<PAGE>   1
                                  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 November 30, 1997

[ ]     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 0-5751


                         COMPREHENSIVE CARE CORPORATION
             (Exact name of registrant as specified in its charter)


            Delaware                                    95-2594724
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


             1111 Bayside Drive, Suite 100, Corona del Mar, CA 92625
           ---------------------------------------------------------
              (Address of principal executive offices and zip code)

                                 (714) 222-2273
               -------------------------------------------------
              (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 January 14, 1998
--------------------------------------           -------------------------------
Common Stock, par value $.01 per share                       3,455,723





<PAGE>   2



                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


<TABLE>
<CAPTION>

                                      Index
                                                                            Page
                                                                            ----


Part I - Financial Information


<S>                                                                         <C>
    Item 1.  -  Condensed Consolidated Financial Statements


       Condensed consolidated balance sheets,
           November 30, 1997 and May 31, 1997................................3

       Condensed consolidated statements of operations for
           the three and six months ended November 30, 1997 and 1996.........4

       Condensed consolidated statements of cash flows for
           the six months ended November 30, 1997 and 1996...................5

       Notes to condensed consolidated financial statements..................6



    Item 2. -  Management's discussion and analysis of financial condition 
                 and results of operations..................................11



Part II - Other Information

    Item 1. -  Legal Proceedings............................................20

    Item 6. -  Exhibits and Reports on Form 8-K.............................21

    Signatures..............................................................22
</TABLE>







                                        2

<PAGE>   3



PART I.  -  FINANCIAL INFORMATION

ITEM 1. -  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (Dollars in thousands, except per share amounts)
                                                                    November 30,     May 31,
                                                                         1997         1997
                                                                         ----         ----
ASSETS                                                               (Unaudited)     (Note)

<S>                                                                 <C>             <C> 
Current assets:
     Cash and cash equivalents ................................      $  4,688       $  3,991
     Accounts receivable, less allowance for
         doubtful accounts of $1,478 and $883 .................         2,130          1,988
     Other receivables ........................................         2,465          2,486
     Property and equipment held for sale .....................            --          2,797
     Other current assets .....................................           311            259
                                                                     --------       --------
Total current assets ..........................................         9,594         11,521
                                                                     --------       --------

Property and equipment ........................................        10,941         10,138
Less accumulated depreciation and amortization ................        (4,116)        (3,820)
                                                                     --------       --------
Net property and equipment ....................................         6,825          6,318
                                                                     --------       --------

Property and equipment held for sale ..........................         1,910          1,910
Notes receivable ..............................................         1,926          1,941
Goodwill, net .................................................         1,341          1,567
Other assets ..................................................         3,158          1,489
                                                                     --------       --------
Total assets ..................................................      $ 24,754       $ 24,746
                                                                     ========       ========

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
       Accounts payable and accrued liabilities ...............      $  5,061       $  5,152
     Accrued claims payable ...................................         6,529          6,256
       Current maturities of long-term debt ...................             2             46
     Unbenefitted tax refunds received ........................        12,092         12,092
     Income taxes payable .....................................           371            362
                                                                     --------       --------
Total current liabilities .....................................        24,055         23,908
                                                                     --------       --------

Long-term debt, excluding current maturities ..................         2,706          2,712
Other liabilities .............................................           668            696
Commitments and contingencies (see Note 6)
Stockholders' deficit:
     Preferred stock, $50.00 par value; authorized 60,000
        shares; issued and outstanding 41,260 shares of
        Series A Non-Voting 4% Cumulative Convertible Preferred
        Stock at redemption value .............................         2,135          2,094
     Common stock, $.01 par value; authorized 12,500,000
        shares; issued and outstanding 3,376,529 shares .......            34             34
     Additional paid-in capital ...............................        48,904         48,888
     Accumulated deficit ......................................       (53,748)       (53,586)
                                                                     --------       --------
         Total stockholders' deficit ..........................        (2,675)        (2,570)
                                                                     --------       --------
Total liabilities and stockholders' deficit ...................      $ 24,754       $ 24,746
                                                                     ========       ========
</TABLE>

Note:   The balance sheet at May 31, 1997 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 statements.



                             See accompanying notes.


                                        3

<PAGE>   4




                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                (Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>

    
                                                            Three Months Ended              Six Months Ended
                                                               November 30,                 November 30,
                                                           1997          1996           1997           1996
                                                         --------       --------       --------       --------

<S>                                                     <C>             <C>           <C>            <C> 
Revenues and gains:
    Operating revenues...............................   $  11,711       $  9,710       $ 22,599       $ 18,703

Costs and expenses:
    Direct healthcare expenses .......................      9,293          8,420         19,662         16,589
    General and administrative expenses ..............      1,533          2,156          2,683          3,810
    Provision for doubtful accounts ..................        (18)           154            157            201
    Depreciation and amortization ....................        229            176            418            338
    Restructuring expenses ...........................         --             --             --            195
                                                         --------       --------       --------       --------
                                                           11,037         10,906         22,920         21,133

Earnings (loss) from operations ......................        674         (1,196)          (321)        (2,430)

    Gain on sale of assets ...........................         (1)            20            156             26
    Loss on sale of assets ...........................         --            (12)            (8)           (12)
    Non-recurring loss ...............................         --             --             --           (250)
    Interest income ..................................         94            105            207            150
    Interest expense .................................        (58)          (260)          (121)          (596)
                                                         --------       --------       --------       --------

Earnings (loss) before income taxes ..................        709         (1,343)           (87)        (3,112)

Provision (benefit) for income taxes .................         16           (344)            34           (345)
                                                         --------       --------       --------       --------

    Net earnings (loss) ..............................        693           (999)          (121)        (2,767)

Dividends on convertible preferred stock .............         20             --             41             --
                                                         --------       --------       --------       --------

Net earnings (loss) attributable to
   common stockholders ...............................   $    673       $   (999)      $   (162)      $ (2,767)
                                                         ========       ========       ========       ========

Earnings (loss) per common share:

    Net earnings (loss) attributable to
     common stockholders .............................   $   0.20       $  (0.34)      $  (0.05)      $  (0.96)
                                                         ========       ========       ========       ========

</TABLE>







                             See accompanying notes.


                                        4

<PAGE>   5



                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                            Six Months Ended
                                                                              November 30,
                                                                            1997         1996
                                                                          -------       -------
<S>                                                                      <C>           <C>  
Cash flows from operating activities:
     Net loss ......................................................      $  (121)      $(2,767)
Adjustments to reconcile net loss to net
     cash used in operating activities:
     Depreciation and amortization .................................          418           338
     Provision for doubtful accounts ...............................          157           201
     Gain on sale of assets ........................................         (156)          (26)
     Loss on sale of assets ........................................            8            12
     Changes in assets and liabilities net of
          effect of acquisitions:
         Increase in accounts receivable ...........................         (299)         (937)
         Decrease (increase) in other receivables ..................           36        (1,015)
         Increase in other current assets and other assets .........       (1,746)          (10)
         Increase in accounts payable and accrued liabilities ......          310         2,103
     Increase in unbenefitted tax refunds received .................           --         5,074
     Increase (decrease) in income taxes payable ...................            9           (28)
     Decrease in other liabilities .................................          (28)         (188)
                                                                          -------       -------

          Net cash (used in) provided by operating activities ......       (1,412)        2,757
                                                                          -------       -------

Cash flows from investing activities:
     Net proceeds from sale of property and equipment (operating and
       held for sale) ..............................................        2,955           405
     Additions to property and equipment ...........................         (857)         (196)
                                                                          -------       -------
          Net cash provided by investing activities ................        2,098           209
                                                                          -------       -------

Cash flows from financing activities:
     Bank and other borrowings .....................................           16            --
     Proceeds from the issuance of Common Stock ....................           61           873
     Repayment of debt .............................................          (66)         (694)
                                                                          -------       -------
          Net cash provided by financing activities ................           11           179
                                                                          -------       -------

Net increase in cash and cash equivalents ..........................          697         3,145

Cash and cash equivalents at beginning of period ...................        3,991         4,433
                                                                          -------       -------

Cash and cash equivalents at end of period .........................      $ 4,688       $ 7,578
                                                                          =======       =======
</TABLE>



                             See accompanying notes.


                                        5

<PAGE>   6


                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                NOVEMBER 30, 1997
                                   (unaudited)



Note 1--  Basis of Presentation

        The condensed consolidated balance sheet as of November 30, 1997, and
the related condensed consolidated statements of operations and cash flows for
the three and six month periods ended November 30, 1997 and 1996 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 three and six months ended November 30, 1997 are
not necessarily indicative of the results to be expected during the balance of
the fiscal year.

        The condensed 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. Notes to consolidated financial statements
included in Form 10-K for the year ended May 31, 1997 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 Company incurred significant
losses from operations in fiscal 1997. Income was recorded for the second
quarter of 1998; however, a loss is still reflected on a year to date basis. The
continuation of the Company's business is dependent upon the resolution of
operating and short-term liquidity problems and the realization of the Company's
plan of operations. These conditions raise doubt about the Company's ability to
continue as a going concern. 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 this uncertainty (see Note 2-- "Operating
Losses and Liquidity").

        The weighted average number of shares outstanding used to compute loss
per share were 3,374,000 and 2,935,000 for the three months ended November 30,
1997 and 1996, respectively; and 3,373,000 and 2,895,000 for the six months
ended November 30, 1997 and 1996, respectively.

NOTE 2--  OPERATING LOSSES AND LIQUIDITY

        At November 30, 1997, the Company had cash and cash equivalents of $4.7
million. During the six months ended November 30, 1997, the Company used $1.4
million in its operating activities and provided $2.1 million from its investing
activities. The Company reported net income of $0.7 million for the quarter
ended November 30, 1997, versus a net loss of $1.0 million for the quarter ended
November 30, 1996. The Company recorded a loss of $0.2 million for the six
months ended November 30, 1997 versus a loss of $2.8 million for the same period
of fiscal 1997. As a result, the Company has an accumulated deficit of $53.7
million and a total stockholders' deficiency of $2.7 million as of November 30,
1997. Additionally, the Company's current assets at November 30, 1997 amounted
to approximately $9.6 million and current liabilities were approximately $24.1
million, resulting in a working capital deficiency of approximately $14.5
million and a negative current ratio of 1:2.5. The Company's primary use of
available cash resources is to continue to expand its behavioral medicine
managed care business and fund operations while it seeks to dispose of its
non-operating freestanding facility held for sale.

        During third quarter fiscal 1997, the Company completed its Debenture
Exchange Offer. In addition to recognizing a gain on the Exchange of $2.2
million, the Exchange resulted in a reduction of debt of $6.8 million with the
remaining $2.7 million in Debentures due in 2010. The Debenture Exchange will
also result in a reduction of interest expense for future periods. The
bondholders also consented to the waiver and elimination of the Debenture
sinking fund. Annual sinking fund installments of 5 percent would have been
payable commencing in April 1996 and continuing annually through April 2009.
During the third quarter of fiscal 1997, the Company exchanged its Secured


                                        6

<PAGE>   7


                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                NOVEMBER 30, 1997
                                   (unaudited)



Convertible Note into Series A Non-Voting 4% Cumulative Convertible Preferred
Stock and also exchanged a minority interest in one of its subsidiaries into
100,000 shares of its Common Stock (see Note 3-- "Acquisitions and
Dispositions"). As a result of the above transactions, current liabilities were
reduced by $11.5 million, non-current liabilities were increased by $1.6
million, and stockholders' deficit was improved by $5.3 million. These
transactions also reduced the Company's future cash obligations with the
significant reduction in debt, interest expense and future sinking fund
requirements.

        The Company also has the following potential sources of cash to fund
additional operating needs:

        -  A firm commitment from a mutual fund to purchase in a private
           placement at least $5.0 million of 15 percent fully secured Company
           notes due no earlier than November 1998 if offered by the Company.

        -  Included in assets held for sale (non-current) is one hospital
           facility designated as property and equipment held for sale with a
           total carrying value of $1.9 million. The Company expects to sell
           this facility during fiscal 1998.

        Additionally, the Company believes that it would be able to raise
additional working capital through either an equity offering or borrowings if it
so desired. However, the Company cannot state with any degree of certainty at
this time whether additional equity capital or working capital would be
available to it, and if available, would be at terms and conditions acceptable
to the Company. All of these potential sources of additional cash in fiscal 1998
are subject to variation due to business and economic influences outside the
Company's control.

        Based upon current levels of operation and cash on hand of $4.7 million
and cash anticipated to be internally generated from operations, the Company
believes that it has sufficient working capital to meet obligations as they
become due; however, the ultimate resolution of the Company's entitlement to
certain IRS refund claims or the occurrence of business or economic conditions
beyond the control of the Company or the loss of existing contracts from which
cash from operations is internally generated may adversely affect the adequacy
of such working capital.

        These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying Condensed Consolidated Financial
Statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the outcome of this
uncertainty.

        In fiscal 1993, the Company established a restructuring reserve to
address the Company's operational issues. One purpose of such reserve was for
the realignment of the Company's focus and business and the settlement and
disposition of certain non-performing and under-utilized assets. Most of the
Company's inpatient freestanding facilities have been sold. Management continues
to implement plans for expanding the Company's managed care and behavioral
medicine contract management operations. During fiscal 1997, the Company
established an additional restructuring reserve of $0.2 million for severance
and other cash outlays related to the planned closure and disposition of
contract units which occurred during the first quarter of fiscal 1997. The
following table sets forth the activity to the restructuring reserve during the
second quarter of fiscal 1998:
<TABLE>
<CAPTION>

                                                          CHARGES   
                                    AUGUST 31,            -------             NOVEMBER 30,
                                       1997      INCOME   EXPENSE  PAYMENTS       1997
                                    ----------   ------   -------  --------   ------------
                                                   (AMOUNTS IN THOUSANDS)
<S>                                  <C>          <C>       <C>       <C>        <C>   
Restructuring Reserve:
Severance .....................      $ 39         $ --      $ --      $ (27)      $ 12
Operations/corporate relocation       197           --        --        (29)       168
                                     ----         ----      ----      -----       ----
                                     $236         $ --      $ --      $ (56)      $180
                                     ====         ====      ====      =====       ====
</TABLE>


                                        7

<PAGE>   8



                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                NOVEMBER 30, 1997
                                   (unaudited)


NOTE 3-- ACQUISITIONS AND DISPOSITIONS

        On June 4, 1997, the Company sold its non-operating freestanding
facility located in Cincinnati, Ohio for a gain of $0.2 million. Proceeds from
the sale were utilized for working capital purposes.

        On August 12, 1996, the company sold a non-operating facility in Costa
Mesa, California. As part of this transaction, the Company took back a note
equal to 83 percent of the selling price. The cash proceeds were utilized to
retire long-term debt and for working capital purposes.

        On July 25, 1996, the Company consented to closing the acquisition of
Healthcare Management Services, Inc., Healthcare Management Services of Ohio,
Inc., Healthcare Management Services of Michigan Inc. and Behavioral Healthcare
Management, Inc. (hereafter collectively referred to as "HMS"). The Company
consented to the closing reserving its rights to assert certain claims against
the Sellers and others. (See Note 6-- Commitments and Contingencies). HMS
contracts with commercial and governmental agencies to provide managed
behavioral health care programs to patients in Michigan and Ohio. Additionally,
HMS provides the following on a contract basis: case management
(precertification, concurrent review, quality assurance, retrospective chart
reviews, peer review and clinical audits as requested by their clients), claims
review, network development, credentialing and management of clinical services
for hospitals and community providers. The Company recorded the acquisition
using the purchase method of accounting. The Company's Condensed Consolidated
Financial Statements for the six months ended November 30, 1996 reflect the
results of operations for HMS for the period of July 25, 1996 through November
30, 1996. In conjunction with this acquisition, the Company issued a net of
10,000 shares of its Common Stock after giving effect to a settlement with one
of the principals in the HMS transaction.

NOTE 4--  PROPERTY AND EQUIPMENT HELD FOR SALE

        The Company has decided to dispose of certain freestanding facilities
and other assets (see Note 2-- "Operating Losses and Liquidity"). Property and
equipment held for sale, consisting of land, building, equipment and other fixed
assets with a historical net book value of approximately $2.7 million at
November 30, 1997, is carried at estimated net realizable value of approximately
$1.9 million. Operating expenses of the facilities designated for disposition
were $53,000 for the three months ended November 30, 1997.

        Property and equipment held for sale, which are under contract and
expected to be sold within the next twelve month period, are shown as current
assets on the consolidated balance sheets. Gains and losses on facilities have
been reflected in the statement of operations. Any impairments to the net
realizable value of property and equipment held for sale have also been recorded
in the statement of operations. There were no transactions affecting the
carrying value of property and equipment held for sale for the three months
ended November 30, 1997.

NOTE 5-- INCOME TAXES

       On July 20, 1995, the Company filed its Federal tax return for fiscal
1995 and subsequently filed Form 1139 "Corporate Application for Tentative
Refund" to carry back losses described in Section 172(f) requesting a refund to
the Company in the amount of $9.4 million. On September 20, 1996, the Company
filed its Federal income tax return for fiscal 1996, and subsequently filed form
1139 "Corporate Application for Tentative Refund" to carry back losses described
under Section 172(f) requesting a refund to the Company in the amount of $5.5
million. Section 172(f) provides for a 10-year net operating loss carryback for
losses attributable to specified liability losses. A specified liability loss is
defined, in general, as any amount otherwise allowable as a deduction which is
attributable to (i) a product liability or (ii) 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. On August
30, 1995, the Company also filed amended Federal tax returns for several prior
fiscal years to carry back losses under Section 172(f). The refunds requested on
the amended returns are approximately $6.2 million for 1986; $0.4 million for
1985; $0.7 million for 1983; and $0.4 million for 1982.


                                        8

<PAGE>   9


                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                NOVEMBER 30, 1997
                                   (unaudited)


There may be opposition by the Internal Revenue Service ("IRS") as to the
Company's ability to obtain benefits from refunds claimed under Section 172(f).
Therefore, no assurances can be made as to the Company's entitlement to all
claimed refunds.

       In September 1996, the Company received a $5.4 million tentative refund
for fiscal 1996. Of this refund, $0.3 million has been recognized as a tax
benefit during the second quarter of fiscal 1997. In October 1995, the Company
received a $9.4 million tentative refund for fiscal 1995. Of this refund, $2.4
million was recognized as a tax benefit during the second quarter of fiscal
1996. Receipt of the 1996 and 1995 Federal refunds does not imply IRS approval.
Due to the lack of significant precedent regarding Section 172(f), the
unbenefitted amounts from fiscal 1996 and 1995 of $5.1 million and $7.0 million,
respectively, are reflected on the Company's consolidated balance sheet in
unbenefitted tax refunds received. In connection with the refund claims, the
Company paid contingency fees of $1.1 million and $1.9 million relating to the
fiscal 1996 and 1995 refunds, respectively. The Company expensed a pro rata
portion of the contingency fees as related tax benefits were recognized. The
remaining amount of $2.4 million is reflected in the Company's consolidated
balance sheet as other receivables. In the event the IRS Appeals Office
determines that the Company is not entitled to all or a portion of the
deductions under Section 172(f), this fee is reimbursable to the Company
proportionately.

       The Company is currently under audit by the IRS related to its fiscal
1996 and fiscal 1995 Federal income tax returns and the amended returns for
prior years. Neither the Company nor the IRS will be foreclosed from raising
other tax issues in regard to any audits of such returns, which also could
ultimately affect the Company's tax liability.

NOTE 6--  COMMITMENTS AND CONTINGENCIES

       The Company entered into a Stock Purchase Agreement on April 30, 1996 to
purchase the outstanding stock of HMS, (see Note 3-- Acquisitions and
Dispositions). The Stock Purchase Agreement was subject to certain escrow
provisions and other contingencies which were not completed until July 25, 1996.
In conjunction with this transaction, HMS initiated an arbitration against The
Emerald Health Network, Inc. ("Emerald") claiming breach of contract and seeking
damages and other relief. In August 1996, Emerald, in turn, initiated action in
the U.S. District Court for the Northern District of Ohio, Eastern Division
(Case No. 1:96CV 1759), against the Company claiming, among other things,
interference with the contract between Emerald and HMS and seeking unspecified
damages and other relief. The Company filed counterclaims against Emerald for
deceptive trade practices, defamation, tortious interference with business
relationships and unfair competition. A confidential settlement has been reached
between Emerald and the Company. The Company believes that it has claims arising
from this transaction against the accountants and legal counsel of HMS. On
October 1, 1996, the Company filed a claim of malpractice against the legal
counsel of HMS. These claims are presently pending and have not as yet been
determined by the court. The Company does not believe that the impact of these
claims will have a material adverse effect on the Company's financial position,
results of operations and cash flows.

       On September 6, 1996, the Company instituted an arbitration against the
HMS principals ("Sellers") with the American Arbitration Association in Orange
County, California seeking, among other things, reimbursement from the Sellers
for damages which the Company sustained by reason of the inaccuracies of the
representations and warranties made by the Sellers and for the indemnification
from each of the Sellers as provided for under the terms of the Stock Purchase
Agreement. One seller has settled his case with the Company. The arbitration
against the remaining Seller is presently pending. The Company does not believe
that the impact of these claims will have a material adverse effect on the
Company's financial position, results of operations and cash flows.

       In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criterion
in regard to net tangible assets available to Common Stock and three year
average net income. The Listing and Compliance Committee of the NYSE has
determined to monitor the Company's progress toward returning to continuing
listing standards, and has so indicated in approving the Company's most recent
Listing Application on December 30, 1996. Management believes, though no
assurance may be given,


                                        9

<PAGE>   10


                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                NOVEMBER 30, 1997
                                   (unaudited)


that the completion of the Company's Debenture Exchange Offer positions the
Company to seek additional equity and thereby satisfy the Committee of the
Company's progress. No assurance may be given that additional equity may be
obtained on terms favorable to the Company.

       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 exceed insurance policy limits and the
Company or a subsidiary 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.

NOTE 7-- EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE

       On December 16, 1997, the Company, with the consent of Chriss W. Street,
terminated a grant of 53,000 remaining unvested restricted shares of Company
common stock originally granted on November 9, 1995. Coincident with this, the
Company implemented a new program to grant Mr. Street 120,000 shares of its
common stock at a price of $6.6875, fair value on the date of grant. These
options are fully vested, non-incentive stock options, exercisable on and after
June 17, 1998 and through December 19, 2002, regardless of whether Mr. Street's
employment with the Company continues through that date.

       On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
Officer of the Company, commenced an action against the Company and its
Chairman, Chriss W. Street, in the Superior Court of the State of California
arising out of the termination of her employment on September 29, 1997. The
action alleges alternate causes of action based upon her employment relationship
with the Company and seeks unspecified damages for unpaid wages, unspecified
actual, compensatory and punitive damages; damages for emotional distress; and
costs, legal fees and penalties under applicable California law. The action is
only in its formative stages, and the time within which the Company is required
to answer has not expired. The Company intends to deny its liability, and to
deny the principal allegations of the complaint. The Company believes that it
has good and meritorious defenses to this action.





                                       10

<PAGE>   11



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 "Risk Factors -- Important Factor Related to Forward-Looking
Statements and Associated Risks, (page 16)."

General

       Comprehensive Care Corporation ("CompCare") was founded 27 years ago to
provide fee-for-service treatment of alcohol abuse at inpatient hospitals. The
Company grew rapidly and prospered due to the willingness of insurance companies
to reimburse the Company for long lengths of stay and at very lucrative day
rates. CompCare's high profitability allowed the Company to "go public" and by
1984 achieve the listing of its common shares on the New York Stock Exchange.
Over time the Company diversified to provide a spectrum of behavioral healthcare
services including drug treatments, smoking cessation and long-term
rehabilitation. Beginning in the late 1980's and accelerating into the 1990's,
insurance companies implemented "managed care" cost containment in behavioral
healthcare. This led to the adoption of policies aimed at reducing inpatient
lengths of stay and day rates paid and encouraging lower cost outpatient
treatments.

       In the fourth quarter of fiscal 1995 the CompCare Board appointed Mr.
Chriss W. Street as President and Chief Executive Officer to restructure the
Company's balance sheet and return operations to sustained profitability.
Through the first fiscal quarter of 1998 the Company divested most of its
unprofitable freestanding inpatient hospital facilities, reduced net debt by 93
percent and resolved a majority of past IRS and legal issues. Operations were
reorganized around strategic investments in expertise and infrastructure that
facilitated the growth of the Company's managed behavioral healthcare business
by 1,000 percent.

       During the second fiscal quarter, ending November 30, 1997, CompCare's
management focused on achieving sustainable profitability. The Company began
implementing its prior announced consolidation of certain financial and
operating functions from its corporate headquarters in Corona del Mar,
California to its rapidly growing managed care subsidiary headquartered in
Tampa, Florida. Management believes that increased communication and the
intensive involvement of Corporate management in the direct operational aspects
of the business were key factors in the Company achieving its first quarterly
operating profit in recent years.

       CompCare's mix of business remained at over 80 percent managed care for
the quarter, although provider operations, which comprises one operating
freestanding hospital and a few small service contracts with medical/surgical
hospitals, achieved profitability as a new manager of the division implemented
substantial reductions in administrative staffing and overhead. The following
table sets forth the distribution of operating revenues for the selected
quarterly periods:
<TABLE>
<CAPTION>

                                                    Three months ended
                                                    ------------------
                                            November 30,   May 31,  November 30,
                                                 1997       1997         1996
                                               -------     ------       -----

<S>                                            <C>          <C>         <C>
       Managed care operations.................  82%          78%         67%
       Provider operations.....................  18           22          33
                                                ---          ---         ---

                                                100%         100%        100%
                                                ===          ===         ===
</TABLE>

       Profit from operations for the second quarter of fiscal 1998 was $674,000
versus a loss from operations of $995,000 for the first quarter of fiscal 1998,
and a loss from operations for the comparable second quarter of 1997 of
$1,196,000. Net earnings for the second quarter of 1998 were $673,000 or $0.20
per share versus a net loss for the first quarter of 1998 of $835,000 or $0.25
per share and a net loss for the comparable second quarter of 1997 of $999,000
or $0.34 per share.




                                       11

<PAGE>   12



Global Restructuring

       In early fiscal 1995, Management developed a "global restructuring" plan
intended to address the Company's immediate challenges and to return to a base
of profitability for future success. Management has achieved all of the stated
objectives in the global restructuring plan, including the restructuring of the
Company's financial obligations represented by the Company's 7 1/2 % Convertible
Subordinated Debentures (the "Debentures") which occurred during the third
quarter of fiscal 1997.

          During fiscal 1997, the Company recorded $0.2 million in restructuring
charges related to the Company's closure of several contract units which
occurred during the first and second quarters of fiscal 1997. The components of
this charge were predominately severance to contract unit employees. Closure of
these units was either consistent with the Company's global restructuring plans
or resulted from contracts not renewed by host hospitals, and will eliminate the
funding of operating losses and cash flow deficits required by these units.

       On June 4, 1997, the Company sold its non-operating freestanding facility
in Cincinnati, Ohio which had been closed in August 1996 due to poor
performance. The Company utilized the proceeds received from the sale for
working capital and short-term investment purposes.

RESULTS OF OPERATIONS

Statistical Information

        The following utilization statistics include data from all operations
including closures during the periods, joint ventures and closed facilities:
<TABLE>
<CAPTION>

                                                  Three months ended            Six months ended
                                            ---------------------------     -----------------------------
                                            November 30,    November 30,    November 30,     November 30,
                                                1997           1996            1997             1996
                                            ------------    ------------    ------------     ------------
<S>                                         <C>             <C>             <C>              <C> 
Managed care operations (covered lives):
     Carve-out (capitated) .............        989,532       1,179,728         989,532       1,179,728
     ASO services ......................        214,606          71,738         214,606          71,738
     EAP services ......................         66,944          66,652          66,944          66,652
     Blended products ..................            848           4,680             848           4,680
                                              ---------       ---------       ---------       ---------
             Total * ...................      1,271,930       1,208,234       1,271,930       1,208,234
                                              =========       =========       =========       =========

Behavioral medicine contracts:
     Patient days ......................          4,276           2,256           7,405           5,170
     Average occupied beds per contract              12               5               5               5
     Admissions ........................            322             358             706             822
     Average length of stay (days) .....             13               6              11               6
     Beds available at end of period ...             92              55              92              55

Freestanding facilities:
     Patient days ......................          1,137           1,591           2,612           3,107
     Occupancy rate ....................             33%             47%             38%             36%
     Admissions ........................            191             301             502             613
     Average length of stay (days) .....              6               5               5               5
     Days available at end of period ...             38              38              38              38
</TABLE>



*  Includes adjustments for retroactivity.




                                       12

<PAGE>   13



Three Months Ended November 30, 1997 Compared to Three Months Ended November 30,
1996

<TABLE>
<CAPTION>

                                           Three months ended      Increase (Decrease)
                                           ------------------      -------------------
                                               November 30,             November 30,
                                             1997       1996          $               %
                                          -------      -------       -------       -----
                                                          (Amounts in thousands)
<S>                                       <C>         <C>          <C>            <C> 
Operating revenues
      Managed care ...................... $ 9,464      $ 6,515       $ 2,949        45%
      Provider operations ...............   2,247        3,195          (948)      -30%
                                          -------      -------       -------       -----
         Net revenues ...................  11,711        9,710         2,001        21%

Direct healthcare expenses ..............   9,293        8,420           873        10%

General and administrative ..............   1,533        2,156          (623)      -29%

Other operating expenses ................     211          330          (119)      -36%
                                          -------      -------       -------       -----
      Operating income (loss) ........... $   674      $(1,196)      $ 1,870       -156%
                                          =======      =======       =======       =====
</TABLE>

        Operating revenues for the second quarter of fiscal 1998 increased by
$2.0 million or 21 percent from the second quarter of fiscal 1997. The second
quarter of fiscal 1998 reflects an increase in managed care operating revenues
of $2.9 million or 45 percent as compared to the second quarter of fiscal 1997.
Provider operations revenues declined by 30 percent with a decrease of $1.3
million in contract units due to the closure of 11 units.

        Direct healthcare expenses increased by approximately $0.9 million or 10
percent from the second quarter of fiscal 1998 compared to the second quarter of
fiscal 1997. The increase in direct healthcare expenses is primarily
attributable to an increase of 35 percent in managed care operations which was
partially offset by the 78 percent decline in direct healthcare expenses for
provider operations. The managed care increase reflects growth in the underlying
business offset by elimination of selected unprofitable contracts and
improvement in the medical loss ratio.

        General and administrative expenses decreased by approximately $0.6
million from the second quarter of fiscal 1997. This reduction in expense
reflects lower acquisition related legal expenses in managed care operations.
This also reflects a decline in corporate overhead spending due to the corporate
reorganization offset somewhat by relocation costs which are being expensed as
incurred. Other operating expenses declined by $0.1 million as a result of a
decrease in the provision for doubtful accounts arising from improved management
of Company receivables.

        Covered lives increased 63,696 or 5.3 percent due to increased
penetration in new and existing contracts.

        During the second quarter of fiscal 1998, patient days of service at
behavioral medicine contracts increase 90 percent from 2,256 patient days to
4,276 patient days. This increase was due to the implementation of a new
contract unit during the first quarter of fiscal 1998. However, average net
revenue per patient day decreased 78 percent from the second quarter of fiscal
1997. This change in operating results is due to the implementation of a
high-volume, lower per patient revenue contract with the State of Idaho.

        Admissions in the second quarter of fiscal 1998 for the freestanding
facility decreased to 191 from 301 in the second quarter of the prior fiscal
year. Average length of stay increased from five days to six days in the current
quarter.

        The Company continues to focus its efforts toward providing effective
lower cost outpatient, partial hospitalization and daycare programs. It also
continues to strive to establish and maintain relationships and contracts with
managed care and others that pay for or broker such services.




                                       13

<PAGE>   14



Six Months Ended November 30, 1997 Compared to Six Months Ended November 30,
1996
<TABLE>
<CAPTION>

                                     Six months ended          Increase (Decrease)
                                        November 30,               November 30,
                                   -----------------------     --------------------
                                     1997           1996         $               %
                                   --------       --------       -------       ----
                                               (Amounts in thousands)
<S>                                <C>          <C>             <C>            <C>  
Operating revenues
      Managed care ..........      $ 18,550       $ 11,988       $ 6,562        55%
      Provider operations ...         4,049          6,715        (2,666)      -40%
                                   --------       --------       -------       ----
         Net revenues .......        22,599         18,703         3,896        21%

Direct healthcare expenses ..        19,662         16,589         3,073        19%

General and administrative ..         2,683          3,810        (1,127)      -30%

Other operating expenses ....           575            734          (159)      -22%
                                   --------       --------       -------       ----

      Operating income (loss)      $   (321)      $ (2,430)      $ 2,109       -87%
                                   ========       ========       =======       ====
</TABLE>

        The Company reported a pretax loss of approximately $0.1 million for the
six months ended November 30, 1997 compared to the pretax loss of $3.1 million
reported for the six months ended November 30, 1996. Included in the results for
fiscal 1997 is a restructuring charge of $0.2 million, a legal settlement of
$0.3 million and $0.1 million in fees and expenses relating to the Company's
Exchange Offer of its Debentures. Exclusive of these non-recurring items, the
pretax loss for the six months ended November 30, 1996 was $2.5 million.

        Operating revenues increased by 21 percent or $3.9 million for the six
months ended November 30, 1997 compared to the six months ended November 30,
1996. The increase in operating revenues is attributable to an increase in
managed care operations of $6.6 million which was offset by a decline of $2.7
million related to provider operations which is comprised of behavioral medicine
contract units and one freestanding facility.

        Direct healthcare expenses increased by 19 percent or $3.1 million for
the six months ended November 30, 1997 as compared to the six months ended
November 30, 1996. The increase in direct healthcare expenses is primarily
attributable to an increase in managed care operations which was partially
offset by a decline in direct healthcare expenses for provider operations. The
managed care increase reflects growth in the underlying business offset by
elimination of selected unprofitable contracts and improvement in the medical
loss ratio.

        General and administrative expenses decreased by 30 percent or $1.1
million for the six months ended November 30, 1997 as compared to the six months
ended November 30, 1996. This reduction in expense reflects lower acquisition
related legal expenses in managed care operations and a decline in corporate
overhead spending due to corporate restructuring. Other operating expenses
declined by $0.2 million as a result of a decrease in the provision for doubtful
accounts arising from improved management of Company receivables. Interest
expense decreased by $0.5 million or 79 percent for the six months ended
November 30, 1997 compared to the six months ended November 30, 1996 as a result
of the Debenture Exchange in the third quarter of fiscal 1997.

        Covered lives increased 63,696 or 5.3 percent due to increased
penetration in new and existing contracts.

        The Company's managed care operations contract with a variety of sources
on a capitated basis. The Company attempts to control its risk by entering into
contractual relationships with healthcare providers, including hospitals and
physician groups on a sub-capitated, discounted fee for service or per case
basis. The Company believes that it distinguishes itself from its competition by
being the "science-based" provider of care by managing all clinical programs
based upon proven treatment technologies.

        During the first six months of fiscal 1998, patient days of service for
behavioral medicine contracts increased by approximately 43 percent from 5,170
patient days to 7,405 patient days. This increase was due to the implementation
of a new contract unit during the first quarter of fiscal 1998. Average net
revenue per patient day decreased 64 percent from the first six months of fiscal
1997. This change is due to the implementation of a high volume, lower per
patient revenue contract with the State of Idaho.


                                       14

<PAGE>   15



        Admissions at the freestanding facility decreased to 502 from 613 in the
first six months of fiscal year 1998. Average length of stay remained unchanged
at five days. Total patient days declined 495 days to 2,612 days in the first
six months of fiscal 1998.

        The Company is taking steps designed to increase revenues, primarily
through the continued development of its behavioral medicine managed care
business. The Company is also implementing cost reduction measures, including
the consolidation of selected corporate functions with the managed care
operations and achievement of various operating efficiencies. In addition, the
Company sold two poorly performing facilities in fiscal 1997 and one during the
first quarter of fiscal 1998. The Company owns two freestanding facilities. One
of the two owned facilities is currently operating and the other is held for
sale. The Company will continue to evaluate the performance of the remaining
operating facility in its respective market.

LIQUIDITY AND CAPITAL RESOURCES

        At November 30, 1997, the Company had cash and cash equivalents of $4.7
million. During the six months ended November 30, 1997, the Company used $1.4
million in its operating activities and provided $2.1 million from its investing
activities. The Company reported net income of $0.7 million for the quarter
ended November 30, 1997, versus a net loss of $1.0 million for the quarter ended
November 30, 1996. The Company recorded a loss of $0.2 million for the six
months ended November 30, 1997 versus a loss of $2.8 million for the same period
of fiscal 1997. As a result, the Company has an accumulated deficit of $53.7
million and a total stockholders' deficiency of $2.7 million as of November 30,
1997. Additionally, the Company's current assets at November 30, 1997 amounted
to approximately $9.6 million and current liabilities were approximately $24.1
million, resulting in a working capital deficiency of approximately $14.5
million and a negative current ratio of 1:2.5. The Company's primary use of
available cash resources is to continue to expand its behavioral medicine
managed care business and fund operations while it seeks to dispose of its
non-operating freestanding facility held for sale.

        During third quarter fiscal 1997, the Company completed its Debenture
Exchange Offer. In addition to recognizing a gain on the Exchange of $2.2
million, the Exchange resulted in a reduction of debt of $6.8 million with the
remaining $2.7 million in Debentures due in 2010. The Debenture Exchange will
also result in a reduction of interest expense for future periods. The
bondholders also consented to the waiver and elimination of the Debenture
sinking fund. Annual sinking fund installments of 5 percent would have been
payable commencing in April 1996 and continuing annually through April 2009.
During the third quarter of fiscal 1997, the Company exchanged its Secured
Convertible Note into Series A Non-Voting 4% Cumulative Convertible Preferred
Stock and also exchanged a minority interest in one of its subsidiaries into
100,000 shares of its Common Stock (see Note 3-- "Acquisitions and
Dispositions"). As a result of the above transactions, current liabilities were
reduced by $11.5 million, non-current liabilities were increased by $1.6
million, and stockholders' deficit was improved by $5.3 million. These
transactions also reduced the Company's future cash obligations with the
significant reduction in debt, interest expense and future sinking fund
requirements.

        The Company also has the following potential sources of cash to fund
additional operating needs:

        -  A firm commitment from a mutual fund to purchase in a private
           placement at least $5.0 million of 15 percent fully secured Company
           notes due no earlier than November 1998 if offered by the Company.

        -  Included in assets held for sale (non-current) is one hospital
           facility designated as property and equipment held for sale with a
           total carrying value of $1.9 million. The Company expects to sell
           this facility during fiscal 1998.

        Additionally, the Company believes that it would be able to raise
additional working capital through either an equity offering or borrowings if it
so desired. However, the Company cannot state with any degree of certainty at
this time whether additional equity capital or working capital would be
available to it, and if available, would be at terms and conditions acceptable
to the Company. All of these potential sources of additional cash in fiscal 1998
are subject to variation due to business and economic influences outside the
Company's control.

        Based upon current levels of operation and cash on hand of $4.7 million
and cash anticipated to be internally generated from operations, the Company 
believes that it has sufficient working capital to meet obligations as they 


                                       15

<PAGE>   16




become due; however, the ultimate resolution of the Company's entitlement to
certain IRS refund claims or the occurrence of business or economic conditions
beyond the control of the Company or the loss of existing contracts from which
cash from operations is internally generated may adversely affect the adequacy
of such working capital.

        These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying Condensed Consolidated Financial
Statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the outcome of this
uncertainty.

        In fiscal 1993, the Company established a restructuring reserve to
address the Company's operational issues. One purpose of such reserve was for
the realignment of the Company's focus and business and the settlement and
disposition of certain non-performing and under-utilized assets. Most of the
Company's inpatient freestanding facilities have been sold. Management continues
to implement plans for expanding the Company's managed care and behavioral
medicine contract management operations. During fiscal 1997, the Company
established an additional restructuring reserve of $0.2 million for severance
and other cash outlays related to the planned closure and disposition of
contract units which occurred during the first quarter of fiscal 1997. The
following table sets forth the activity to the restructuring reserve during the
second quarter of fiscal 1998:

<TABLE>
<CAPTION>

                                   AUGUST 31,          CHARGES            NOVEMBER 30,
                                     1997     INCOME   EXPENSE   PAYMENTS      1997
                                     ----      ----      ----      -----       ----
                                                     (AMOUNTS IN THOUSANDS)
<S>                                 <C>       <C>     <C>         <C>        <C>  
Restructuring Reserve:
Severance .....................      $ 39      $ --      $ --      $ (27)      $ 12
Operations/corporate relocation       197        --        --        (29)       168
                                     ----      ----      ----      -----       ----
                                     $236      $ --      $ --      $ (56)      $180
                                     ====      ====      ====      =====       ====
</TABLE>

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)
disposing of its remaining freestanding facility on acceptable terms, (ii)
expanding the behavioral medicine managed care operations, (iii) securing and
retaining certain refunds from the IRS and certain judgments from adverse
parties in the legal proceedings described above, and (iv) maintaining the
listing of the Company's Common Stock on the NYSE.

       The forward-looking statements included herein are based on current
assumptions that competitive conditions within the healthcare industry will not
change materially or adversely, that the Company will retain key management
personnel, that the Company's forecasts will accurately anticipate market demand
for its services, that the IRS refunds are recoverable and that there will be no
material adverse change in the Company's operations or business. 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.

HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY

       As of November 30, 1997, the Company had a stockholders' deficiency of
$2.7 million, a working capital deficiency of approximately $14.5 million and a
negative current ratio of 1:2.5. Income from operations for the quarter ended
November 30, 1997 was $0.7 million.

       There can be no assurance that the Company will be able to sustain
profitability and maintain positive cash flows from operations or that
profitability and positive cash flow from operations can be sustained on an
ongoing basis.


                                       16

<PAGE>   17



Moreover, the level of profitability or positive cash flow cannot accurately be
predicted.

       The Company's lack of profitability has resulted in the Company failing
to satisfy listing standards of the NYSE. No assurance can be made that the
Common Stock will continue to trade on the NYSE or that the Company can satisfy
the comparable requirements of any other stock exchange or the NASDAQ stock
market.

ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN

       The Company's independent auditors have included an explanatory paragraph
in their report on the Company's consolidated financial statements as of May 31,
1997 that states that the Company's history of losses and consolidated financial
position raise substantial doubt about its ability to continue as a going
concern.

NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING

       In the past, the Company's negative cash flow from operations has
consumed substantial amounts of cash. The completion of the Debenture Exchange
Offer required substantial amounts of cash for the payment of $4.6 million of
default interest and/or payment in exchange for surrender of Debentures which
resulted in a depletion of the Company's cash resources.

       During prior fiscal years, a principal source of liquidity has been the
private sale of equity securities and debt securities convertible into equity.
Under the shareholder policies of the NYSE, the Company may not be able to
effect large placements of equity without shareholder approval, which, if not
obtained, may adversely affect the Company with respect to future capital
formation. In addition, issuance of additional equity securities by the Company
could result in substantial dilution to stockholders.

       The Company has received tax refunds for fiscal 1996 and 1995 in the
amounts of $9.4 million and $5.4 million, respectively. Such refunds are based
on loss carrybacks under Section 172(f) of the Internal Revenue Code. Any IRS
claim for return of all or any portion thereof could have an adverse effect on
the Company's cash flows.
See "Taxes," below.

TAXES

        The Company has received tax refunds of approximately $14.8 million from
the carry back of fiscal 1996 and 1995 specified losses defined in Section
172(f). Section 172(f) provides for a 10-year net operating loss carryback for
losses attributable to specified liability losses. A specified liability loss is
defined, in general, as any amount otherwise allowable as a deduction which is
attributable to (i) a product liability or (ii) 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. Receipt of
the 1996 and 1995 tax refunds does not imply IRS approval. The proceeds to the
Company of the 1995 refund were reduced by a $2.5 million offset for the
Company's outstanding payroll tax obligation to the Internal Revenue Service
("IRS"), including interest, pursuant to a settlement agreement relating to tax
years 1983 through 1991. Also, a $3.0 million contingency fee was paid to
Deloitte & Touche, LLP from the 1995 and 1996 refund proceeds. Section 172(f) is
an area of the tax law without guiding legal precedent. There may be substantial
opposition by the IRS to all or a substantial portion of such claims, and no
assurances can be made as to the ability to retain tax refunds based on such
deductions. Although the Company is currently being audited by the IRS, neither
the Company nor the IRS will be precluded in any resultant tax audit from
raising these and additional issues.

        The Company may be unable to utilize some or all of its allowable tax
deductions or losses, which depends upon factors including the availability of
sufficient net income from which to deduct such losses during limited carryback
and carryover periods. Further, the Company's ability to use any Net Operating
Losses may be subject to limitation in the event that the Company issues or
agrees to issue substantial amounts of additional equity. The Company monitors
the potential for "change of ownership" and believes that its financing plans as
contemplated will not cause a "change of ownership;" however, no assurances can
be made that future events will not act to limit the Company's tax benefits.




                                       17

<PAGE>   18



DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS

        The Company's ability to succeed in increasing revenues may depend in
part on the extent to which reimbursement of the cost of such treatment will be
available from government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price of medical products and services.

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 materially
adversely affect 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, and result in significant losses by reason of unanticipated
utilization levels requiring 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 payors 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 payors 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.

DEPENDENCE ON KEY PERSONNEL

        The Company depends and will continue to depend upon the services of its
senior management and skilled personnel. The Company is presently in the process
of relocating certain significant management functions to Tampa, Florida, where
Comprehensive Behavioral, the Company's principal subsidiary, is located. In
connection with such relocation, the Company is in the process of an executive
search for a Chief Financial Officer. There is no assurance that the Company
will be able to successfully recruit an individual who has the necessary
background and experience in the managed healthcare field.

SHARES ELIGIBLE FOR FUTURE SALE

        The Company has issued or committed to issue no shares for future
issuances related to business transactions, approximately 344,000 shares related
to the conversion of debt or private placements, and options or other rights to
purchase approximately 1,243,000 shares; and contemplates issuing additional
amounts of debt, equity or convertible securities in private transactions in
furtherance of fulfilling its future capital needs (see "Need for Additional
Funds: Uncertainty of Future Funding"). Issuance of additional equity, and such
shares becoming free of restrictions on resale pursuant to Rule 144 or upon
registration thereof pursuant to registration rights granted on almost all of
these shares, and additional sales of equity, could adversely affect the trading
prices of the Common Stock.

PRICE VOLATILITY IN PUBLIC MARKET

        The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. Trading prices of securities of companies in the
healthcare and managed care sectors have experienced significant volatility.

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, which could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. There is currently issued and outstanding 41,260
shares of Preferred Stock designated as Series A Non-Voting 4% Cumulative
Convertible Preferred Stock. The Company's Restated Certificate of Incorporation
also provides for a classified board of directors, with directors divided



                                       18


<PAGE>   19







into three classes serving staggered terms. In addition, 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. In addition, Section 203 of the General
Corporation Law of Delaware prohibits the Company from engaging in certain
business combinations with interested stockholders. In addition, each share of
the Company's Common Stock includes one right on the terms, and subject to the
conditions, of the Rights Agreement between the Company and Continental Stock
Transfer & Trust Company. 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.

CONTINUED LISTING ON NYSE

        The Company has been below certain continued listing criteria of the
NYSE since prior to October 1994. The continued listing of the Company's Common
Stock on the NYSE is subject to continual review and possible delisting upon
notices from the Listing and Compliance Committee of the NYSE.

LIMITATIONS ON THE DEDUCTIBILITY OF COMPENSATION UNDER CERTAIN CIRCUMSTANCES

        Pursuant to the 1993 Omnibus Budget Reconciliation Act, a portion of
annual compensation payable after 1993 to any of the Company's five highest paid
executive officers would not be deductible by the Company for federal income tax
purposes to the extent such officers' overall compensation exceeds $1.0 million
per executive officer. Qualifying performance-based incentive compensation,
however, would be both deductible and excluded for purposes of calculating the
$1.0 million base. The Board of Directors has determined that no portion of
anticipated compensation payable to any executive officer in 1998 would be
non-deductible.




                                       19

<PAGE>   20



PART II.  -  OTHER INFORMATION

ITEM 1.  -  LEGAL PROCEEDINGS

        The Company entered into a Stock Purchase Agreement on April 30, 1996 to
purchase the outstanding stock of HMS (see Note 3-- Acquisitions and
Dispositions). The Stock Purchase Agreement was subject to certain escrow
provisions and other contingencies which were not completed until July 25, 1996.
In conjunction with this transaction, HMS initiated an arbitration against The
Emerald Health Network, Inc. ("Emerald") claiming breach of contract and seeking
damages and other relief. In August 1996, Emerald, in turn, initiated action in
the U.S. District Court for the Northern District of Ohio, Eastern Division
(Case No. 1:96CV1759), against the Company claiming, among other things,
interference with the contract between Emerald and HMS and seeking unspecified
damages and other relief. The Company filed counterclaims against Emerald for
deceptive trade practices, defamation, tortious interference with business
relationships and unfair competition. A confidential settlement has been reached
between Emerald and the Company. The Company believes that it has claims arising
from this transaction against the accountants and legal counsel of HMS. On
October 1, 1996, the Company filed a claim of malpractice against the legal
counsel of HMS. These claims are presently pending and have not as yet been
determined by the court. The Company does not believe that the impact of these
claims will have a material adverse effect on the Company's financial position,
results of operations and cash flows.

        On September 6, 1996, the Company instituted an arbitration against the
HMS principals ("Sellers") with the American Arbitration Association in Orange
County, California seeking, among other things, reimbursement from the Sellers
for damages which the Company sustained by reason of the inaccuracies of the
representations and warranties made by the Sellers and for the indemnification
from each of the Sellers as provided for under the terms of the Stock Purchase
Agreement. One seller has settled his case with the Company. The arbitration
against the remaining Seller is presently pending. The Company does not believe
that the impact of these claims will have a material adverse effect on the
Company's financial position, results of operations and cash flows.

        In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criterion
in regard to net tangible assets available to Common Stock and three year
average net income. The Listing and Compliance Committee of the NYSE has
determined to monitor the Company's progress toward returning to continuing
listing standards, and has so indicated in approving the Company's most recent
Listing Application on December 30, 1996. Management believes, though no
assurance may be given, that the completion of the Company's Debenture Exchange
Offer will enable the Company to seek additional equity and thereby satisfy the
Committee of the Company's progress. No assurance may be given that additional
equity may be obtained on terms favorable to the Company.

        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 exceed insurance policy limits and the
Company or a subsidiary 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 3.  -  CONTINUED LISTING ON NYSE

        The Company has been below certain continued listing criteria of the
NYSE since prior to October 1994. The continued listing of the Company's Common
Stock on the NYSE is subject to continual review and possible delisting upon
notices from the Listing and Compliance Committee of the NYSE.




                                       20

<PAGE>   21



ITEM 6.  -  EXHIBITS AND REPORTS ON FORM 8-K

       (a) Exhibits

           27 Financial Data Schedules (filed herewith).

       (b) Reports on Form 8-K

           1) The Company announced on August 19, 1997, that Stuart J. Ghertner,
              Ph.D., had resigned as Chief Operating Officer of the Company and
              as President of its wholly-owned subsidiary, Comprehensive
              Behavioral Care, Inc., effective September 12, 1997. Dr. Ghertner
              will continue to be available to the Company on a consulting
              basis.

           2) The Company filed a current report on Form 8-K dated September 12,
              1997, to report under Item 5, that the number of members
              comprising the Board of Directors was increased to six; the number
              of directors comprising Class II directors was increased to two;
              and Mr. John A. McCarthy, Jr. was appointed as a Class II director
              until the 1999 Annual Meeting of Stockholders.

           3) The Company filed a current report on Form 8-K dated October 3,
              1997, to report under Item 5, that Ms. Kerri Ruppert, Senior Vice
              President and Chief Financial Officer of the Company, was
              separated from the Company, effective September 29, 1997, and that
              Ms. Carol Pollack was elected as the Company's interim Chief
              Financial Officer, effective September 30, 1997. The Company also
              reported that Mr. W. James Nicol resigned as a Class II director
              of the Company, and that the vacancy would not be filled at this
              time, reducing the number of Class II directors to one and the
              entire Board to five.

           4) The Company filed a current report on Form 8-K dated December 8,
              1997, to report under Item 5, the results of its Annual Meeting of
              Stockholders which included the election of two Class I Directors
              and the approval of an amendment to the Company's 1995 Incentive
              Plan to increase the number of shares authorized and available for
              issuance thereunder from 450,000 to 600,000.

           5) The Company filed a current report on Form 8-K dated January 9,
              1998, to report under Item 5, that Ms. Kerri Ruppert, the former
              Chief Financial Officer of the Company, commenced an action
              against the Company and its Chairman, Chriss W. Street, arising
              out of the termination of her employment on September 29, 1997.



                                       21

<PAGE>   22



                                    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








January 14, 1998                               By  /s/          CHRISS W. STREET
                                                  ------------------------------
                                                                Chriss W. Street
                                                                   President and
                                                         Chief Executive Officer
                                                   (Principal Executive Officer)






January 14, 1998                                By /s/          CAROL R. POLLACK
                                                  ------------------------------
                                                                Carol R. Pollack
                                                 Interim Chief Financial Officer
                                                   (Principal Financial Officer)
                                                  (Principal Accounting Officer)




                                       22

<PAGE>   23



                                    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



January 14, 1998                               By  /s/       
                                                  ------------------------------
                                                                Chriss W. Street
                                                                   President and
                                                         Chief Executive Officer
                                                   (Principal Executive Officer)






January 14, 1998                                By /s/        
                                                  ------------------------------
                                                                Carol R. Pollack
                                                 Interim Chief Financial Officer
                                                   (Principal Financial Officer)
                                                  (Principal Accounting Officer)










                                       23

<PAGE>   24







                         COMPREHENSIVE CARE CORPORATION



                                  EXHIBIT INDEX

                                    FORM 10-Q

                     SECOND QUARTER ENDED NOVEMBER 30, 1997









EXHIBIT NO.             DESCRIPTION
-----------             -----------


27                      Financial Data Schedules (filed herewith).