
healthcare providers. Since we are subject to increases in healthcare operating expenses based on an increase in the number and frequency of our members seeking behavioral care services, our profitability depends on our ability to predict and
effectively manage healthcare operating expenses in relation to the fixed premiums we receive under capitation arrangements. Providing services on a capitation basis exposes us to the risk that our contracts may ultimately be unprofitable if we are
unable to anticipate or control healthcare costs. Estimation of healthcare operating expense is our most significant critical accounting estimate. See Managements Discussion and Analysis of Financial Condition and Results of Operations
 Critical Accounting Estimates below.

ANCILLARY PRODUCTS

Through our subsidiaries, including Core, we provide healthcare related ancillary products through various distribution channels.

Our ancillary products include:

|                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø     Pharmaceutical Management - |  | With this product we integrate multiple sets of clinical data to perform an analysis of behavioral pharmaceutical usage and trends to effectively quantify, monitor, strategically
plan, and most importantly implement the most effective quality and cost management strategies.                                                                                                                                                                                 
|                                  | 
|Ø     LifeGuide247 -             |  | This is a 24-hour service that provides guidance through lifes difficult situations, such as job stress, financial troubles, relationships, grievance and simple legal
matters. Service is available online or by telephone.                                                                                                                                                                                                                                      
|                                  | 
|Ø     Emergency Vital Records -   |  | This product provides access to members vital medical records to emergency responders in the case of an emergency. Paramedics and emergency room practitioners can now
access a members medical records quickly and easily in cases where the member may not be able to provide key information at such a critical time. The product provides answers to 25 key questions patients need to provide an emergency room. We
have immediate interest in this product.
|                                  | 
|Ø     Vision/Dental/Medical -     |  | These are inexpensive discount programs that are low cost to us but provide an excellent annuity.                                                                                                                                                                                                                                                                                                                                                                  
|                                  | 
|Ø     Other Insurance Products -  |  | We plan on marketing these insurance products to our existing customer base sometime in the future.                                                                                                                                                                                                                                                                                                                                                                
|                                  | 
|Ø     Pharmacy Discounts -        |  | This is a prescription discount program. The program incorporates two tiers. Tier one is a free card that gives discounts on prescription drugs. Tier two provides deeper
discounted rates on name brand and generic prescription drugs. Tier two requires the payment of a monthly fee by members.                                                                                                                                                                

RECENT
DEVELOPMENTS

Agreement to serve Puerto Rico Medicare Members

On August 13, 2010, CompCare de Puerto Rico, Inc. (CCPR), a wholly-owned subsidiary of CBC, entered into an Agreement for the Provision of Services with MMM Healthcare, Inc. and its
corporate affiliate PMC Medicare Choice, Inc. (collectively, MMM/PMC) to provide on an exclusive basis mental health and substance abuse services



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and pharmacy prescription drugs management services to members of MMM/PMCs benefit health plans in Puerto Rico. The agreement became effective on September 18, 2010.

The agreement provides for an initial two year term, with automatic renewals for additional one year terms unless either party gives 90
days prior written notice of its intention not to renew the agreement. In the event MMM/PMC should terminate the agreement without cause, it is required under the terms of the agreement to pay CCPR certain monetary penalties.

Pursuant to the agreement, MMM/PMC is required to pay CCPR a per member per month fee on a capitation basis for certain administrative,
mental health and pharmacy management services based on MMM/PMCs then monthly number of health plan members. The projected annual revenues of CCPR due to this agreement are expected to exceed $45 million with net income from the contract
estimated at break-even.

Accordingly, CCPR will be assuming the financial risk of providing the contracted mental health
services and psychotropic pharmacy management services. Under certain circumstances we may enter into negotiations to adjust the capitation rates paid to CCPR. No assurance can be given that such negotiations will be fulfilled in our favor.

In connection with the agreement, CBC and CCPR obtained a letter of credit from a bank in the amount of $4,000,000 (the
Letter of Credit) for the benefit of MMM/PMC to secure CCPRs compliance with its obligations under the agreement. MMM/PMC may draw on all or part of the Letter of Credit under certain circumstances, including CCPRs failure to
comply with certain of its obligations under the agreement. The collateral for the Letter of Credit was provided by a major stockholder of the Company. The Letter of Credit is to remain in full force during the term of the agreement and for six
months thereafter, reducing in amount by $666,666 per month. Additionally, and as part of the agreement, we and our primary operating subsidiary, CBC, executed a guarantee of CCPRs payment and performance of its obligations under or relating
to the agreement.

Pursuant to the agreement, MMM/PMC provided an interest-free advance of $600,000 on September 20, 2010
against any compensation due to CCPR in the final month of the initial contract term. In exchange for the $600,000 advance, the Company issued to an affiliate of MMM/PMC a five-year warrant effective September 18, 2010 to purchase up to
5,000,000 shares of the Companys common stock at an exercise price of $0.25 per share.

Opening of Puerto Rico office

On September 7, 2010, CompCare launched a full-service office in San Juan, Puerto Rico that provides an on-site customer service
call center, care management, claims processing and the administration of special patient requests, including 24/7 access to emergency services. The Puerto Rico office is staffed by 39 employees who are dedicated to serving our Puerto Rico clients
and members.

Other Recent Developments

On September 24, 2010, John M. Hill, our then Co-Chief Executive Officer, President and a member of our Board of Directors, upon mutual agreement with our Board, resigned from his position as our
Co-Chief Executive Officer, President and as a member of our Board. Clark Marcus thus became the sole Chief Executive Officer of the Company.

On July 22, 2010, we acquired the remaining 49% interest owned by the minority partner in our jointly owned subsidiary, CCPR. CCPR was established in 2008 to develop our managed behavioral health
care business in Puerto Rico. With this transaction, we now own 100% of CCPR, positioning the Company to take full advantage of additional opportunities in the Puerto Rico market.

In addition to the aforementioned new contract in Puerto Rico, we added five other new customers to our portfolio of clients during the
first three quarters of 2010. In the aggregate, we will manage an additional 250,000 members on a capitated or ASO basis for health plans servicing Medicaid, Medicare, CHIP, and commercial members. We expect revenues of approximately $8 million from
these new contracts in 2010, resulting in associated net income of approximately $0.4 million and $0.01 in earnings per share. In 2011, we anticipate revenues of approximately $11 million that will generate net income of approximately $0.6 million
and earnings per share of $0.01. Our expectations of the financial performance of these contracts are estimates and are subject to the effects of future trends in utilization and our ability to control costs, among



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many factors. Accordingly, no assurance can be given that such annual revenues, results of operations, and earnings per share will actually be realized on such contracts.

We were unable to repay our
71/2% convertible subordinated debentures in the
amount of $2,244,000 of principal or to pay the final interest installment of $84,150 on the debentures maturity date of April 15, 2010. However, we have reached agreement with certain owners of the debentures representing approximately
74%, or $1.7 million, of the debentures to cancel such debentures in exchange for the issuance by us of senior promissory notes, warrants to purchase shares of our common stock, and cash payments of approximately $86,000 in the aggregate. The senior
promissory notes bear interest at a rate of 10% per annum, payable semiannually on April 15 and October 15 of each year through April 15, 2012, the maturity date of the senior promissory notes. The warrants allow for the purchase
of an aggregate of approximately 6.8 million shares of our common stock at an exercise price of $0.25 per share. All of the warrants have five year terms and are currently exercisable. We are not able to estimate the financial effect resulting
from a state of default with respect to the debentures held by the remaining bond holders.

RESULTS OF
OPERATIONS

For the three months ended September 30, 2010, we reported an operating loss of $3.2 million
and a net loss of $3.7 million, or $0.07 loss per share (basic and diluted).

The following table summarizes our operating
results from continuing operations for the three months ended September 30, 2010 and 2009 (amounts in thousands):



|                                           |  |                                  |             |   |      |  |             |  
|------------------------------------------ |  | -------------------------------- | ----------- | - | ---- |  | ----------- | -
|                                           |  | THREE MONTHS ENDED SEPTEMBER 30, |            
|                                           |  | 2010                             |             |   | 2009 | 
|Operating revenues:                        |  |                                  |             |   |      |  |             |  
|Managed care                               |  |                                  | $    7,898  |   |      |  | $    3,559  |  
|Consumer marketing                         |  |                                  | 3           |   |      |  | 9           |  
|                                           |  |                                  |             |   |      |  |             |  
|Total revenues                             |  |                                  | 7,901       |   |      |  | 3,568       |  
|                                           |  |                                 
|Costs of services and sales:               |  |                                  |             |   |      |  |             |  
|Claims expense                             |  |                                  | 6,079       |   |      |  | 2,605       |  
|Other healthcare operating expenses        |  |                                  | 1,469       |   |      |  | 902         |  
|Other costs of services and sales          |  |                                  | 5           |   |      |  | 5           |  
|                                           |  |                                  |             |   |      |  |             |  
|Total costs of services and sales          |  |                                  | 7,553       |   |      |  | 3,512       |  
|                                           |  |                                  |             |   |      |  |             |  
|Gross margin                               |  |                                  | 348         |   |      |  | 56          |  
|Other Expenses:                            |  |                                  |             |   |      |  |             |  
|General and administrative expenses        |  |                                  | 2,259       |   |      |  | 2,224       |  
|Bad debt expense                           |  |                                  | --          |   |      |  | --          |  
|Depreciation and amortization              |  |                                  | 201         |   |      |  | 187         |  
|                                           |  |                                  |             |   |      |  |             |  
|Total operating expenses                   |  |                                  | 2,460       |   |      |  | 2,411       |  
|Equity based expenses                      |  |                                  | 1,127       |   |      |  | 212         |  
|                                           |  |                                  |             |   |      |  |             |  
|Total expenses                             |  |                                  | 3,587       |   |      |  | 2,623       |  
|                                           |  |                                  |             |   |      |  |             |  
|Operating loss before pre-acquisition loss |  |                                  | $    (3,239 | ) |      |  | $    (2,567 | )
|                                           |  |                                  |             |   |      |  |             |  

Managed care revenues increased by 121.9%, or $4.3 million, to $7.9 million for the three months ended
September 30, 2010 compared to $3.6 million for the three months ended September 30, 2009, attributable primarily to $3.1 million of new business with customers located in Texas, Wisconsin, Puerto Rico and Louisiana.

Claims expense on capitated contracts increased by approximately $3.5 million, or 133.4%, for the three months ended September 30,
2010, as compared to the three months ended September 30, 2009, due primarily to an increase of $3.9 million in claims expense attributable to the aforementioned new business with customers in Texas, Wisconsin, Puerto Rico and Louisiana. Claims
expense as a percentage of capitated revenues decreased from 88.0% for the three months ended September 30, 2009 to 83.2% for the three months ended September 30, 2010 due to rate increases totaling approximately $0.3 million received on
two major contracts in Michigan as well as lower utilization of services in Michigan. Other healthcare operating expenses, attributable to servicing both capitated contracts and ASO contracts, increased by 62.9%, or approximately $567,000, due
primarily to costs associated with opening a new office location in Puerto Rico during the three months ended September 30, 2010. Overall, gross margin increased by



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$292,000 from $56,000 for the three months ended September 30, 2009 to $348,000 for the three months ended September 30, 2010.

The following table summarizes our operating results from continuing operations for the nine months ended September 30, 2010 and
2009 (amounts in thousands):



|                                           |  |                                 |             |   |      |  |              |  
|------------------------------------------ |  | ------------------------------- | ----------- | - | ---- |  | ------------ | -
|                                           |  | NINE MONTHS ENDED SEPTEMBER 30, |            
|                                           |  | 2010                            |             |   | 2009 | 
|Operating revenues:                        |  |                                 |             |   |      |  |              |  
|Managed care                               |  |                                 | $    17,315 |   |      |  | $    10,411  |  
|Consumer marketing                         |  |                                 | 29          |   |      |  | 18           |  
|                                           |  |                                 |             |   |      |  |              |  
|Total revenues                             |  |                                 | 17,344      |   |      |  | 10,429       |  
|                                           |  |                                
|Costs of services and sales:               |  |                                 |             |   |      |  |              |  
|Claims expense                             |  |                                 | 11,696      |   |      |  | 6,893        |  
|Other healthcare operating expenses        |  |                                 | 3,818       |   |      |  | 3,068        |  
|Other costs of services and sales          |  |                                 | 28          |   |      |  | 9            |  
|                                           |  |                                 |             |   |      |  |              |  
|Total costs of services and sales          |  |                                 | 15,542      |   |      |  | 9,970        |  
|                                           |  |                                 |             |   |      |  |              |  
|Gross margin                               |  |                                 | 1,802       |   |      |  | 459          |  
|Other Expenses:                            |  |                                 |             |   |      |  |              |  
|General and administrative expenses        |  |                                 | 6,506       |   |      |  | 4,994        |  
|Bad debt expense                           |  |                                 | --          |   |      |  | 4            |  
|Depreciation and amortization              |  |                                 | 553         |   |      |  | 498          |  
|                                           |  |                                 |             |   |      |  |              |  
|Total operating expenses                   |  |                                 | 7,059       |   |      |  | 5,496        |  
|Merger transaction costs                   |  |                                 | --          |   |      |  | 589          |  
|Equity based expenses                      |  |                                 | 2,031       |   |      |  | 8,813        |  
|                                           |  |                                 |             |   |      |  |              |  
|Total expenses                             |  |                                 | 9,090       |   |      |  | 14,898       |  
|                                           |  |                                 |             |   |      |  |              |  
|Operating loss before pre-acquisition loss |  |                                 | $    (7,288 | ) |      |  | $    (14,439 | )
|                                           |  |                                 |             |   |      |  |              |  

Managed care revenues increased 66.3%, or $6.9 million, to $17.3 million for the nine months ended
September 30, 2010 compared to $10.4 million for the nine months ended September 30, 2009. The increase is primarily attributable to $5.0 million of new business from customers located in Texas, Wisconsin, Puerto Rico and Louisiana and
approximately $1.3 million of additional revenue from existing customers in Michigan.

Claims expense on capitated contracts
increased approximately 69.7%, or $4.8 million, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, due primarily to an increase of $5.8 million in claims expense attributable to the
aforementioned new business with customers in Texas, Wisconsin, Puerto Rico and Louisiana, offset by a reduction of $1.2 million of claims expense following a settlement with a former customer. The claims expense reduction resulting from the
settlement also accounted for the decrease in claims expense as a percentage of capitated revenues, which decreased from 79.1% for the nine months ended September 30, 2009 to 74.6% for the nine months ended September 30, 2010. Other
healthcare operating expenses, attributable to servicing both capitated contracts and ASO contracts, increased 24.4%, or approximately $750,000, due primarily to costs associated with opening a new office location in Puerto Rico, higher physician
case review fees, and costs related to increasing the size of our employee base to accommodate expected growth prospects in the near future. Overall, gross margin increased by $1.3 million from $459,000 for the nine months ended September 30,
2009 to $1.8 million for the nine months ended September 30, 2010.

General and administrative expenses increased by
30.3%, or approximately $1.5 million, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, due primarily to settlement expenses, legal fees, and costs related to increasing the size of the
executive management team to accommodate expected growth prospects in the near future.

We had no merger transaction costs for
the nine months ended September 30, 2010 compared to $589,000 incurred during the nine months ended September 30, 2009, which consisted primarily of financial advisory and legal fees. Equity based expenses of $2.0 million recorded in the
nine months ended September 30, 2010 are comprised of $874,000 of expenses related to stock options and warrants granted to employees and directors and $1.2 million of expenses for stock options and warrants issued to consultants and clients.
Equity based expenses of $8.9 million in



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2009 is comprised of $8.2 million of expenses related to stock options and warrants granted to employees and directors, $500,000 of expenses for stock options and warrants issued to consultants,
and $91,000 of expenses due to the early vesting of stock options as a result of the change in control.

SEASONALITY
OF BUSINESS

Historically, we have experienced increased member utilization during the months of
March, April and May and consistently low utilization by members during the months of June, July, and August. Such variations in member utilization impact our costs of care during these months, generally having a positive impact on our gross margins
and operating profits during the June through August period and a negative impact on our gross margins and operating profits during the months of March through May.

CONCENTRATION OF RISK

For the nine
months ended September 30, 2010, approximately 54.0% of our operating revenue was concentrated in contracts with three health plans to provide behavioral healthcare services under CHIP, Medicare and Medicaid plans. In addition, 43.2% of our
operating revenue was attributable to health plan clients servicing Medicaid members in the state of Michigan. The terms of the contracts ranged from one to two years and are automatically renewable for additional one-year periods unless terminated
by either party by giving the requisite written notice.

On September 23, 2010, we received notice from a major customer
located in Michigan serving Medicaid and Medicare members that it would manage its members behavioral health care benefits through an affiliate and consequently discontinue contracting with us effective December 31, 2010. Revenues from
this client accounted for 20.9% of our operating revenues for the nine months ended September 30, 2010 and 27.1% of our operating revenues for the nine months ended September 30, 2009. The loss of further clients in which our revenue is
concentrated, unless replaced by new business, would have a material negative impact on us.

LIQUIDITY AND
CAPITAL RESOURCES

Sources of Liquidity

Our primary source of liquidity on an on-going basis consists of the monthly capitation payments we receive from our clients for
providing managed care services. Based on historical experience, there is a high degree of certainty with respect to the reliability and timing of these payments from continuing contracts. However, the expiration of existing contracts or
commencement of new contracts may cause our operational cash flow to vary significantly.

Our external sources of funds
consist primarily of borrowings, lease financing, and the use of our common stock as a form of liquidity:

Borrowings. We have used on
an as-needed basis unsecured loans from individuals and companies to meet on-going working capital needs. The duration of the borrowings has ranged from one week to three years, with stated interest rates ranging from 7% to 24%. Certain of the loans
have contained features such as the ability to convert all or a portion of the loan into our common stock, or have had a warrant for the purchase of our common stock issued in conjunction with the loan, or both. During the nine months ended
September 30, 2010, we obtained approximately $3.6 million in loans to fund our operations, of which $1.5 had been repaid at September 30, 2010. Repayments of borrowings were made with cash generated from operations and new borrowings.
Future repayments are expected to be made from similar sources.

A further source of liquidity via borrowing is the renegotiation of a portion
of our convertible subordinated debentures that were due in full on April 15, 2010. We were not able to repay the debentures on the due date, but have converted approximately $1.7 million, or 74%, of the outstanding debentures to three-year
senior promissory notes with an interest rate of 10%.

Lease Financing. Liquidity has also been provided by the use of lease financing
to acquire capital equipment. The leases are secured by the equipment acquired, have implied interest rates ranging from 13.4 to 18.6% and have 36 and 48 month terms. During the nine months ending September 30, 2010, we financed through capital
leases the acquisition of approximately $419,000 of software and equipment.



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Sales of common stock.We
periodically sell our common stock in private placements. The funds from such sales have been used for working capital purposes. During the nine months ended September 30, 2010, we raised approximately $1.5 million through the sale of our
common stock.

Use of common stock in lieu of cash. Certain vendors and note holders have accepted our common stock as payment for
services, interest and debt. During the nine months ended September 30, 2010, we avoided cash outlays of approximately $2.4 million for services, interest and debt repayment by issuing our common stock.

We do not have any unused sources of liquidity, collateral to use in obtaining a secured loan or line of credit, or access to debt markets. Our ability
to continue to borrow funds on an unsecured basis is unknown, as well as our ability to sell our common stock in private placements. With the exception of contracted maturities of debt, there are no other known future liquidity commitments or
events. We do not have any off-balance sheet financing arrangements.

The following is a schedule of our contractual commitments as of
September 30, 2010:



|                                |  |                        |            |  |                |  |       |             |  |  |            |  |  |              |    |  |  |  |    | 
|------------------------------- |  | ---------------------- | ---------- |  | -------------- |  | ----- | ----------- |  |  | ---------- |  |  | ------------ | -- |  |  |  | -- | 
|                                |  | Payments Due by Period |           
|                                |  | Total                  |            |  | LessThan 1Year |  |       | 1  3 Years |  |  | 4  5Years |  |  | After 5Years |   
|                                |  | (Amounts in thousands) |           
|Subordinated Debentures (a)     |  |                        | 637        |  |                |  | 637   |             |  |  | --         |  |  |              | -- |  |  |  | -- | 
|Debt Obligations (b)            |  |                        | $    5,547 |  |                |  | 3,759 |             |  |  | 1,788      |  |  |              | -- |  |  |  | -- | 
|Capital Lease Obligations (c)   |  |                        | 735        |  |                |  | 329   |             |  |  | 370        |  |  |              | 36 |  |  |  | -- | 
|Operating Lease Obligations (d) |  |                        | 290        |  |                |  | 211   |             |  |  | 79         |  |  |              | -- |  |  |  | -- | 
|                                |  |                        |            |  |                |  |       |             |  |  |            |  |  |              |    |  |  |  |    | 
|                                |  |                        |            |  |               
|Total                           |  |                        | $    7,209 |  |                |  | 4,936 |             |  |  | 2,237      |  |  |              | 36 |  |  |  | -- | 
|                                |  |                        |            |  |                |  |       |             |  |  |            |  |  |              |    |  |  |  |    | 



| | (a) | Amount represents the remaining balance plus accrued interest at 10% of our convertible subordinated debentures for which we have not been able to convert to senior
promissory notes. We were unable to repay our subordinated debentures in the amount of $2,244,000 of principal on the debentures maturity date of April 15, 2010. However, we have reached agreement with certain owners of the debentures
representing approximately 74%, or $1.7 million, of the debentures to cancel such debentures in exchange for the issuance by us of 10% senior promissory notes. At September 30, 2010, the resolution of the remaining debentures is unknown.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Represents amounts due under promissory notes, zero-coupon promissory notes, and the senior promissory notes issued as a result of conversions of certain of our
subordinate debentures.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Capital lease obligations is secured debt incurred under non-cancelable financing leases of computer hardware, telecommunications equipment, and computer software.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Represents amounts due under non-cancelable rental agreements for office equipment and building office space.
| | --- | -------------------------------------------------------------------------------------------------------------

During the nine months ended September 30, 2010, cash and cash equivalents increased by a net of approximately $0.3 million,
attributable primarily to $1.5 million in cash provided by the sale of our stock in private placements and $1.9 million in net proceeds from the issuance of note obligations, offset by $2.8 million in cash used in operating activities, $135,000 paid
to acquire the stock of a jointly owned subsidiary held by a third party, and $154,000 in investments in equipment and software.

At September 30, 2010, cash and cash equivalents were approximately $1.0 million. We had a working capital deficit of $14.0 million at September 30, 2010 and an operating loss of $7.3 million
for the nine months ended September 30, 2010. We expect that with our existing contracts plus the possible addition of new contracts we are seeking and the expected continued financial support from our major stockholders, that we will be able
to reduce our operating losses and sustain current operations over the next 12 months. We are looking at various sources of financing if operations cannot support our ongoing plan; however, there are no assurances that we will be able to find such
financing in the amounts or on terms acceptable to us, if at all. Failure to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during 2010 would adversely affect our
ability to achieve our business objectives and continue as a going concern. There can be no assurance as to the availability of any additional debt or equity financing, or that we will be able to achieve profitable operations and positive cash
flows. These conditions raise doubt about our ability to continue as a going concern.



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The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Although management believes that our current cash position plus the expected continued support of our major stockholders will be
sufficient to meet our current levels of operations, additional cash resources may be required should we wish to accelerate sales or complete one or more acquisitions. Additional cash resources may be needed if we do not meet our sales
targets, cannot refinance our debt obligations, exceed our projected operating costs, or incur unanticipated expenses. We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution and have
not made any arrangements to obtain such additional financing. We can provide no assurance that we will not require additional financing or that we will be able to refinance our existing debt obligations in the event such refinancing should be
needed or advisable. Likewise, we can provide no assurance that if we need additional financing that it will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are
needed, or if such funds cannot be obtained on terms favorable to us, we may be unable to execute our business plan or pay our costs and expenses as they are incurred, which could have a material adverse effect on our business, financial condition
and results of operations.

Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and
other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and
may impact our ability to achieve and sustain profitability and positive cash flow. Although considerable variability is inherent in such estimates and no assurances can be given that such variability will not be significant, we believe that our
unpaid claims liability is adequate. However, actual results could differ from the $5.5 million claims payable amount reported as of September 30, 2010.

CRITICAL ACCOUNTING ESTIMATES

Our
discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements, most notably our estimate for IBNR claims. On
an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ from these estimates as a result of actual claims differing from our assumptions or conditions.

We believe our accounting policies specific to revenue recognition, accrued claims payable, premium deficiencies, goodwill, and equity based expense involve our most significant judgments and estimates
that are material to our consolidated financial statements (see Note 1 Description of the Companys Business and Basis of Presentation to the unaudited, interim, condensed, consolidated financial statements).

REVENUE RECOGNITION

We provide managed behavioral healthcare and substance abuse services to recipients, primarily through subcontracts with health plans. Revenue under the vast majority of these agreements is earned and
recognized monthly based on the number of covered members as reported to us by our clients regardless of whether services actually provided are lesser or greater than anticipated when we entered into such contracts (generally referred to as
capitated arrangements). The information regarding the number of covered members is supplied by our clients and we review membership eligibility records and other reported information to verify its accuracy in calculating the amount of revenue to be
recognized. Consequently, the vast majority of our revenue is determined by the monthly receipt of covered member information and the associated payment from the client, thereby removing uncertainty and precluding us from needing to make assumptions
to estimate monthly revenue amounts.

During the nine months ended September 30, 2010, we entered into a contract to provide
autism treatment services to a health plans membership for which there was no historical claims data. In the absence of data upon which to base pricing, we included cost sharing/cost savings provisions in the agreement with the health plan
whereby we share in the additional cost or cost savings when comparing actual claims costs to the estimated claims costs incorporated into the contracts pricing. Accordingly, we may adjust our revenue periodically as claims data becomes
available to permit a comparison of actual claims costs to targeted claims costs. Such adjustments are made when we believe such adjustments are probable and reasonably estimable, but are subject to the effects of unforeseen fluctuations in
utilization, among other factors.

We may experience adjustments to our revenues to reflect changes in the number and
eligibility status of members subsequent to when revenue is recognized. Subsequent adjustments to our revenue have not been material to date.



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ACCRUED
CLAIMS PAYABLE AND COST OF CARE

Cost of care includes amounts paid to hospitals and treatment facilities, healthcare professionals, physician groups and other managed
care organizations under capitated contracts and healthcare expenses which include items such as information systems, case management and quality assurance, attributable to both capitated and ASO contracts.

The cost of behavioral health services is recognized in the period in which an eligible member actually receives services and includes an
estimate of IBNR. We contract with various healthcare providers including hospitals, physician groups and other managed care organizations either on a discounted fee-for-service or a per-case basis. We determine that a member has received services
when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine whether (1) the member is eligible to receive such services, (2) the service provided
is medically necessary and is covered by the benefit plans certificate of coverage, and (3) the service has been authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for
payment and the associated cost of behavioral health services is recognized. If the claim is denied, the service provider is notified and has appeal rights under their contract with us.

Accrued claims payable consists primarily of reserves established for reported claims and IBNR claims, which are unpaid through the
respective balance sheet dates. Our policy is to record managements best estimate of IBNR. The IBNR liability is estimated monthly using an actuarial paid completion factor methodology and is continually reviewed and adjusted, if necessary, to
reflect any change in the estimated liability as more information becomes available. In deriving an initial range of estimates, we use an industry accepted actuarial model that incorporates past claims payment experience, enrollment data and key
assumptions such as trends in healthcare costs and seasonality. Authorization data, utilization statistics, calculated completion percentages and qualitative factors are then combined with the initial range to form the basis of managements
best estimate of the accrued claims payable balance.

The accrued claims payable ranges were between $5.3 and $5.5 million at
September 30, 2010 and between $4.6 and $4.7 million at December 31, 2009. Based on the information available, we determined our best estimate of the accrued claims liability to be $5.5 million at September 30, 2010 and $4.7 million
at December 31, 2009. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three years.

Accrued claims payable at September 30, 2010 and December 31, 2009 are comprised of approximately $2.1 million and $2.7 million, respectively, of submitted and approved claims, which had not yet
been paid, and $3.4 million and $2.0 million for IBNR claims, respectively.

Many aspects of our managed care business are not
predictable with consistency, and, as a result, estimating IBNR claims involves a significant amount of management judgment. Actual claims incurred could differ from the estimated claims payable amount presented. The following are factors, among
others, that would have an impact on our future operations and financial condition:



| |  |  | changes in utilization patterns;
| | - |  | --------------------------------

| |  |  | changes in healthcare costs;
| | - |  | ----------------------------

| |  |  | changes in claims submission timeframes by providers;
| | - |  | -----------------------------------------------------

| |  |  | success in renegotiating contracts with healthcare providers;
| | - |  | -------------------------------------------------------------

| |  |  | occurrence of catastrophes;
| | - |  | ---------------------------

| |  |  | changes in benefit plan design; and
| | - |  | -----------------------------------

| |  |  | the impact of present or future state and federal regulations.
| | - |  | --------------------------------------------------------------

By way of example, a 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at September 30, 2010
could increase our claims expense by approximately $64,000 and reduce our net results as illustrated in the table below:



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|                            |  |                                     |           | 
|--------------------------- |  | ----------------------------------- | --------- | 
|Change in Healthcare Costs: |  |                                     |           | 
|                            | 
|(Decrease)
Increase         |  | (Decrease)IncreaseIn Claims Expense |          
|                            | 
|(5%)                        |  |                                     | ($64,000) | 
|5%                          |  |                                     | $64,000   | 

PREMIUM
DEFICIENCIES

We accrue losses under our managed care contracts when it is probable that a loss has been
incurred and the amount of the loss can be reasonably estimated. We perform this loss accrual analysis on a contract-by-contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance
costs, and each contracts specific terms related to future revenue increases as compared to expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate
of future cost increases.

We generally have the ability to cancel a contract with 60 to 90 days written notice or request a
renegotiation of terms under certain circumstances, if a managed care contract is not meeting our financial goals. Prior to a cancellation, we typically submit a request for a rate increase accompanied by supporting utilization data. Although our
clients have historically been generally receptive to such requests, no assurance can be given that such requests will be fulfilled in the future in our favor. If a rate increase is not granted, we have the ability, in most cases, to terminate the
contract and limit our risk to a short-term period.

We perform a review of our portfolio of contracts on a quarterly basis to
identify loss contracts (as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide  Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. At
September 30, 2010, no contract loss reserve for future periods was necessary in managements opinion.

GOODWILL

We evaluate at least annually the amount of our recorded goodwill by performing impairment tests that compare the carrying
amount to an estimated fair value. Management considers both the income and market approaches in the fair value determination. In estimating the fair value under the income approach, management makes its best assumptions regarding future cash flows
and applies a discount rate to the cash flows to yield a present, fair value of equity. The market approach is based primarily on reference to transactions including our common stock and the quoted market prices of our common stock. As a result of
such tests, management believes there is no material risk of loss from impairment of goodwill. However, actual results may differ significantly from managements assumptions, resulting in a potentially adverse impact to our consolidated
financial statements.

EQUITY BASED EXPENSE

We have adopted ASC 718-20, Compensation  Stock Compensation, and elected to apply the modified-prospective method to
measure expenses for stock options and warrants at fair value on the grant date and recognize these expenses on a straight-line basis over the service period for those options and warrants expected to vest. We use the Black-Scholes option pricing
model, which requires certain variables for input to calculate the fair value of a stock award on the grant date. These variables include the expected volatility of our stock price, award exercise behaviors, the risk free interest rate and expected
dividends. We use significant judgment in estimating expected volatility of the stock, exercise behavior and forfeiture rates.

Expected Volatility

We estimate the volatility of the share price by using historical data of our traded stock in combination with managements expectation of the extent of fluctuation in future stock prices. We believe
our historical volatility is more representative of future stock price volatility and as such it has been given greater weight in estimating future volatility.



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Expected
Term

A variety of factors are considered in determining the expected term of options granted. Options granted are
grouped by their homogeneity, based on the optionees position, whether managerial or clerical, and length of service and turnover rate. Where possible, we analyze exercise and post-vesting termination behavior. For any group without sufficient
information, we estimate the expected term of the options granted by averaging the vesting term and the contractual term of the options.

Expected Forfeiture Rate

We generally separate our option awards
into two groups: employee and non-employee awards. The historical data of each group are analyzed independently to estimate the forfeiture rate of options at the time of grant. These estimates are revised in subsequent periods if actual forfeitures
differ from estimated forfeitures.

LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.
Aside from the litigation described in Part II, Item 1, Legal Proceedings, as of the date of this report, we are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business,
financial condition or operating results.

ITEM3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

While we currently have market risk sensitive instruments, we have no significant exposure to changing interest rates, as the interest rates on our short term and long-term debt is fixed. Additionally, we
do not use derivative financial instruments for investment or trading purposes and our investments are generally limited to cash deposits.

ITEM4. CONTROLS AND PROCEDURES



|(a) | Evaluation of Disclosure Controls and Procedures
|--- | ------------------------------------------------

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period
covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (1) recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms, and (2) accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure.



|(b) | Change in Internal Control over Financial Reporting
|--- | ---------------------------------------------------

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

PART II  OTHER INFORMATION

ITEM1. LEGAL PROCEEDINGS

In the ordinary conduct of our business, we are subject to periodic lawsuits and claims. Although we cannot predict with certainty the ultimate resolution of lawsuits and claims asserted against us, we do
not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our business, results of operations, cash flows or financial condition. Our policy is to assess the likelihood of any adverse
judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue in accordance with ASC
450-10, Contingencies (ASC 450-10), and related pronouncements. In accordance with ASC 450-10, a liability is recorded and charged to operating expense when we determine that a loss is probable and the amount can



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be reasonably estimated. Additionally, we disclose contingencies for which a material loss is reasonably possible, but not probable. Except as described below, as of September 30, 2010,
there were no material contingencies requiring accrual or disclosure.

A complaint entitled MDwise, Inc. vs.
Comprehensive Behavioral Care, Inc. was filed against us in April 2009 in the Marion County Superior Court in Indiana by MDwise, Inc. (MDwise), a former client located in Indiana. The complaint sought unspecified damages and a
declaratory judgment requiring us to pay outstanding provider claims that are allegedly our responsibility under the expired contract. On July 8, 2010, we entered into a settlement agreement with MDwise whereby MDwise would relinquish all
claims against us in exchange for four payments of $50,000 to be paid by us during the remainder of 2010. As security for our obligation to make the payments, we issued to MDwise a promissory note in the amount of $350,000 bearing interest at the
rate of 8% per annum. During the three months ended September 30, 2010, we paid three installments of $50,000 as scheduled. The last payment was made in October 2010. As a result, the promissory note was cancelled and the complaint was
dismissed with prejudice.

We initiated an action against Jerry Katzman in July 2009 in the U.S. District Court for the Middle
District of Florida alleging that Mr. Katzman, a former director, fraudulently induced us to enter into an employment agreement and, alternatively, that Mr. Katzman breached that alleged employment agreement. In December 2009,
Mr. Katzman filed an answer and counterclaim. The counterclaim requested judgment in Mr. Katzmans favor and compensatory damages to remedy alleged breaches of contract by us. The matter was tried before a jury on September 27,
2010, and a verdict was rendered by the jury on October 1, 2010. The jury found that Mr. Katzman did not fraudulently induce CompCare to enter into the contract. The jury also found that Mr. Katzman was entitled to no award on his
counterclaim. Mr. Katzman and the Company have filed post trial motions. Mr. Katzman also simultaneously initiated litigation in the Delaware Court of Chancery seeking indemnification for his fees and costs incurred, in part, in the
litigation described above. The company is vigorously opposing the Delaware litigation and seeking sanctions against Mr. Katzman for frivolous litigation and forum shopping.

In April, 2010, the Company initiated litigation against Mr. Katzman and his domestic partner, Margaret Peggy Husted
(the Defendants), relating to shares of Company stock that the Company contends were improperly issued. The Company asserted claims against the Defendants for violation of various provisions of the Securities Exchange Act, conversion,
and breach of fiduciary duty as to Mr. Katzman, only. Discovery in this matter has just begun and the Company will continue to vigorously pursue the recovery of the disputed stock and damages, as appropriate.

On July 2, 2010, CBC, our wholly-owned subsidiary, entered into a Settlement Agreement, Release and Other Binding Commitments, by
and among Inspira Mental Health Management, Inc. (Inspira), CBC and Messrs. John Hill, Clark Marcus, and Giuseppe Crisafi (the Settlement Agreement), for the settlement of a complaint filed by Inspira on April 5, 2010
entitled Inspira Mental Health Management, Inc. v. Comprehensive Behavioral Care, Inc., John Hill, Clark Marcus, Giuseppe Crisafi. The complaint claimed breach of contract and bad faith by CBC with respect to the Shareholders Agreement,
dated December 8, 2008, and a Memorandum of Understanding, executed July 24, 2008, each between Inspira and CBC, each relating to CompCare de Puerto Rico (CCPR). Inspira also asserted claims of breach of fiduciary duty
against Messrs. Hill, Marcus and Crisafi as CCPR officers and directors. Inspira sought compensatory damages against CBC and Messrs. Hill, Marcus and Crisafi of up to $2,000,000 and a judicial dissolution of CCPR. The Settlement Agreement
provides that in exchange for Inspira filing a stipulation of dismissal with prejudice of the above-referenced action, the exchange of mutual releases and the resignation of two CCPR directors nominated by Inspira, CBC would, among other things,
acquire Inspiras 49% equity interest in CCPR for $135,000 and enter into an agreement with Inspira whereby Inspira would become a preferred provider of managed behavioral healthcare services to CCPR clients in Puerto Rico. Such
transactions were consummated on July 19, 2010. On July 22, 2010, Inspira filed a Stipulation of Dismissal of the above-referenced action with the Court of First Instance, Superior Court of Puerto Rico.

On September 21, 2010, a complaint entitled InfoMc, Inc. v. Comprehensive Behavioral Care, Inc. and CompCare de Puerto Rico,
Inc. was filed against us in the U.S. District Court for the Eastern District of Pennsylvania alleging, among other things, that we improperly used InfoMC, Inc.s trademarks in connection with CompCare de Puerto Rico, Incs. proposal
to obtain a managed behavioral healthcare services contract in Puerto Rico. The complaint asserts claims for federal trademark infringement, false advertising, unfair competition, conversion, promissory estoppel and unjust enrichment. InfoMC, Inc.
is seeking monetary damages in an unspecified amount and certain injunctive relief. We will vigorously defend ourselves against the allegations asserted. However, until the



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complaint is withdrawn or settled, we will incur legal fees in defending against this action and may be subject to awards of compensatory and other damages, including attorneys fees.

Management believes that the Company has reserves that are adequate to cover the litigation described above. Management also
believes that the resolution of these matters will not have a material adverse effect on the Companys financial condition or results of operations; however, there can be no assurance that we will not sustain material liability as a result of
these claims.

ITEM1A. RISK FACTORS

The risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2009 have not materially changed.

ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS

We sold and
issued shares of our common stock and issued warrants to purchase shares of our common stock in private placements not involving a public offering as follows:



| | - | On July 9, 2010, we issued 200,000 shares of our common stock to a note holder of the Company in lieu of cash paid for interest.
| | - | --------------------------------------------------------------------------------------------------------------------------------



| | - | On July 12, 2010, we issued a warrant with a five year term to purchase 300,000 shares of our common stock to a key employee. The warrant may be exercised at the
price of $0.50 per share, to the extent vested. The shares acquirable pursuant to the warrant vest in three equal amounts 12 months, 24 months and 36 months following the warrant issuance date.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | On July 27, 2010, we sold 4,600,000 shares of our common stock to an existing investor in the Company for aggregate proceeds of $1,150,000.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| | - | On August 12, 2010, we sold 1,000,000 shares of our common stock in a private placement transaction to one accredited investor for aggregate proceeds of $250,000.
In connection with this sale, we issued a warrant to a consultant to the Company for financial services. The warrant has a five year term and enables the holder to purchase 100,000 shares of our common stock. The warrant was vested in full at
issuance and may be exercised at the price of $0.25 per share.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | On August 13, 2010, we issued a five-year warrant, dated September 18, 2010, to purchase up to 5,000,000 shares of our common stock at an exercise price of
$0.25 to an affiliate of a company for which we have agreed to provide behavioral health and prescription drugs management services beginning September 18, 2010. The warrant was issued in exchange for a $600,000 advance from the customer that
is due to be repaid out of the final capitation payment received from the client.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | On August 23, 2010, we issued to a key employee a five year warrant to purchase 300,000 shares of our common stock. The warrant may be exercised at the price of
$0.50 per share, to the extent vested. The shares acquirable pursuant to the warrant vest as follows:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 75,000 vest at the warrant issuance date
| | - |  | ----------------------------------------

| |  |  | 75,000 vest 12 months after the warrant issuance date
| | - |  | -----------------------------------------------------

| |  |  | 75,000 vest 24 months after the warrant issuance date
| | - |  | -----------------------------------------------------

| |  |  | 75,000 vest 30 months after the warrant issuance date
| | - |  | -----------------------------------------------------



| | - | On September 12, 2010, we issued 80,000 shares of our common stock to a consultant who accepted the shares in lieu of $20,000 of cash compensation.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | - | On September 13, 2010, we issued a warrant with a five year term to purchase 1,000,000 shares of our common stock to a key sales and marketing employee. The
warrant may be exercised at the price of $1.00 per share, to the extent vested. Vesting of shares acquirable pursuant to the warrant is dependent on the employees attainment of annual sales targets.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | - | On September 15, 2010, we issued 300,000 shares of our common stock to a note holder of the Company in lieu of cash paid for interest.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| | - | On October 4, 2010, we issued a five year warrant to purchase 1,058,250 shares of our common stock to a holder of our 71/2% convertible subordinated debentures who had agreed to exchange his
debenture plus accrued interest thereon for a senior promissory notes issued by us. The warrant was vested in full at issuance, will expire in October 2015, and is exercisable at a price of $0.25 per share.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | On November 3, 2010, we issued an aggregate of 66,400 warrants to two holders of our 71/2% convertible subordinated debentures who had agreed to exchange
their debentures plus accrued interest thereon for senior promissory notes issued by us. The warrants were vested in full at issuance, expire in November 2015, and are exercisable at a price of $0.25 per share.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Based on certain representations and warranties of the recipients referenced above, we relied on Section 3(a)(9) and 4(2) of the
Securities Act of 1933, as amended (the Securities Act) as applicable, for an exemption from the registration requirements of the Securities Act. The shares purchased have not been registered under the Securities Act and may not be sold
in the United States absent registration or an applicable exemption from registration requirements.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

We were unable to repay our 71/2% convertible subordinated debentures in the amount of $2,244,000 of
principal or to pay the final interest installment of $84,150 on the debentures maturity date of April 15, 2010. However, we have reached agreement with certain owners of the debentures representing approximately 74%, or $1.7 million, of
the debentures to cancel such debentures in exchange for the issuance by us of senior promissory notes, warrants to purchase shares of our common stock, and cash payments of approximately $86,000 in the aggregate. The senior promissory notes bear
interest at a rate of 10% per annum, payable semiannually on April 15 and October 15 of each year through April 15, 2012, the maturity date of the senior promissory notes. The warrants allow for the purchase of an aggregate of
approximately 6.8 million shares of our common stock at an exercise price of $0.25 per share. All of the warrants have five year terms and are currently exercisable. We are not able to estimate the financial effect resulting from a state of
default with respect to the debentures held by the remaining bond holders.

ITEM6.
EXHIBITS



|               |  |                                                                                                                                                                                                                                                                                                                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                             
|               | 
|4.2            |  | Form of warrant to purchase Common Stock issued by Comprehensive Care Corporation to MSO of Puerto Rico, Inc. dated September 18, 2010, incorporated by reference to Exhibit 4.2
to our Form 10-Q for the quarterly period ended June 30, 2010 and filed August 16, 2010.                                                                                                               
|10.21          |  | Agreement for the Provision of Services, dated as of August 13, 2010 between CompCare de Puerto Rico, Inc. and MMM Healthcare, Inc. and its corporate affiliate PMC Medicare
Choice, Inc. (the Registrant has submitted an application for confidential treatment with respect to portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended)
|31.1           |  | Certification of 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 Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                      
|32.2           |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                      



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMPREHENSIVE CARE CORPORATION

November 12, 2010



|   |  |                                                                                   
|-- |  | ----------------------------------------------------------------------------------
|   | 
|By |  | /s/ CLARK A. MARCUS                                                               
|   |  | Clark A. Marcus Chief Executive Officer and Chairman (Principal Executive
Officer)
|   | 
|By |  | /s/ GIUSEPPE CRISAFI                                                              
|   |  | Giuseppe Crisafi Chief Financial Officer (Principal Financial Officer)            



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