##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[X]  |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|     |  |                                                                                         
|     |  | For the period ended February 28, 2002.                                                 
|     |  |                                                                                         
|[  ] |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|     |  |                                                                                         
|     |  | For the transition period from
 to                                                      
|     |  |                                                                                         
|     |  | 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.)

200 South Hoover Blvd, Suite 200, Tampa, FL 33609
(Address of principal executive offices and zip code)

(813) 288-4808
(Registrants telephone number, including area code)

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 [X]  No [  ]

Indicate the number of shares outstanding of each of the issuers classes
of Common Stock, as of the latest practicable date:

|                                       |  |                             
|-------------------------------------- |  | ----------------------------
|Classes                                |  | Outstanding at April 9, 2002
|                                       |  |                             
|Common Stock, par value $.01 per share |  | 3,867,302                   





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TABLE OF CONTENTS



|                                |                                                                                                |                                                                               |  |  |  |  |  | 
|------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I.  FINANCIAL INFORMATION
|                                | Item 1  Consolidated Financial Statements                                                    
|                                |                                                                                                | Consolidated Balance Sheets                                                  
|                                |                                                                                                | Consolidated Statements of Operations                                        
|                                |                                                                                                | Consolidated Statements of Cash Flows                                        
|                                |                                                                                                | Note 1  Basis of Presentation and Summary of Significant Accounting Policies
|                                | Item 2  Managements discussion and analysis of financial condition and results of operations
|PART II  OTHER INFORMATION    
|                                | Item 1  LEGAL PROCEEDINGS                                                                    
|                                | Item 6  Exhibits and Reports on Form 8-K                                                     
|                                | SIGNATURE                                                                                     



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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

Index

|                               |                                          |                                                                                              |                                                                                            |  |       |      | 
|------------------------------ | ---------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ |  | ----- | ---- | 
|                               |                                          |                                                                                              |                                                                                            |  | Page 
|PART I  FINANCIAL INFORMATION |                                          |                                                                                              |                                                                                            | 
|                               |                                          |                                                                                              |                                                                                            | 
|                               | Item 1Consolidated Financial Statements |                                                                                              |                                                                                            |  |      
|                               |                                          |                                                                                              |                                                                                            | 
|                               |                                          |                                                                                              | Consolidated Balance Sheets, February 28, 2002 and May 31, 2001                            |  |       | 3    | 
|                               |                                          |                                                                                              |                                                                                            | 
|                               |                                          |                                                                                              | Consolidated Statements of Operations for the Nine months ended February 28, 2002 and 2001 |  |       | 4    | 
|                               |                                          |                                                                                              |                                                                                            | 
|                               |                                          |                                                                                              | Consolidated Statements of Cash Flows for the Nine months ended February 28, 2002 and 2001 |  |       | 5    | 
|                               |                                          |                                                                                              |                                                                                            | 
|                               |                                          |                                                                                              | Notes to Consolidated Financial Statements                                                 |  |       | 6-12 | 
|                               |                                          |                                                                                              |                                                                                            | 
|                               |                                          | Item 2Managements discussion and analysis of financial condition and Results of operations |                                                                                            |  | 12-15 |     
|                               |                                          |                                                                                              |                                                                                            | 
|PART II  OTHER INFORMATION    |                                          |                                                                                              |                                                                                            | 
|                               |                                          |                                                                                              |                                                                                            | 
|                               |                                          | Item 1Legal Proceedings                                                                     |                                                                                            |  | 16-17 |     
|                               |                                          |                                                                                              |                                                                                            | 
|                               |                                          | Item 6Exhibits and Reports on Form 8-K                                                      |                                                                                            |  | 17    |     
|                               |                                          |                                                                                              |                                                                                            | 
|                               |                                          | Signatures                                                                                   |                                                                                            |  | 18    |     

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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES




PART I.  FINANCIAL INFORMATION




Item 1  Consolidated Financial Statements




Consolidated Balance Sheets

|                                              |                                                                                                             |   |                        |         |         |   |         |         |  
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | - | ---------------------- | ------- | ------- | - | ------- | ------- | -
|                                              |                                                                                                             |   | February 28,           |         | May 31,
|                                              |                                                                                                             |   | 2002                   |         | 2001   
|                                              |                                                                                                             |   |                        |         |        
|                                              |                                                                                                             |   | (unaudited)            |         |         |   |        
|                                              |                                                                                                             |   | (Amounts in thousands)
|ASSETS                                        |                                                                                                             |   |                        |         |         |   |         |        
|Current assets:                               |                                                                                                             |   |                        |         |         |   |         |        
|                                              | Cash and cash equivalents                                                                                   |   | $                      | 4,462   |         |   | $       | 2,891   |  
|                                              | Restricted cash                                                                                             |   |                        |        |         |   |         | 48      |  
|                                              | Accounts receivable, less allowance for doubtful accounts of $11                                            |   |                        | 289     |         |   |         | 422     |  
|                                              | Accounts receivable  managed care reinsurance contract (Note 4)                                            |   |                        | 717     |         |   |         | 783     |  
|                                              | Other receivable (Note 7)                                                                                   |   |                        | 2,548   |         |   |         | 2,548   |  
|                                              | Other current assets                                                                                        |   |                        | 394     |         |   |         | 817     |  
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total current assets                          |                                                                                                             |   | 8,410                  |         |         |   | 7,509   |        
|Property and equipment, net                   |                                                                                                             |   | 325                    |         |         |   | 555     |        
|Note receivable                               |                                                                                                             |   | 160                    |         |         |   | 164     |        
|Goodwill, net                                 |                                                                                                             |   | 991                    |         |         |   | 936     |        
|Restricted cash (Note 1)                      |                                                                                                             |   | 430                    |         |         |   | 561     |        
|Other assets                                  |                                                                                                             |   | 73                     |         |         |   | 29      |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total assets                                  |                                                                                                             | $ | 10,389                 |         |         | $ | 9,754   |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|LIABILITIES AND STOCKHOLDERS DEFICIT         |                                                                                                             |   |                        |         |         |   |         |        
|Current liabilities:                          |                                                                                                             |   |                        |         |         |   |         |        
|                                              | Accounts payable and accrued liabilities                                                                    |   | $                      | 2,791   |         |   | $       | 3,302   |  
|                                              | Accrued claims payable (Note 1)                                                                             |   |                        | 3,109   |         |   |         | 3,071   |  
|                                              | Accrued reinsurance claims payable (Note 4)                                                                 |   |                        | 1,736   |         |   |         | 783     |  
|                                              | Unbenefitted
tax refunds received (Note 7)                                                                  |   |                        | 12,092  |         |   |         | 12,092  |  
|                                              | Income taxes payable                                                                                        |   |                        | 29      |         |   |         | 31      |  
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total current liabilities                     |                                                                                                             |   | 19,757                 |         |         |   | 19,279  |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Long-term liabilities:                        |                                                                                                             |   |                        |         |         |   |         |        
|                                              | Long-term debt                                                                                              |   |                        | 2,244   |         |   |         | 2,244   |  
|                                              | Other liabilities                                                                                           |   |                        | 7       |         |   |         | 9       |  
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total long-term liabilities                   |                                                                                                             |   | 2,251                  |         |         |   | 2,253   |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total liabilities                             |                                                                                                             |   | 22,008                 |         |         |   | 21,532  |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Commitments and Contingencies (Notes 4 and 7) |                                                                                                             |   |                        |         |         |   |         |        
|Stockholders deficit:                        |                                                                                                             |   |                        |         |         |   |         |        
|                                              | Preferred stock, $50.00 par value; authorized 18,740 shares; none issued                                    |   |                        |        |         |   |         |        |  
|                                              | Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,867,303 and 3,817,803 |   |                        | 39      |         |   |         | 38      |  
|                                              | Additional paid-in-capital                                                                                  |   |                        | 51,839  |         |   |         | 51,813  |  
|                                              | Deferred compensation                                                                                       |   |                        | (1      | )       |   |         |        |  
|                                              | Accumulated deficit                                                                                         |   |                        | (63,496 | )       |   |         | (63,629 | )
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total stockholders deficit                   |                                                                                                             |   | (11,619                | )       |         |   | (11,778 | )      
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total liabilities and stockholders deficit   |                                                                                                             | $ | 10,389                 |         |         | $ | 9,754   |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        

See accompanying notes.

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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES




Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)

|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |        |  
|------------------------------------------------------------------------ | ----------------------------------------------------- | - | ------------------ | ----- | ----------------- | - | ----- | ----- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                         |                                                       |   | Three months Ended |       | Nine months Ended
|                                                                         |                                                       |   | February 28,       |       | February 28,     
|                                                                         |                                                       |   |                    |       |                  
|                                                                         |                                                       |   | 2002               |       | 2001              |   | 2002  |       | 2001
|                                                                         |                                                       |   |                    |       |                   |   |       |       |     
|Operating revenues                                                       |                                                       | $ | 7,110              |       |                   | $ | 4,560 |       |      | $ | 19,706 |        |   | $ | 12,740 |       
|Costs and expenses:                                                      |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|                                                                         | Healthcare operating expenses                         |   |                    | 6,093 |                   |   |       | 3,653 |      |   |        | 16,827 |   |   |        | 10,478 |  
|                                                                         | General and administrative expenses                   |   |                    | 874   |                   |   |       | 930   |      |   |        | 2,573  |   |   |        | 2,811  |  
|                                                                         | Recovery of doubtful accounts                         |   |                    | (3    | )                 |   |       | (41   | )    |   |        | (88    | ) |   |        | (82    | )
|                                                                         | Depreciation and amortization                         |   |                    | 80    |                   |   |       | 168   |      |   |        | 268    |   |   |        | 509    |  
|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|                                                                         |                                                       |   | 7,044              |       |                   |   | 4,710 |       |      |   | 19,580 |        |   |   | 13,716 |       
|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|Operating income (loss) before items shown below                         |                                                       |   | 66                 |       |                   |   | (150  | )     |      |   | 126    |        |   |   | (976   | )     
|Other income (expense):                                                  |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|                                                                         | Loss in connection with prepayment of note receivable |   |                    |      |                   |   |       |      |      |   |        |       |   |   |        | (496   | )
|                                                                         | Reduction in accrued interest expense                 |   |                    |      |                   |   |       |      |      |   |        |       |   |   |        | 290    |  
|                                                                         | Interest income                                       |   |                    | 18    |                   |   |       | 37    |      |   |        | 71     |   |   |        | 130    |  
|                                                                         | Interest expense                                      |   |                    | (43   | )                 |   |       | (43   | )    |   |        | (132   | ) |   |        | (164   | )
|                                                                         | Other non-operating income                            |   |                    | 5     |                   |   |       | 230   |      |   |        | 22     |   |   |        | 230    |  
|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|Income (loss) before income taxes                                        |                                                       |   | 46                 |       |                   |   | 74    |       |      |   | 87     |        |   |   | (986   | )     
|Income tax expense                                                       |                                                       |   |                   |       |                   |   | 9     |       |      |   | 9      |        |   |   | 30     |       
|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|Income (loss) before cumulative effect of change in accounting
principle |                                                       | $ | 46                 |       |                   | $ | 65    |       |      | $ | 78     |        |   | $ | (1,016 | )     
|Cumulative effect of change in accounting principle                      |                                                       |   |                   |       |                   |   |      |       |      |   | 55     |        |   |   |       |       
|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|Net income (loss) attributable to common stockholders                    |                                                       | $ | 46                 |       |                   | $ | 65    |       |      | $ | 133    |        |   | $ | (1,016 | )     
|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|Basic and diluted income (loss) per share:                               |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|Income (loss) before cumulative effect of change in accounting
principle |                                                       | $ | 0.01               |       |                   | $ | 0.02  |       |      | $ | 0.02   |        |   | $ | (0.27  | )     
|Cumulative effect of change in accounting principle                      |                                                       |   |                   |       |                   |   |      |       |      |   | 0.01   |        |   |   |       |       
|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       
|Net income (loss)                                                        |                                                       | $ | 0.01               |       |                   | $ | 0.02  |       |      | $ | 0.03   |        |   | $ | (0.27  | )     
|                                                                         |                                                       |   |                    |       |                   |   |       |       |      |   |        |        |   |   |        |       

See accompanying notes.

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Consolidated Statements of Cash Flows
(Unaudited)

|                                                                                                   |                                                                      |   |                        |       |      |   |        |         |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | - | ---------------------- | ----- | ---- | - | ------ | ------- | -
|                                                                                                   |                                                                      |   | Nine months Ended     
|                                                                                                   |                                                                      |   | February 28,          
|                                                                                                   |                                                                      |   |                       
|                                                                                                   |                                                                      |   | 2002                   |       | 2001
|                                                                                                   |                                                                      |   |                        |       |     
|                                                                                                   |                                                                      |   | (Amounts in thousands)
|Cash flows from operating activities:                                                              |                                                                      |   |                        |       |      |   |        |        
|Net income (loss)                                                                                  |                                                                      | $ | 133                    |       |      | $ | (1,016 | )      
|Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                                      |   |                        |       |      |   |        |        
|                                                                                                   | Depreciation and amortization                                        |   |                        | 268   |      |   |        | 509     |  
|                                                                                                   | Cumulative effect of change in accounting principle                  |   |                        | (55   | )    |   |        |        |  
|                                                                                                   | Compensation expense  stock options issued                          |   |                        |      |      |   |        | 11      |  
|                                                                                                   | Loss in connection with prepayment of note receivable                |   |                        |      |      |   |        | 496     |  
|                                                                                                   | Reduction in accrued interest expense                                |   |                        |      |      |   |        | (290    | )
|Changes in assets and liabilities:                                                                 |                                                                      |   |                        |       |      |   |        |        
|                                                                                                   | Accounts receivable                                                  |   |                        | 133   |      |   |        | (103    | )
|                                                                                                   | Accounts receivable  pharmacy and laboratory costs                  |   |                        |      |      |   |        | 10,469  |  
|                                                                                                   | Accounts receivable  managed care reinsurance contract              |   |                        | 66    |      |   |        |        |  
|                                                                                                   | Other current assets, restricted funds, and other non-current assets |   |                        | 558   |      |   |        | 1,291   |  
|                                                                                                   | Accounts payable and accrued liabilities                             |   |                        | (496  | )    |   |        | (768    | )
|                                                                                                   | Accrued claims payable                                               |   |                        | 38    |      |   |        | (375    | )
|                                                                                                   | Accrued pharmacy and laboratory costs payable                        |   |                        |      |      |   |        | (10,469 | )
|                                                                                                   | Accrued reinsurance claims payable                                   |   |                        | 953   |      |   |        |        |  
|                                                                                                   | Income taxes payable                                                 |   |                        | (2    | )    |   |        | (5      | )
|                                                                                                   | Other liabilities                                                    |   |                        | (2    | )    |   |        | (35     | )
|                                                                                                   |                                                                      |   |                        |       |      |   |        |        
|                                                                                                   | Net cash provided by (used in) operating activities                  |   |                        | 1,594 |      |   |        | (285    | )
|                                                                                                   |                                                                      |   |                        |       |      |   |        |        
|Cash flows from investing activities:                                                              |                                                                      |   |                        |       |      |   |        |        
|                                                                                                   | Payments received on note receivable                                 |   |                        | 3     |      |   |        | 509     |  
|                                                                                                   | Additions to property and equipment                                  |   |                        | (26   | )    |   |        | (26     | )
|                                                                                                   |                                                                      |   |                        |       |      |   |        |        
|                                                                                                   | Net cash provided by (used in) investing activities                  |   |                        | (23   | )    |   |        | 483     |  
|                                                                                                   |                                                                      |   |                        |       |      |   |        |        
|Net increase in cash and cash equivalents                                                          |                                                                      |   | 1,571                  |       |      |   | 198    |        
|Cash and cash equivalents at beginning of year                                                     |                                                                      |   | 2,891                  |       |      |   | 2,518  |        
|                                                                                                   |                                                                      |   |                        |       |      |   |        |        
|Cash and cash equivalents at end of period                                                         |                                                                      | $ | 4,462                  |       |      | $ | 2,716  |        
|                                                                                                   |                                                                      |   |                        |       |      |   |        |        

See accompanying notes

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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES




Note 1  Basis of Presentation and Summary of Significant Accounting Policies

The consolidated balance sheet as of February 28, 2002, and the related
consolidated statements of operations and cash flows for the nine months ended
February 28, 2002 and February 28, 2001 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such adjustments
consisted only of normal recurring items. The results of operations for the
nine months ended February 28, 2002 are not necessarily indicative of the
results to be expected during the balance of the fiscal year.

The consolidated financial statements do not include all information and
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. The balance sheet at May 31, 2001 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statement presentation. Notes to consolidated financial statements
included in Form 10-K for the year ended May 31, 2001 on file with the
Securities and Exchange Commission provide additional disclosures and a further
description of accounting policies.

The Companys financial statements are presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The consolidated financial
statements do not include any adjustments to reflect the possible future
effects on the recovery and classification of assets or the amount and
classification of liabilities that may result from the outcome of the
uncertainties described in Note 3  Liquidity and Capital Resources.

The Companys managed care activities are performed under the terms of
agreements with health maintenance organizations, preferred provider
organizations, and other payers to provide contracted medical services to
subscribing participants. Under these agreements, revenue arises from
agreements to provide contracted services to qualified beneficiaries and is
earned monthly based on the number of qualified participants regardless of
services actually provided (generally referred to as capitation arrangements).
Such agreements accounted for 84.0%, or $16.6 million, of revenue for the nine
months ended February 28, 2002 compared to 78.2%, or $10.0 million, of revenue
for the nine months ended February 28, 2001. The Companys revenues from
providing other behavioral healthcare services are earned on a fee-for-service
basis and are recognized as services are rendered.

Restricted Cash

As of February 28, 2002, non-current restricted accounts include $0.3
million of cash held in trust in connection with the Companys Directors and
Officers liability insurance policy, $0.1 million of cash required to meet the
specific requirements for licensure in one state, and $0.1 million of cash that
is restricted in accordance with the terms of one operating lease.

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 the Company. The 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. Although considerable variability is inherent
in such estimates, management believes that the unpaid claims liability is
adequate. The estimates are continually reviewed and adjusted as experience
develops or new information becomes known with adjustments included in current
operations.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

Note 2  Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations and No. 142,
Goodwill and Other Intangible Assets, which establishes new standards for the
treatment of goodwill and other intangible assets. SFAS 142 is effective for
fiscal years

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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

beginning after December 31, 2001 and permits early adoption for companies with
a fiscal year beginning after March 15, 2001. SFAS 142 prescribes that
amortization of goodwill will cease as of the adoption date. The Company has
elected to adopt SFAS 142 effective June 1, 2001 and, as a result, there has
been no amortization expense recorded during Fiscal 2002 (see Note 6). In
accordance with SFAS 142, the Company has performed an impairment test within
six months of the adoption date and will perform one at least annually
thereafter and whenever events and circumstances occur that might effect the
carrying value of these assets.

Note 3  Liquidity and Capital Resources

At February 28, 2002, the Company had unrestricted cash and cash
equivalents of $4.5 million. During the nine months ended February 28, 2002,
$1.6 million was provided by the Companys operating activities, of which $1.0
million was provided as a result of timing differences between the collection
of state reinsurance program amounts and the payment dates for reinsurance
claims specific to one major contract (see Note 4, Item 2). The Company
reported net income of approximately $133,000 for the nine months ended
February 28, 2002, which includes approximately $55,000 specific to the
cumulative effect of a change in accounting principle (see Note 6) and a
$66,000 bad debt recovery specific to one contract that terminated in Fiscal
1999. This compares to a net loss of $1.0 million for the nine months ended
February 28, 2001. The Company has an accumulated deficit of $63.5 million and
total stockholders deficit of $11.6 million as of February 28, 2002.
Additionally, the Companys current assets at February 28, 2002 amounted to
approximately $8.4 million and current liabilities were approximately $19.8
million, resulting in a working capital deficiency of approximately $11.3
million. The working capital deficiency referred to above results primarily
from a $12.1 million liability related to Federal income tax refunds received
in prior years. The ultimate outcome of the Internal Revenue Service audit
whereby it is seeking recovery of the refunds from the Company, including the
amount to be repaid, if any, and the timing thereof, is not determinable (see
Note 7).

The Company has a long-term debt obligation of approximately $2.2 million
specific to its 7 1/2% convertible subordinated debentures, which are due in
April 2010. By reason of the terms of the indenture, the Company is required
to make semi-annual interest payments to its debenture holders in April and
October of each year, but is not required to make any principal payments,
sinking fund payments, or to redeem any securities prior to maturity in 2010.
The debentures are convertible into approximately 9,000 shares of Common Stock
at a conversion price of $248.12 per share.

Management cannot state with any degree of certainty whether any required
additional equity or debt financing will be available to it during Fiscal 2002
and, if available, that the source of financing would be available on terms and
conditions acceptable to the Company. The Company does not currently engage in
transactions relating to market sensitive risk instruments.

The above conditions raise substantial doubt about the Companys ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustment that may result from the outcome of
this uncertainty.

During Fiscal 2001 and Fiscal 2000, management took steps to trim costs
and save cash, including making significant staff reductions, centralizing
certain contract management and clinical functions, and eliminating the
Companys California administrative office and related executive staff
positions. The Companys continuation as a going concern is dependent upon its
ability to maintain profitability, to generate sufficient cash flow to meet its
obligations on a timely basis, and to obtain additional financing as may be
required.

Note 4  Major Customers/Contracts

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | The Company had contracts with Humana Health Plans (Humana) under which
it provided services to members in Florida. Effective June 30, 2000,
Humana completed the sale of its North Florida Medicaid business to
HealthEase of Florida, Inc. Additionally, Humanas contracts with the
Company, which covered specific commercial, Medicaid and Medicare
populations of approximately 60,000 members in Florida terminated
September 30, 2000. Humana contracts accounted for $0.7 million, or
5.5%, of operating revenue for the nine months ended February 28, 2001.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  | Effective July 1, 2000, the Company entered into a contract with one HMO to
continue to provide behavioral healthcare services to approximately 100,000
of 160,000 Florida members that were managed by the Company under prior
contracts with Humana. The combined revenue from the contracts that were
transitioned from Humana, plus two additional contracts that the Company has
with this HMO, accounted for 15.0%, or $3.0 million, of the Companys
operating revenues during the nine months ended February 28, 2002 compared
to                               

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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | 17.9%, or $2.3 million, for the nine months ended February 28, 2001.
Additionally, the Company has one major contract with an affiliate of this
HMO (see Item 2 below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) |  | During the fourth quarter of the fiscal year ended May 31, 2001, the
Company implemented one new contract to provide behavioral healthcare
services to Connecticut members under contract with one HMO. For the nine
months ended February 28, 2002, this contract represented approximately
13.3%, or $2.6 million, of the Companys operating revenue. Additionally,
this contract provides that the Company, through its contract with this
HMO, receives additional funds directly from a state reinsurance program.
During the nine months ended February 28, 2002, the Company filed
reinsurance claims totaling approximately $2.9 million. Such claims
represent cost reimbursements and, as such, are not included in the
reported operating revenues or healthcare operating expenses. As of
February 28, 2002, the Company has reported $0.7 million as a component of
accounts receivable, with $1.7 million reported as accrued reinsurance
claims payable, in the accompanying balance sheet. In the event that
these reinsurance amounts are not collected by the Company, the Company
could remain liable to perform services for the specific members that
qualify for such reimbursements. For non-reinsurance claims incurred but
not reported under this contract, the Company estimates its claims payable
using a similar method as that used for other existing contracts. As of
February 28, 2002, there was a limited amount of historical data available
to the Company for use in such estimates specific to this contract. Thus,
actual results could differ from the claims payable amount reported as of
February 28, 2002. While the Company believes its estimate to be
adequate, management will review and make any necessary changes to its
estimate as additional data becomes available.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(3) |  | The Company has two contracts with one HMO to provide behavioral
healthcare services to contracted members in Texas. These combined
contracts represented approximately 7.2%, or $1.4 million, and 10.5%, or
$1.3 million, of the Companys operating revenue for the nine months ended
February 28, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) |  | During the fiscal year ended May 31, 2001, the Company implemented five
new contracts to provide behavioral healthcare services to Florida members
under contracts with one HMO. These combined contracts, plus one
additional contract that was implemented during Fiscal 2002, represented
approximately 22.7%, or $4.5 million, and 18.7%, or $2.4 million, of the
Companys operating revenue for the nine months ended February 28, 2002
and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

The Companys contracts with its customers are typically for initial
one-year terms, with automatic annual extensions. Such contracts generally
provide for cancellation by either party with 60 to 90 days written notice.

Note 5  Note Receivable

In Fiscal 2001, the Company entered into a prepayment agreement and note
modification with Jefferson Hills Corporation (JHC) in connection with the
secured promissory note, which originated out of the sale in Fiscal 1999 of the
Companys Aurora, Colorado facility to JHC. The terms of the prepayment
agreement required JHC to immediately remit $500,000 to the Company as a
prepayment on the note. Additionally, the note was modified to reflect a
remaining balance due totaling $170,000 and to require JHC to make monthly
principal and interest payments until April 2006. One final principal payment
in the amount of approximately $146,000 will be due from JHC in April 2006. As
an inducement to JHC to make such prepayment, the Company credited JHC with an
aggregate of approximately $996,000. As a result, the Company recorded a
non-operating loss during the nine months ended February 28, 2001 of
approximately $496,000 in connection with this transaction.

Note 6  Goodwill

Effective June 1, 2001, the Company adopted, on a prospective basis, SFAS
142, Goodwill and Other Intangible Assets (see Note 2). As a result of the
early adoption of SFAS 142, no amortization expense was recorded during the
nine months ended February 28, 2002 compared to approximately $54,000 of
amortization expense recorded during the nine months ended February 28, 2001.
SFAS 142 requires the elimination of any unamortized deferred credits
immediately upon adoption of SFAS 142. As of June 1, 2001, the Company had
$55,000 of unamortized deferred credits which related to the Companys
acquisition in 1996 of one entity that was purchased for an amount below the
fair value of the net assets acquired. As a result, the Company recognized
$55,000 as the cumulative effect of a change in accounting principle during the
quarter ended August 31, 2001.

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##### Table of Contents



COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

The following table presents net income (loss) and the earnings (loss) per
basic and diluted share on a pro forma basis after eliminating amortization
expense for the three and nine month periods ended February 28, 2001. As a
result, Fiscal 2001 results are comparable with Fiscal 2002 (in thousands,
except per share amounts):

|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ------ | -
|                                                                                  |  | Three Months Ended |       | Nine months Ended
|                                                                                  |  | February 28,       |       | February 28,     
|                                                                                  |  |                    |       |                  
|                                                                                  |  | 2002               |       | 2001              |  | 2002 |       | 2001
|                                                                                  |  |                    |       |                   |  |      |       |     
|Reported income (loss)                                                            |  | $                  | 46    |                   |  | $    | 65    |      |  | $ | 78    |  |  | $ | (1,016 | )
|Add back: Goodwill amortization                                                   |  |                    |      |                   |  |      | 18    |      |  |   |      |  |  |   | 54     |  
|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Reported income (loss) before cumulative effect of change
in accounting principle |  |                    | 46    |                   |  |      | 83    |      |  |   | 78    |  |  |   | (962   | )
|Cumulative effect of change in accounting principle                               |  |                    |      |                   |  |      |      |      |  |   | 55    |  |  |   |       |  
|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Net income (loss) attributable to common stockholders                             |  | $                  | 46    |                   |  | $    | 83    |      |  | $ | 133   |  |  | $ | (962   | )
|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Basic and diluted income (loss) per share:                                        |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Reported income (loss)                                                            |  | $                  | 0.01  |                   |  | $    | 0.02  |      |  | $ | 0.02  |  |  | $ | (0.27  | )
|Goodwill                                                                          |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   | 0.01   |  
|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Reported income (loss) before cumulative effect of change
in accounting principle |  |                    | 0.01  |                   |  |      | 0.02  |      |  |   | 0.02  |  |  |   | (0.26  | )
|Cumulative effect of change in accounting principle                               |  |                    |      |                   |  |      |      |      |  |   | 0.01  |  |  |   |       |  
|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Net income (loss)                                                                 |  | $                  | 0.01  |                   |  | $    | 0.02  |      |  | $ | 0.03  |  |  | $ | (0.26  | )
|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Weighted Average Common Shares Outstanding  basic                                |  |                    | 3,867 |                   |  |      | 3,818 |      |  |   | 3,856 |  |  |   | 3,818  |  
|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Weighted Average Common Shares Outstanding  diluted                              |  |                    | 4,187 |                   |  |      | 3,818 |      |  |   | 4,041 |  |  |   | 3,818  |  
|                                                                                  |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  

Note 7  Income Taxes

The Companys provision for income taxes differs from the statutory rate
of 34% due, primarily, to the Companys increased valuation allowance for
losses generated during the nine months ended February 28, 2001.

In connection with the filing of its Federal income tax returns for fiscal
years 1995 and 1996, the Company filed a tentative refund claim to carry back
losses described in Section 172(f) of the Internal Revenue Code (IRC),
requesting a refund of $9.4 million and $5.5 million, respectively, of which
refunds of $9.4 million and $5.4 million were received. In addition, the
Company also filed amended Federal income tax returns for fiscal years prior to
1995, requesting similar refunds for losses carried back under Section 172(f)
of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and
$0.4 million for 1982, a total of $7.7 million. Further, the Company entered
into a fee arrangement with its tax advisor that required the Company to
advance its tax advisor an amount equal to 20% of any state or federal refunds
received. Such fees were due and payable to the Companys tax advisor within
30 days upon receipt of such tax refunds. However, if it is ultimately
determined upon examination and through appellate conference that such tax
strategies are unallowable, the Company is entitled to receive a pro rata
refund from its tax advisor of any fee that resulted from the disallowed item
or items.

Section 172(f) of the IRC provides for a ten year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of
business in which the Company operates is unclear. No assurance can be
provided that the Company will be able to retain the refunds received to date
or that the other refunds requested will be received.

During fiscal years 1997 and 1996, the Company recognized a portion of the
refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is recorded
as a deferred liability, Unbenefitted tax refunds received, pending
resolution by the Internal Revenue Service (IRS) of the appropriateness of
the 172(f) carryback. The other refunds requested under Section 172(f) for
prior years of $7.7 million have not been received nor has the Company
recognized any tax benefit related to these potential refunds.

9



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##### Table of Contents



COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be
upheld the Company would be required to repay $12.4 million in refunds
previously received, plus accrued interest of approximately $7.8 million
through February 28, 2002. Accordingly, the Company would be entitled to a
repayment of the fees advanced to its tax advisor relating to these refunds of
approximately $2.5 million, which is reported as other receivable in the
accompanying balance sheets. This report commenced the administrative appeals
process. The Company filed a protest letter with the IRS on November 6, 1998.
The IRS reserves the right to assess and collect the tax previously refunded to
the Company at any time during the appeals process.

On July 11, 2000, the Company submitted an Offer in Compromise (the
Offer) to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. To assist the IRS in
evaluating the Offer, the Company has provided additional documents to the IRS
and held various discussions with the IRS during Fiscal 2001 and Fiscal 2002.
Effective March 13, 2002, the Company submitted an amended Offer in Compromise
(Amended Offer) to the IRS. The Amended Offer must be reviewed and approved
by IRS including its District Counsel. There can be no assurance that the IRS
will accept the Amended Offer.

Note 8  Basic and Diluted Earnings (Loss) Per Share

Net earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Convertible debentures
were not included in the calculation of earnings (loss) per share as they are
antidilutive. The following table sets forth the computation of basic and
diluted earnings (loss) per share in accordance with Statement No. 128,
Earnings Per Share:

|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |        |       | 
|------------------------------------------------------------------------ | -------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ---- | --------------------------------------------- | ----- | ----------------- | ---- | ---- | ----- | ---- | ---- | --- | ----- | - | ----- | ------ | ----- | 
|                                                                         |                                                                                  |                                                                                                              |      | Three Months Ended                            |       | Nine months Ended
|                                                                         |                                                                                  |                                                                                                              |      | February 28,                                  |       | February 28,     
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                  
|                                                                         |                                                                                  |                                                                                                              |      | 2002                                          |       | 2001              |      | 2002 |       | 2001
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |     
|                                                                         |                                                                                  |                                                                                                              |      | (Amounts in thousands, except per share data)
|Numerator:                                                               |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|                                                                         | Income (loss) before cumulative effect of change in accounting principle         |                                                                                                              | $    | 46                                            |       |                   | $    | 65   |       |      | $    | 78  |       |   | $     | (1,016 | )    
|                                                                         | Cumulative effect of change in accounting principle                              |                                                                                                              |      |                                              |       |                   |      |     |       |      |      | 55  |       |   |       |       |      
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|                                                                         | Numerator for diluted earnings (loss) per share available to common
stockholders |                                                                                                              | $    | 46                                            |       |                   | $    | 65   |       |      | $    | 133 |       |   | $     | (1,016 | )    
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|Denominator:                                                             |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|                                                                         |                                                                                  | Weighted average shares                                                                                      |      |                                               | 3,867 |                   |      |      | 3,818 |      |      |     | 3,856 |   |       |        | 3,818 | 
|                                                                         |                                                                                  | Effect of dilutive securities:                                                                               |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |        |       | 
|                                                                         |                                                                                  | Employee stock options                                                                                       |      |                                               | 320   |                   |      |      |      |      |      |     | 185   |   |       |        |      | 
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|                                                                         |                                                                                  | Denominator for diluted earnings (loss) per share-adjusted weighted
average shares after assumed conversions |      |                                               | 4,187 |                   |      |      | 3,818 |      |      |     | 4,041 |   |       |        | 3,818 | 
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|Basic earnings (loss) per share:                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|Income (loss) before cumulative effect of change in accounting principle |                                                                                  | $                                                                                                            | 0.01 |                                               |       | $                 | 0.02 |      |       | $    | 0.02 |     |       | $ | (0.27 | )     
|Cumulative effect of change in accounting principle                      |                                                                                  |                                                                                                              |     |                                               |       |                   |     |      |       |      | 0.01 |     |       |   |      |       
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|Net income (loss)                                                        |                                                                                  | $                                                                                                            | 0.01 |                                               |       | $                 | 0.02 |      |       | $    | 0.03 |     |       | $ | (0.27 | )     
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|Diluted earnings (loss) per share:                                       |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|Income (loss) before cumulative effect of change in accounting principle |                                                                                  | $                                                                                                            | 0.01 |                                               |       | $                 | 0.02 |      |       | $    | 0.02 |     |       | $ | (0.27 | )     
|Cumulative effect of change in accounting principle                      |                                                                                  |                                                                                                              |     |                                               |       |                   |     |      |       |      | 0.01 |     |       |   |      |       
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       
|Net income (loss)                                                        |                                                                                  | $                                                                                                            | 0.01 |                                               |       | $                 | 0.02 |      |       | $    | 0.03 |     |       | $ | (0.27 | )     
|                                                                         |                                                                                  |                                                                                                              |      |                                               |       |                   |      |      |       |      |      |     |       |   |       |       

Authorized shares of common stock reserved for possible issuance for
convertible debentures and stock options are as follows at February 28, 2002:

|                                                  |       |  |         |           | 
|------------------------------------------------- | ----- |  | ------- | --------- | 
|Convertible debentures                            |       |  | 9,044   |          
|Outstanding stock options                         |       |  | 915,725 |          
|Possible future issuance under stock option plans |       |  | 186,984 |          
|                                                  |       |  |         |          
|                                                  | Total |  |         | 1,111,753 | 
|                                                  |       |  |         |          

10



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##### Table of Contents



COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

Note 9  Commitments and Contingencies

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | During the fiscal year ended May 31, 2001, the Company implemented a
major contract for one new client requiring that the Company maintains a
$600,000 performance bond throughout the term of the contract. This bond,
which was issued in September 2001 with an effective date of April 1,
2001, is unsecured and is automatically renewable as long as the contract
remains in force.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(2) |  | During the fiscal year ended May 31, 2000, the Company renewed one
contract, which included a requirement that the Company maintains a
$550,000 performance bond throughout the term of the contract. The
original term of the bond was for one year and the bond, which is
unsecured, is automatically renewable as long as the contract remains in
force.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(3) |  | On February 19, 1999, the California Superior Court denied the Companys
Petition for Writ of Mandate of an adverse administrative appeal decision
regarding application of the Maximum Inpatient Reimbursement Limitation to
Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its
fiscal periods 1983 through 1986. This facility was owned by the Company
until its disposal in fiscal year 1991. The subject matter of the
Superior Court action involved the refusal of the administrative law judge
to order further reductions in the liability for costs associated with
treating high cost, long stay Medi-Cal patients, which are commonly
referred to as outliers. The Company does not plan to appeal the
California Superior Court decision for which the Notice of Entry of
Judgment was entered on February 26, 1999.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |  | During the fiscal year ended May 31, 2001, the Company lowered its
estimate by approximately $0.3 million specific to interest charges that
were previously accrued in connection with this liability. This change
in estimate was based on information provided to the Company by the
California Department of Health Services. As of February 28, 2002, the
Company has approximately $1.0 million accrued relating to this matter.                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |  | On March 29, 2001, the Company submitted an offer to the State of
California to resolve this liability at a substantially reduced amount.
On April 23, 2001, the Company received a letter, dated April 11, 2001,
from the State of California advising the company that its proposed
settlement offer was not accepted and, additionally, requesting payment
of approximately $0.8 million. The Company is contemplating a second
settlement offer. There can be no assurance that the State of California
will give consideration to such offer or agree to alternate terms.                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(4) |  | With respect to the contingency related to prior years income taxes, see
Note 7, Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(5) |  | The Company would remain liable to perform the services covered under
subcapitation agreements if the parties with which the Company
subcapitates were unable to fulfill their responsibilities under such
agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

From time to time, the Company and its subsidiaries are also parties and
their property is subject to ordinary, routine litigation incidental to their
business. In some pending cases, claims may exceed insurance policy limits and
the Company or any one of its subsidiaries may have exposure to a liability
that is not covered by insurance. Management believes that the outcome of such
lawsuits will not have a material adverse impact on the Companys financial
statements.

Regulatory Monitoring and Compliance

The Company is subject to extensive and evolving state and federal
regulations, including licensure and compliance with regulations related to
healthcare providers, insurance companies, and other risk assuming entities.
These laws and regulations may vary considerably among states and, as a result,
the Company may be subject to the specific regulatory approach adopted by each
state for the regulation of managed care companies and for providers of
behavioral healthcare treatment services. Currently, management cannot quantify
the potential effects of additional regulation of the managed care industry,
but such costs could have an adverse effect on future operations to the extent
that they are not able to be recouped in future managed care contracts.

The Company is subject to the requirements of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA). The purpose of the HIPAA
provisions is to improve the efficiency and effectiveness of the healthcare
system through standardization of the electronic data interchange of certain
administrative and financial

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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

transactions and, also, to protect the security and privacy of transmitted
information. Entities subject to HIPAA include all healthcare providers and
all healthcare plans. To meet the specific requirements of HIPAA, the Company
will incur costs to insure the adequacy and security of its healthcare
information system and communication networks. Additionally, the Company may
incur costs to implement the specific transaction codes required by HIPAA for
claims, payment, enrollment, eligibility, or to become compliant with security
and privacy rules, which may be more stringent for providers of certain
behavioral healthcare services. The expected timetable to be compliant is
currently October 2002 for transaction code changes, although recent
legislation allows for a one-year delay of this compliance date if a formal
compliance plan is filed by October 2002, and April 2003 for compliance with
the privacy rules. The Company is currently evaluating its systems and
policies that are impacted by HIPAA. While these efforts will be ongoing, the
Company expects to meet all compliance rules and timetables with respect to the
HIPAA regulations. Failure to do so may result in penalties and have a
material adverse effect on the Companys ability to retain its customers or to
gain new business.




Item 2 
Managements discussion and analysis of financial condition and results of operations

This Quarterly Report on Form 10-Q includes forward-looking statements,
the realization of which may be impacted by certain important factors discussed
below under Cautionary Statement and Risk Factors  Important Factors
Related to Forward-Looking Statements and Associated Risks (page 14).

General

Introduction

The Company has provided managed behavioral healthcare services and
products since 1992. Current services include a broad spectrum of inpatient
and outpatient mental health and substance abuse therapy, counseling, and
supportive interventions. The Companys chief focus is its managed care
business.

Recent Developments

During Fiscal 2000 and Fiscal 2001, management took steps to trim costs
and save cash, including making significant staff reductions, centralizing
certain contract management and clinical functions, and eliminating the
Companys California administrative office and related executive staff
positions. These changes were necessary following the loss of business tied to
the Companys former contracts in Puerto Rico, which terminated in April 1999
and which represented approximately 44% of the Companys operating revenues
from continuing operations during Fiscal 1999.

During Fiscal 2002, the Company has benefited from the cost control
measures that were implemented in the prior two fiscal years, including the
centralization efforts that have allowed us to enter into new contracts during
Fiscal 2002 and 2001 without adding significantly to our operating costs.
Additionally, revenue has increased during Fiscal 2002 from membership growth
specific to existing contracts, primarily the state sponsored childrens health
insurance programs.

More recently, the Company began providing behavioral healthcare benefits
to approximately 140,000 members in Michigan effective April 2002. Annual revenues from this
contract are expected to exceed $2.0 million in Fiscal 2003. With the addition
of this new business, the Company now serves more than 1,000,000 members
nationwide.

Results of Operations

The Company reported net income of $46,000, or $0.01 earnings per share,
for the quarter ended February 28, 2002 compared to $65,000, or $0.02 earnings
per share, for the quarter ended February 28, 2001. Net income for the nine
months ended February 28, 2002 was $133,000, or $0.03 earnings per share, which
includes approximately $55,000 specific to the cumulative effect of a change in
accounting principle (see Note 6) and a $66,000 bad debt recovery specific to
one contract that terminated in Fiscal 1999. This compares to a net loss of
$1.0 million, or $0.27 loss per share, for the nine months ended February 28,
2001. The following tables summarize the Companys financial data for the
three and nine months ended February 28, 2002 and 2001 (in
thousands):

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THE THREE MONTHS ENDED FEBRUARY 28, 2002 COMPARED TO THE THREE MONTHS ENDED FEBRUARY 28, 2001:

|                                |  |              |       |              |  |   |       |  
|------------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | -
|                                |  | Consolidated |       | Consolidated
|                                |  | Operations   |       | Operations  
|                                |  | Fiscal 2002  |       | Fiscal 2001 
|                                |  |              |       |             
|Operating revenues              |  | $            | 7,110 |              |  | $ | 4,560 |  
|Healthcare operating expenses   |  |              | 6,093 |              |  |   | 3,653 |  
|General/administrative expenses |  |              | 874   |              |  |   | 930   |  
|Other operating expenses        |  |              | 77    |              |  |   | 127   |  
|                                |  |              |       |              |  |   |       |  
|                                |  |              | 7,044 |              |  |   | 4,710 |  
|                                |  |              |       |              |  |   |       |  
|Operating income (loss)         |  | $            | 66    |              |  | $ | (150  | )
|                                |  |              |       |              |  |   |       |  

The Company reported operating income of $66,000 for the quarter ended
February 28, 2002 compared to the operating loss of $150,000 for the quarter
ended February 28, 2001. Operating revenues increased by 55.9%, or $2.6
million, to $7.1 million for the quarter ended February 28, 2002 compared to
$4.6 million for the quarter ended February 28, 2001. This increase is
attributable to two major contracts implemented during Fiscal 2001 and
membership growth from state sponsored childrens health insurance programs.

Healthcare operating expenses increased by approximately $2.4 million, or
66.8%, for the quarter ended February 28, 2002 as compared to the quarter ended
February 28, 2001. This increase is directly attributable to revenue growth as
described above. Healthcare operating expense as a percentage of operating
revenue increased by 5.6%, from 80.1% for the quarter ended February 28, 2001
to 85.7% for the quarter ended February 28, 2002. This increase is primarily
attributable to a change in revenue mix resulting in increased Medicaid and
Medicare membership during Fiscal 2002 compared to Fiscal 2001.

General and administrative expenses decreased by approximately $0.1
million, or 6.0%, for the quarter ended February 28, 2002 as compared to the
quarter ended February 28, 2001. This decrease is attributable to the Companys
continuing efforts to reduce general and administrative costs. General and
administrative expense as a percentage of operating revenue decreased from
20.4% for the quarter ended February 28, 2001 to 12.3% for the quarter ended
February 28, 2002.

Other operating expenses decreased by $0.1 million for the quarter ended
February 28, 2002 compared to the quarter ended February 28, 2001. This
decrease is primarily attributable to a reduction in depreciation expense,
which results from assets being fully depreciated and, also, from decreases in
capital spending. Additionally, Fiscal 2002 results do not include any
amortization expense compared to $18,000 of amortization expense recorded
during the three months ended February 28, 2001 (see Note 6 to the unaudited
financial statements  Goodwill).

THE NINE MONTHS ENDED FEBRUARY 28, 2002 COMPARED TO THE NINE MONTHS ENDED FEBRUARY 28, 2001:

|                                |  |              |        |              |  |   |        |  
|------------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | -
|                                |  | Consolidated |        | Consolidated
|                                |  | Operations   |        | Operations  
|                                |  | Fiscal 2002  |        | Fiscal 2001 
|                                |  |              |        |             
|Operating revenues              |  | $            | 19,706 |              |  | $ | 12,740 |  
|Healthcare operating expenses   |  |              | 16,827 |              |  |   | 10,478 |  
|General/administrative expenses |  |              | 2,573  |              |  |   | 2,811  |  
|Other operating expenses        |  |              | 180    |              |  |   | 427    |  
|                                |  |              |        |              |  |   |        |  
|                                |  |              | 19,580 |              |  |   | 13,716 |  
|                                |  |              |        |              |  |   |        |  
|Operating income (loss)         |  | $            | 126    |              |  | $ | (976   | )
|                                |  |              |        |              |  |   |        |  

The Company reported operating income of $126,000 for the nine months
ended February 28, 2002 compared to the operating loss of $976,000 for the nine
months ended February 28, 2001. Operating revenues increased by 54.7%, or $7.0
million, to $19.7 million for the nine months ended February 28, 2002 compared
to $12.7

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million for the nine months ended February 28, 2001. This increase is
attributable to two major contracts implemented during Fiscal 2001 and
membership growth from state sponsored childrens health insurance programs.

Healthcare operating expenses increased by approximately $6.3 million, or
60.6%, for the nine months ended February 28, 2002 as compared to the nine
months ended February 28, 2001. This increase is directly attributable to
revenue growth as described above. Healthcare operating expense as a
percentage of operating revenue increased by 3.1%, from 82.3% for the nine
months ended February 28, 2001 to 85.4% for the nine months ended February 28,
2002. This increase is primarily attributable to a change in revenue mix
resulting in increased Medicaid and Medicare membership during Fiscal 2002
compared to Fiscal 2001.

General and administrative expenses decreased by approximately $0.2
million, or 8.5%, for the nine months ended February 28, 2002 as compared to
the nine months ended February 28, 2001. This decrease is attributable to the
Companys continuing efforts to reduce general and administrative costs.
General and administrative expense as a percentage of operating revenue
decreased from 22.1% for the nine months ended February 28, 2001 to 13.1% for
the nine months ended February 28, 2002.

Other operating expenses decreased by $0.2 million for the nine months
ended February 28, 2002 compared to the nine months ended February 28, 2001.
This decrease is primarily attributable to a reduction in depreciation expense,
which results from assets being fully depreciated and, also, from decreases in
capital spending. Additionally, Fiscal 2002 results do not include any
amortization expense compared to $54,000 of amortization expense recorded
during the nine months ended February 28, 2001 (see Note 6 to the unaudited
financial statements  Goodwill).

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain information included
in this quarterly report on Form 10-Q and in other Company reports, SEC
filings, statements, and presentations is forward looking within the meaning of
the Private Securities Litigation Reform Act of 1995, including, but not
limited to, statements concerning the Companys anticipated operating results,
financial resources, increases in revenues, increased profitability, interest
expense, growth and expansion, and the ability to obtain new behavioral
healthcare contracts. Such forward-looking information involves important
risks and uncertainties that could significantly affect actual results and
cause them to differ materially from expectations expressed herein and in other
Company reports, SEC filings, statements, and presentations. These risks and
uncertainties include local, regional, and national economic and political
conditions, the effect of governmental regulation, the competitive environment
in which the Company operates, and other risks detailed from time to time in
the Companys SEC reports

Risk Factors

Important Factors Related to Forward-Looking Statements and Associated Risks

This Quarterly Report on Form 10-Q contains certain forward-looking
statements that are based on current expectations and involve a number of risks
and uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the Companys success in (i)
expanding the managed behavioral healthcare operations, (ii) effective
management in the delivery of services, (iii) risk and utilization in context
of capitated payouts, and (iv) retaining certain refunds from the IRS.

Concentration of Risk

The Company currently has twelve contracts with four HMOs to provide
behavioral healthcare services under commercial, Medicaid, and Medicare plans,
to contracted members in Connecticut, Florida and Texas. These combined
contracts represent approximately 58.1% and 47.2% of the Companys operating
revenue for the nine months ended February 28, 2002 and 2001, respectively.
The terms of each contract are generally for one-year periods and are
automatically renewable for additional one-year periods unless terminated by
either party.

Uncertainty of Future Profitability

As of February 28, 2002, the Company had stockholders deficit of $11.6
million and a working capital deficiency of approximately $11.3 million. The
Company reported net income for the nine months ended February 28, 2002 of
approximately $0.1 million. There can be no assurance that the Company will be
able to sustain profitability or that the Company can maintain positive cash
flow on an ongoing basis. Present results of operations are not necessarily
indicative of anticipated future results of operations.

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Need for Additional Funds; Uncertainty of Future Funding

During recent fiscal years, a principal source of liquidity has been the
sale of hospital facilities. During Fiscal 1999, the Company completed its
plan to dispose of its hospital business segment and as such, does not
currently own any hospital facilities. Subject to various market conditions,
an additional source of liquidity could be the issuance of additional equity
securities, which could result in substantial dilution to stockholders.

The Company may be required to repay a portion of the tax refunds received
from the Internal Revenue Service for Fiscal 1996 and 1995, which amounted to
$9.4 million and $5.4 million, respectively (see Part II  Item 1, Legal
Proceedings, below). Further, the Company may be required to repay some amount
to Medi-Cal in connection with the judgment entered on February 26, 1999, which
is more fully described under Part II  Item 1, Legal Proceedings, below.

Uncertainty of Pricing; Healthcare Reform and Related Matters

Managed care operations are at risk for costs incurred to supply agreed
upon levels of service. Failure to anticipate or control costs could have
material, adverse effects on the Company. Additionally, the business of
providing services on a full-risk capitation basis exposes the Company to the
additional risk that contracts negotiated and entered into may ultimately be
determined to be unprofitable if utilization levels require the Company to
deliver and provide services at capitation rates which do not account for or
factor in such utilization levels.

The levels of revenues and profitability of healthcare companies may be
affected by the continuing efforts of governmental and third party payers to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to
be, a number of federal and state proposals to implement governmental controls
on the price of healthcare. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payers for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business and no assurance can be given that any such reforms will not
have a material adverse effect on the Company.

Shares Eligible for Future Sale

The Company has granted an aggregate of 916,000 options to employees and
consultants of the Company. The Company cannot determine if any of these
options will be exercised in the foreseeable future. If exercised, the shares
to be issued by the Company could be presently sold in the open market.

Anti-takeover Provisions

The Companys Restated Certificate of Incorporation provides for 60,000
authorized shares of Preferred Stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by the Board of Directors
without any vote or action by the stockholders that could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. As of February 28, 2002, there are 18,740 remaining
shares authorized and available to issue, and no outstanding shares of
Preferred Stock. The Companys Restated Certificate of Incorporation also
provides for a classified board of directors with directors divided into three
classes serving staggered terms. The Companys stock option plans generally
provide for the acceleration of vesting of options granted under such plans in
the event of certain transactions which result in a change of control of the
Company. Section 203 of the General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders and
therefore could adversely affect the price of the Companys Common Stock or the
possibility of sale of shares to an acquiring person.

Assumptions relating to the foregoing involve judgments that are difficult
to predict accurately and are subject to many factors that can materially
affect results. Budgeting and other management decisions are subjective in
many respects and thus susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of which may
cause the Company to alter its budgets which may in turn affect the Companys
results. In light of the factors that can materially affect the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.

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PART II  OTHER INFORMATION




Item 1  LEGAL PROCEEDINGS

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | On February 19, 1999, the California Superior Court denied the Companys
Petition for Writ of Mandate of an adverse administrative appeal decision
regarding application of the Maximum Inpatient Reimbursement Limitation
to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its
fiscal periods 1983 through 1986. The Company owned this facility until
its disposal in fiscal year 1991. The subject matter of the Superior
Court action involved the refusal of the administrative law judge to
order further reductions in the liability for costs associated with
treating high cost, long stay Medi-Cal patients, which are commonly
referred to as outliers. The Company does not plan to appeal the
California Superior Court decision for which the Notice of Entry of
Judgment was entered on February 26, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | During the fiscal year ended May 31, 2001, the Company lowered its estimate
by approximately $0.3 million specific to interest charges that were
previously accrued in connection with this liability. This change in
estimate was based on information provided to the Company by the California
Department of Health Services. As of February 28, 2002, the Company has
approximately $1.0 million accrued relating to this matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | In March 2001, the Company submitted an offer to the State of California to
resolve this liability at a substantially reduced amount. On April 23,
2001, the Company received a letter, dated April 11, 2001, from the State
of California advising the company that its proposed settlement offer was
not accepted and, additionally, requesting payment of approximately $0.8
million. The Company is contemplating a second settlement offer. There
can be no assurance that the State of California will give consideration to
such offer or agree to alternate terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(2) |  | In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed a tentative refund claim to
carry back losses described in Section 172(f) of the Internal Revenue
Code (IRC), requesting a refund to the Company of $9.4 million and $5.5
million, respectively, of which refunds of $9.4 million and $5.4 million
were received. In addition, the Company also filed amended Federal
income tax returns for fiscal years prior to 1995, requesting similar
refunds of losses carried back under Section 172(f) of $6.2 million for
1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for
1982, a total of $7.7 million. Further, the Company entered into a fee
arrangement with its tax advisor that required the Company to advance its
tax advisor an amount equal to 20% of any state or federal refunds
received. Such fees were due and payable to the Companys tax advisor
within 30 days upon receipt of such tax refunds. However, if it is
ultimately determined upon examination and through appellate conference
that such tax strategies are unallowable, the Company is entitled to
receive a pro rata refund from its tax advisor of any fee that resulted
from the disallowed item or items.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | During fiscal years 1997 and 1996, the Company recognized a portion of the
refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is
recorded as a deferred liability, Unbenefitted tax refunds received
pending resolution by the Internal Revenue Service (IRS) of the
appropriateness of the Section 172(f) carryback. The additional refunds
requested under Section 172(f) for prior years of $7.7 million have not
been received, nor has the Company recognized any tax benefit related to
these potential refunds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or
(2) a liability arising under a federal or state law or out of any tort if
the act giving rise to such liability occurs at least three years before
the beginning of the taxable year. The applicability of Section 172(f) to
the type of business in which the Company operates is unclear. No
assurance can be provided that the Company will be able to retain the
refunds received to date or that the additional refunds requested will be
received.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | As a result of the Section 172(f) carryback claims filed by the Company,
and the tentative refunds received, the Company came under audit with
respect to the tax years previously mentioned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing
$12.4 million of the $14.8 million of refunds previously received, and the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | additional refunds requested of $7.7 million. If the position of the IRS
were to be upheld, the Company would be required to repay $12.4 million in
refunds previously received, plus accrued interest of approximately $7.8
million through February 28, 2002. Accordingly, the Company would be
entitled to a repayment of the fees advanced to its tax advisor relating to
these refunds of approximately $2.5 million, which is reported as other
receivable in the accompanying balance sheets. This report commenced the
administrative appeals process. The Company filed a protest letter with
the IRS on November 6, 1998. The IRS reserves the right to assess and
collect the tax previously refunded to the Company at any time during the
appeals process.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | On July 11, 2000, the Company submitted an Offer in Compromise (the Offer)
to the Appeals Office of the IRS to resolve the controversy with respect to
the refunds at a substantially reduced amount. To assist the IRS in
evaluating the Offer, the Company has provided additional documents to the
IRS and held various discussions with the IRS during Fiscal 2001 and Fiscal
2002. Effective March 13, 2002, the Company submitted an amended Offer in
Compromise (Amended Offer) to the IRS. The Amended Offer must be
reviewed and approved by IRS including its District Counsel. There can be
no assurance that the IRS will accept the Amended Offer.                                                                                                      

From time to time, the Company and its subsidiaries are also parties to
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims may exceed insurance policy
limits and the Company or any one of its subsidiaries may have exposure to
liability that is not covered by insurance. Management believes that the
outcome of such lawsuits will not have a material adverse impact on the
Companys financial statements.




Item 6  Exhibits and Reports on Form 8-K

Reports on Form 8-K  None.

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AND SUBSIDIARIES




SIGNATURE

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

|               |  |                                                                                                                    
|-------------- |  | -------------------------------------------------------------------------------------------------------------------
|               |  | COMPREHENSIVE CARE CORPORATION                                                                                     
|              
|               |  |                                                                                                                    
|              
|April 12, 2002 |  | by  /s/ ROBERT J. LANDISRobert J. Landis
Chairman of the Board of Directors,
Chief Financial Officer, and Treasurer

18