##### 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 1934For the period ended November 30, 2003.[  ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from ___________________ to ___________________Commission File Number1-9927


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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

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 5, 2004Common Stock, par value $.01 per share
    
    4,643,049






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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
|                                         | Item 2  Managements discussion and analysis of financial condition and Results of operations
|                                         | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            
|                                         | Item 4. Controls and Procedures                                                               
|PART II  OTHER INFORMATION             
|                                         | Item 1  LEGAL PROCEEDINGS                                                                    
|                                         | Item 2  CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                         | Item 6  Exhibits and Reports on Form 8-K                                                     
|                                         | SIGNATURES                                                                                    
|EX-31.1 Section 302 Certification of CEO
|EX-31.2 Section 302 Certification of CFO
|EX-32.1 Section 906 Certification of CEO
|EX-32.2 Section 906 Certification of CFO



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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

Index

PagePART I  FINANCIAL INFORMATIONItem 1Consolidated Financial StatementsConsolidated Balance Sheets,
November 30, 2003 and May 31, 2003
    
    
    3Consolidated Statements of Operations for
the Three and Six months ended November 30, 2003 and 2002
    
    
    4Consolidated Statements of Cash Flows for
the Six months ended November 30, 2003 and 2002
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-11Item 2Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    11-18Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4Controls and Procedures
    
    
    18-19PART II  OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    20Item 2Changes in Securities and Use of Proceeds
    
    
    20Item 6 Exhibits and Reports on Form 8-K
    
    
    20Signatures
    
    
    21Certifications
    
    
    22-25


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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES




PART
I.  FINANCIAL INFORMATION







Consolidated Balance Sheets

November 30,
    
    May 31,2003
    
    2003(unaudited)(Amounts in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,796
    
    
    $
    3,590Accounts receivable, less allowance for doubtful accounts of $27
    
    
    255
    
    
    
    75Accounts receivable  managed care reinsurance contract
    
    
    482
    
    
    
    354Other current assets
    
    
    368
    
    
    
    605Total current assets
    
    
    3,901
    
    
    
    4,624Property and equipment, net
    
    
    374
    
    
    
    230Note receivable
    
    
    153
    
    
    
    155Goodwill, net
    
    
    991
    
    
    
    991Restricted cash
    
    
    327
    
    
    
    328Other assets
    
    
    52
    
    
    
    51Total assets
    
    $
    5,798
    
    
    $
    6,379LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    1,782
    
    
    $
    1,836Accrued claims payable
    
    
    3,873
    
    
    
    4,103Accrued reinsurance claims payable
    
    
    3,315
    
    
    
    3,117Income taxes payable
    
    
    19
    
    
    
    15Total current liabilities
    
    
    8,989
    
    
    
    9,071Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    87
    
    
    
    54Total long-term liabilities
    
    
    2,331
    
    
    
    2,298Total liabilities
    
    
    11,320
    
    
    
    11,369Commitments and Contingencies (Note 5)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 3,943,049 and 3,936,549
    
    
    39
    
    
    
    39Additional paid-in-capital
    
    
    51,941
    
    
    
    51,928Deferred compensation
    
    
    (4
    )
    
    
    (16
    )Accumulated deficit
    
    
    (57,498
    )
    
    
    (56,941
    )Total stockholders deficit
    
    
    (5,522
    )
    
    
    (4,990
    )Total liabilities and stockholders deficit
    
    $
    5,798
    
    
    $
    6,379


See accompanying notes.

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

Three months Ended
    
    Six Months EndedNovember 30,
    
    November 30,2003
    
    2002
    
    2003
    
    2002Operating revenues
    
    $
    7,011
    
    
    $
    8,631
    
    
    $
    14,904
    
    
    $
    16,938Costs and expenses:Healthcare operating expenses
    
    
    6,199
    
    
    
    7,760
    
    
    
    13,051
    
    
    
    15,113General and administrative expenses
    
    
    970
    
    
    
    952
    
    
    
    1,878
    
    
    
    1,840Recovery of doubtful accounts
    
    
    (4
    )
    
    
    (6
    )
    
    
    (12
    )
    
    
    (14
    )Depreciation and amortization
    
    
    28
    
    
    
    63
    
    
    
    55
    
    
    
    1317,193
    
    
    
    8,769
    
    
    
    14,972
    
    
    
    17,070Operating loss from continuing operations before items
shown below
    
    
    (182
    )
    
    
    (138
    )
    
    
    (68
    )
    
    
    (132
    )Other income (expense):Gain on sale of assets
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    4Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Interest income
    
    
    6
    
    
    
    13
    
    
    
    18
    
    
    
    29Interest expense
    
    
    (54
    )
    
    
    (44
    )
    
    
    (102
    )
    
    
    (90
    )Other non-operating income
    
    
    
    
    
    
    478
    
    
    
    1
    
    
    
    478(Loss) income from continuing operations before income taxes
    
    
    (230
    )
    
    
    310
    
    
    
    (151
    )
    
    
    284Income tax expense
    
    
    3
    
    
    
    3
    
    
    
    20
    
    
    
    10(Loss) income from continuing operations
    
    $
    (233
    )
    
    $
    307
    
    
    $
    (171
    )
    
    $
    274Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    Net (loss) income attributable to common stockholders
    
    $
    (233
    )
    
    $
    307
    
    
    $
    (558
    )
    
    $
    274(Loss) income per common share  basic:(Loss) income from continuing operations
    
    $
    (0.06
    )
    
    $
    0.08
    
    
    $
    (0.04
    )
    
    $
    0.07Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.10
    )
    
    
    Net (loss) income
    
    $
    (0.06
    )
    
    $
    0.08
    
    
    $
    (0.14
    )
    
    $
    0.07(Loss) income per common share  diluted:(Loss) income from continuing operations
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.04
    )
    
    $
    0.07Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.10
    )
    
    
    Net (loss) income
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.14
    )
    
    $
    0.07Weighted average common shares outstanding:Basic
    
    
    3,942
    
    
    
    3,898
    
    
    
    3,939
    
    
    
    3,892Diluted
    
    
    3,942
    
    
    
    4,254
    
    
    
    3,939
    
    
    
    3,984


See accompanying notes.

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Consolidated Statements of Cash Flows
(Unaudited)

Six Months EndedNovember 30,2003
    
    2002(Amounts in thousands)Cash flows from operating activities:Net (loss) income from continuing operations
    
    $
    (171
    )
    
    $
    274Adjustments to reconcile net (loss) income from continuing operations
to net cash used in operating activities:Depreciation and amortization
    
    
    55
    
    
    
    131Gain on sale of assets
    
    
    
    
    
    
    (4
    )Compensation expense  stock issued
    
    
    23
    
    
    
    20Compensation expense  stock options issued
    
    
    
    
    
    
    1Other non-operating gain
    
    
    
    
    
    
    (470
    )Loss on disposal of assets
    
    
    
    
    
    
    5Changes in assets and liabilities:Accounts receivable
    
    
    (180
    )
    
    
    (807
    )Accounts receivable  managed care reinsurance contract
    
    
    (128
    )
    
    
    (62
    )Other current assets, restricted funds, and other non-current assets
    
    
    145
    
    
    
    21Accounts payable and accrued liabilities
    
    
    (345
    )
    
    
    (621
    )Accrued claims payable
    
    
    (230
    )
    
    
    (91
    )Accrued reinsurance claims payable
    
    
    198
    
    
    
    542Income taxes payable
    
    
    4
    
    
    
    (2
    )Other liabilities
    
    
    (1
    )
    
    
    Net cash used in continuing operations
    
    
    (630
    )
    
    
    (1,063
    )Net cash used in discontinued operations
    
    
    (22
    )
    
    
    Net cash used in continuing and discontinued operations
    
    
    (652
    )
    
    
    (1,063
    )Cash flows from investing activities:Net proceeds from sale of property and equipment
    
    
    
    
    
    
    3Payments received on note receivable
    
    
    2
    
    
    
    2Additions to property and equipment
    
    
    (132
    )
    
    
    (22
    )Net cash used in investing activities
    
    
    (130
    )
    
    
    (17
    )Cash flows from financing activities:Proceeds from the issuance of Common Stock
    
    
    2
    
    
    
    Repayment of debt
    
    
    (14
    )
    
    
    (6
    )Net cash used in financing activities
    
    
    (12
    )
    
    
    (6
    )Net decrease in cash and cash equivalents
    
    
    (794
    )
    
    
    (1,086
    )Cash and cash equivalents at beginning of year
    
    
    3,590
    
    
    
    5,340Cash and cash equivalents at end of period
    
    $
    2,796
    
    
    $
    4,254


See accompanying notes

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Note 1  Summary of Significant Accounting Policies

The consolidated balance sheet as of November 30, 2003, and the related
consolidated statements of operations for the three and six months ended
November 30, 2003 and 2002, and cash flows for the six months ended November
30, 2003 and 2002 are unaudited and have been prepared in accordance with
accounting principles generally accepted in the United States of America 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 six months ended November 30, 2003 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 accounting principles generally
accepted in the United States of America. The balance sheet at May 31, 2003 has
been derived from the audited financial statements at that date, but does not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statement presentation. Notes to consolidated financial statements included in
Form 10-K for the year ended May 31, 2003 are on file with the Securities and
Exchange Commission and 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 2  Basis of Presentation.

The Companys managed care activities are performed under the terms of
agreements with health maintenance organizations (HMOs), preferred provider
organizations (PPOs), and other health plans or payers to provide contracted
behavioral healthcare services to subscribing participants. Revenue under a
substantial portion of these agreements 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 87.2%,
or $13.0 million, of revenue for the six months ended November 30, 2003 and
88.0%, or $14.9 million, of revenue for the six months ended November 30, 2002.
The balance of the Companys revenues is earned on a fee-for-service basis and
is recognized as services are rendered.

Restricted Cash

As of November 30, 2003 and May 31, 2003, 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.

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 and is continually reviewed and adjusted, if necessary, to
reflect any change in the estimated liability. These estimates are subject to
the effects of trends in utilization and other factors. However, actual claims
incurred could differ from the estimated claims payable amount reported as of
November 30, 2003. Although considerable variability is inherent in such
estimates, management believes that the unpaid claims liability is adequate.

Income Taxes

The Company calculates deferred taxes and related income tax expense using
the liability method. This method determines deferred taxes by applying the
current tax rate to net operating loss carryforwards and to the cumulative
temporary differences between the recorded carrying amounts and the
corresponding tax basis of assets and liabilities. A valuation allowance is
established for deferred tax assets unless their realization is considered more

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AND SUBSIDIARIES

likely than not. The Companys provision for income taxes is the sum of the
change in the balance of deferred taxes between the beginning and the end of
the period and income taxes currently payable or receivable.

Stock Options

In December 2002, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, which amends the
disclosure requirements of SFAS 123, Accounting for Stock-Based Compensation
and provides alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. As
permitted by SFAS 148, the Company has elected to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its employee stock options. Under
APB 25, in the event that the exercise price of the Companys employee stock
options is less than the market price of the underlying stock on the date of
grant, compensation expense is recognized. No stock-based employee
compensation cost is reflected in net (loss) income, as all options granted
under the Companys employee stock options plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net (loss) income and (loss) income
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation.

Quarter
    
    Quarter
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    Ended11/30/03
    
    11/30/02
    
    11/30/03
    
    11/30/02Net (loss) income, as reported
    
    $
    (233
    )
    
    $
    307
    
    
    $
    (558
    )
    
    $
    274Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
Effects
    
    
    (110
    )
    
    
    (43
    )
    
    
    (110
    )
    
    
    (62
    )Pro forma net (loss) income
    
    $
    (343
    )
    
    $
    264
    
    
    $
    (668
    )
    
    $
    212(Loss) income per common share:Basic  as reported
    
    $
    (0.06
    )
    
    $
    0.08
    
    
    $
    (0.14
    )
    
    $
    0.07Diluted  as reported
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.14
    )
    
    $
    0.07Basic  pro forma
    
    $
    (0.09
    )
    
    $
    0.07
    
    
    $
    (0.17
    )
    
    $
    0.05Diluted  pro forma
    
    $
    (0.09
    )
    
    $
    0.06
    
    
    $
    (0.17
    )
    
    $
    0.05


Per Share data

In calculating basic (loss) income per share, net (loss) income is divided
by the weighted average number of common shares outstanding for the period.
Diluted (loss) income per share reflects the assumed exercise or conversion of
all dilutive securities, such as options, warrants, and convertible debentures.
No such exercise or conversion is assumed where the effect is antidilutive,
such as when there is a net loss. The following table sets forth the
computation of basic and diluted (loss) income per share in accordance with
Statement No. 128, Earnings Per Share (amounts in thousands, except per share
data):

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Three Months Ended
    
    Six Months EndedNovember 30,
    
    November 30,2003
    
    2002
    
    2003
    
    2002Numerator:Numerator for diluted (loss) income per share from continuing
operations
    
    $
    (233
    )
    
    $
    307
    
    
    $
    (171
    )
    
    $
    274Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    Net (loss) income attributable to common stockholders
    
    $
    (233
    )
    
    $
    307
    
    
    $
    (558
    )
    
    $
    274Denominator:Weighted average shares
    
    
    3,942
    
    
    
    3,898
    
    
    
    3,939
    
    
    
    3,892Effect of dilutive securities:Employee stock options
    
    
    
    
    
    
    356
    
    
    
    
    
    
    
    92Denominator for diluted (loss) income per share-adjusted weighted
average shares after assumed conversions
    
    
    3,942
    
    
    
    4,254
    
    
    
    3,939
    
    
    
    3,984Basic (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.06
    )
    
    $
    0.08
    
    
    $
    (0.04
    )
    
    $
    0.07Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.10
    )
    
    
    Net (loss) income
    
    $
    (0.06
    )
    
    $
    0.08
    
    
    $
    (0.14
    )
    
    $
    0.07Diluted (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.04
    )
    
    $
    0.07Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.10
    )
    
    
    Net (loss) income
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.14
    )
    
    $
    0.07


Authorized shares of common stock reserved for possible issuance for
convertible debentures and stock options are as follows at November 30, 2003:

Convertible debentures
    
    
    9,044Outstanding stock options
    
    
    1,174,724Possible future issuance under stock option plans
    
    
    372,235Total
    
    
    1,556,003


Note 2  Basis of Presentation

The accompanying consolidated financial statements are prepared on a going
concern basis. During the six months ended November 30, 2003, net cash used
in continuing operations amounted to $630,000 and $22,000 was used in
discontinued operations. Additionally, the Company used $117,000 in connection
with the Companys ongoing implementation of its new, customized management
information system. The Companys capital needs during Fiscal 2004 will
include additional installments toward the $253,000 that remains to be paid in
connection with this system, which has expected total costs of approximately
$370,000. Once implemented, this system will enable the Company to meet HIPAA
requirements, streamline the Companys entire clinical and claims functions,
and offer service improvements to the Companys participating providers.
Further, in addition to amounts already paid during Fiscal 2004, the Company
may be required to repay a total of approximately $300,000 in principal and
interest to Medicare within the current fiscal year in connection with one
Medicare cost report settlement (see Note 4  Discontinued Operations). As
of November 30, 2003, the Company had a working capital deficiency of $5.1
million and a stockholders deficit of $5.5 million. In December 2003, the
Company raised approximately $1.0 million through the sale of an aggregate of
700,000 shares of common stock in a private transaction thereby reducing its
working capital deficiency and stockholders deficit each by approximately $1.0
million as a result of this transaction (see Note 6  Subsequent Event). The
shares issued in connection with this private placement have not been
registered and may be resold pursuant to Rule 144 under the general rules and
regulations of the Securities Act of 1933 as amended assuming that all of the
conditions and provisions of the rule are complied with. The earliest date
that these shares would become eligible for resale without a registration
statement would be December 8, 2004. The Company is continuing to pursue
sources of financing on terms that would support the Companys capital needs
and provide available funds for working capital during Fiscal 2004. Management
cannot state with any degree of certainty whether any required additional
equity or debt financing will be available to the Company during Fiscal 2004
and, if available, that the source of financing would be available on terms and
conditions acceptable to the Company. These conditions raise substantial doubt
about the Companys ability to continue as a going concern, which is dependent

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COMPREHENSIVE CARE CORPORATION
AND SUBSIDIARIES

upon its ability to continue to generate sufficient cash flow to meet its
obligations on a timely basis, obtaining additional financing as may be
required and, ultimately, sustaining an operating profit. The accompanying
consolidated financial statements do not include any adjustments that may
result from the outcome of this uncertainty.

Note 3  Major Customers/Contracts

(1) Beginning January 1, 2003, the Company contracted with a new HMO client to
provide behavioral healthcare services to contracted Medicaid members in
Florida. This business accounted for 25.3%, or $3.8 million, of the Companys
operating revenues during the six months ended November 30, 2003. During the
prior fiscal year, such Medicaid members were serviced by the Company through
its contract with another HMO whose agreements with the Company covered
Medicaid, Medicare, and commercial members and represented a combined 23.5%, or
$4.0 million, of the Companys operating revenue for the six months ended
November 30, 2002. On December 31, 2002, the Company received a formal
termination notice, effective February 28, 2003, from the prior HMO client with
respect to the Medicare and commercial business. In addition, the acquiring
HMO, whose contract with the Company was scheduled to renew in January 2004,
formally advised the Company on October 30, 2003 that it had determined to
insource behavioral health and, therefore, would not renew its contract with
the Company. Accordingly, the Companys contract with this HMO customer
terminated effective December 31, 2003. In preparation for the loss of revenue
specific to this contract, the Company has undertaken efforts to restructure
its regional and corporate operations, including the centralization of certain
clinical and administrative functions, generalized staff downsizing, and the
elimination of certain expenses that cannot be supported with existing and
remaining revenues.

(2) The Company has one contract to provide behavioral healthcare services to
Connecticut members under contract with one HMO. This agreement represented
approximately 11.3%, or $1.7 million and 8.5%, or $1.4 million, of the
Companys operating revenue for the six months ended November 30, 2003 and
2002, respectively. Additionally, this contract provides that the Company,
through its contract with this HMO, receives additional funds directly from a
state reinsurance program for the purpose of paying providers. During the six
months ended November 30, 2003 and 2002, the Company filed reinsurance claims
totaling approximately $1.1 million and $1.6 million, respectively. Such claims
represent cost reimbursements and, as such, are not included in the reported
operating revenues and are accounted for as reductions of healthcare operating
expenses. As of November 30, 2003 and May 31, 2003, respectively, the Company
has reported $0.5 million and $0.4 million as accounts receivablemanaged care
reinsurance contracts, with $3.3 million and $3.1 million reported as accrued
reinsurance claims payable, in the accompanying balance sheet. In the event
that the Company does not collect the amounts receivable related to reinsurance
amounts, the Company could remain liable for the costs of the specific services
provided to members that qualify for such reimbursements. The difference
between the reinsurance receivable amount and the reinsurance payable amount is
related to timing differences between the authorization date, the date the
money is received by the Company, and the date the money is paid to the
provider. In certain cases, providers have submitted claims for authorized
services having incorrect service codes or otherwise incorrect information that
has caused payment to be denied by the Company. In such cases, there are
contractual and statutory provisions that allow the provider to appeal a denied
claim. If no appeal is received by the Company within the prescribed amount of
time, the Company may be required to remit the reinsurance funds back to the
appropriate party. 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. This HMO has been a customer since
March 2001. The original contract term ended December 31, 2002 and, in
accordance with its terms, has automatically renewed for two consecutive
one-year periods, with the current term ending December 31, 2004.

(3) The Company has contracts with one HMO to provide behavioral healthcare
services to contracted commercial, Medicaid, and Childrens Health Insurance
Program (CHIP) members in Texas. This business accounted for approximately
12.6%, or $1.9 million, and 11.4%, or $1.9 million, of the Companys operating
revenues during the six months ended November 30, 2003 and 2002, respectively.
Under recently passed legislation, the benefits available to Texas CHIP
recipients had been significantly reduced and, as a result, the Company and
this HMO customer agreed to amend their current contract covering CHIP members
to reflect a reduced fee and benefit arrangement. For each of the six months
ended November 30, 2003 and 2002, CHIP business under this contract accounted
for approximately $0.7 million, or 4.7%, and $1.2 million, or 6.8%,
respectively, of the Companys operating revenues. The recent CHIP legislation
was subject to pending bills that have since been passed, thereby restoring the
majority of the benefits available to CHIP recipients. As a result, the
Company and this HMO client are currently evaluating their existing contractual
arrangement given these very recent developments in Texas. The company has
responded to the expected revenue reductions by adjusting staffing and other
operating costs as part of its current cost reduction program begun during the
quarter ended November 30, 2003. Management will continue to closely monitor
developments in Texas.

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This HMO has been a customer of the Company since November 1998. The original
contract term was for one year and the contract provides for automatic one-year
renewal terms.

(4) During the prior fiscal year, the Company had three contracts with one HMO
to provide behavioral healthcare services to Florida members. The combined
revenue from these contracts accounted for 18.9%, or $3.2 million, of the
Companys operating revenues during the six months ended November 30, 2002.
These contracts covering Florida members terminated effective January 1, 2003.
Additionally, the Company has one major contract with an affiliate of this HMO
(see Item 2 above).

Although there can be no assurance that the Company will be able to reduce its
costs in an amount sufficient to offset the gross margins associated with the
customer listed under (1) above and the CHIP business described under (3)
above, the Company has undertaken efforts to restructure its regional and
corporate operations, including the centralization of certain clinical and
administrative functions, generalized staff downsizing, and the elimination of
certain expenses that cannot be supported with existing and remaining revenues,
to minimize any effect on future results of operations.

In general, 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 4  Discontinued Operations

Results for the six months ended November 30, 2003 include a change in
estimate that resulted in a net charge of approximately $387,000 during the
quarter ended August 31, 2003, which has been included under Discontinued
Operations in the accompanying financial statements. Such charge is primarily
due to the Companys Fiscal 1999 Medicare cost report for its Aurora, Colorado
psychiatric hospital that was owned by the Company until its disposal on March
11, 1999, which completed the Companys plan to dispose of its hospital
business segment. The Fiscal 1999 cost report had recently been under audit by
the Medicare fiscal intermediary in the normal course of completing the final
settlement for Fiscal 1999. Prior to the intermediarys completion of the
audit, management reviewed proposed adjustments with the Medicare fiscal
intermediary and separately with the Companys cost report consultant. After
filing the Companys response to the proposed adjustments, which included
documentation that was accepted by the Medicare intermediary, thereby allowing
the intermediary to reverse specific adjustments that would have been
unfavorable, and based on continuing discussions with the Medicare
intermediary, management believed that no liability existed in relation to this
Fiscal 1999 cost report. However, in late September 2003, the Company received
notice from the Medicare fiscal intermediary that the intermediary had
completed its audit and that various audit adjustments made by the intermediary
would result in approximately $400,000 being due back to the Medicare program
specific to Fiscal 1999.

The Company does not expect to appeal this settlement and, as such,
expects to repay the full amount of approximately $400,000 specific to Fiscal
1999 less approximately $22,000 paid during the quarter ended November 30, 2003
and less approximately $106,000 in Medicare refunds that are currently due the
Company in connection with the Fiscal 1995 and 1996 Medicare cost report
settlements for this same Aurora, Colorado hospital. The Company has
requested an installment payment plan from Medicare and, during the quarter
ended November 30, 2003, while awaiting approval of the plan, the Company paid
an aggregate of $22,000 representing two installments under the proposed
settlement. If the Medicare fiscal intermediary determines that no installment
plan is available to the Company, it would require that the remaining principal
balance of approximately $272,000 plus any accrued interest would be due in an
immediate lump sum payment. Such amount is included in accounts payable and
accrued expenses in the accompanying balance sheet at November 30, 2003.

Note 5  Commitments and Contingencies

(1) Contracts with two existing clients require the Company to maintain
performance bonds throughout the contract terms. At November 30, 2003, the
Company maintained performance bonds of $1,200,000 and $600,000 in compliance
with these requirements.

(2) 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.

(3) Related to the Companys discontinued hospital operations, Medicare
guidelines allow the Medicare fiscal intermediary to re-open previously filed
cost reports. Management believes that the Companys Fiscal 1998 and

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1999 cost reports remain eligible for re-opening at some future date, in which
case the intermediary may determine that additional amounts are due to or from
Medicare.

(4) 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 transactions and, also, to protect the security
and privacy of protected health information. Entities subject to HIPAA include
some healthcare providers and all healthcare plans. To meet the specific
requirements of HIPAA, the Company recently determined it needed to make a
significant investment in its current information system or in a new
information system that would better meet the Companys future needs. As a
result, the Company entered into a Letter of Intent with Qualifacts Systems,
Inc. (Qualifacts), a vendor that has provided the Company with an immediate,
temporary solution to meet HIPAA compliance rules specific to the Electronic
Health Care Transactions and Code Sets Standards Model Compliance Plan with the
Centers for Medicare and Medicaid Services and, additionally, to design a new,
customized management information system that will enable the Company to
continue to meet HIPAA requirements in the future. The Company expects to incur
a total of approximately $0.4 million of costs to customize the Qualifacts
system and activate the licenses needed for Qualifacts and other, related
third-party software.

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 which case 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 is not aware of any such lawsuits that
could have a material adverse impact on the Companys financial statements.

NOTE 6  Subsequent Events

(1) Effective December 8, 2003, the Company completed a private transaction for
the sale of an aggregate of 700,000 shares of its common stock, $.01 par value,
to two individuals for an aggregate of $1,015,000 in gross proceeds to the
Company. The Company realized net proceeds of approximately $1.0 million
thereby reducing its working capital deficiency and stockholders deficit each
by approximately $1.0 million as a result of this transaction. The shares
issued in connection with this private placement have not been registered and
may be resold pursuant to Rule 144 under the general rules and regulations of
the Securities Act of 1933 as amended assuming that all of the conditions and
provisions of the rule are complied with. The earliest date that these shares
would become eligible for resale without a registration statement would be
December 8, 2004. Further, the number of issued and outstanding shares of the
Companys common stock increased from 3,943,049 to 4,643,049.

(2) Effective December 30, 2003, the Company received cash totaling $137,500
from Jefferson Hills Corporation (JHC) in full settlement of the secured 8.0%
promissory note receivable, which originated out of the sale in Fiscal 1999 of
the Companys Aurora, Colorado facility to JHC. Such note, which amounted to
approximately $156,000 as of November 30, 2003, had been due in April 2006. The
Company allowed JHC a discount of approximately 12% for the early payment and,
as a result, the Company expects to record an $18,000, non-operating loss
during the fiscal quarter ending February 28, 2004.




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 15).

General

Introduction

The Company has provided managed behavioral healthcare services and
products since 1992. Services are marketed primarily through business
development staff who are responsible for developing new sales leads and for
preparing responses to formal commercial and public sector Requests for
Proposals (RFPs). The Company typically has several RFPs in process, with
submissions being made to a diverse selection of existing and prospective
clients. Current services include a broad spectrum of inpatient and outpatient
mental health and substance abuse therapy, counseling, and supportive
interventions.

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Results of Operations

For the six months ended November 30, 2003, the Company reported a loss
from continuing operations of $171,000, or $0.04 loss per share (basic and
diluted), and a net loss of $558,000, or $0.14 loss per share (basic and
diluted), compared to net income of $274,000, or $0.07 earnings per share
(basic and diluted) for the six months ended November 30, 2002, which included
a $470,000, non-operating gain related to one settlement.

For the quarter ended November 30, 2003, the Company reported a net loss
of $233,000, or $0.06 basic and diluted earnings per share, compared to net
income of $307,000, or $0.08 basic earnings per share ($0.07 diluted earnings
per share) for the quarter ended November 30, 2002, which included a $470,000,
non-operating gain related to one settlement.

Due to the recent loss of business in certain markets, we reduced our
staff by approximately 10% in December 2003. Additionally, as part of our
ongoing expense reduction program to align costs with expected revenues, we
will maintain in effect a temporary salary freeze applicable to all employees,
salary reductions applicable to senior and executive management personnel, and
certain other reductions in operating costs associated with the specific
contracts that have terminated or otherwise cannot be supported by expected
revenues.

The following tables summarize the Companys operating results from
continuing operations for the three and six months ended November 30, 2003 and
2002 (in thousands):

The three months Ended November 30, 2003 Compared To The three months Ended
November 30, 2002:

Consolidated
    
    ConsolidatedContinuing
    
    ContinuingOperations
    
    OperationsFiscal 2004
    
    Fiscal 2003Operating revenues
    
    $
    7,011
    
    
    $
    8,631Healthcare operating expenses
    
    
    6,199
    
    
    
    7,760General/administrative expenses
    
    
    970
    
    
    
    952Other operating expenses
    
    
    24
    
    
    
    577,193
    
    
    
    8,769Operating loss
    
    $
    (182
    )
    
    $
    (138
    )


The Company reported a net loss of $233,000 and an operating loss of
$182,000 for the quarter ended November 30, 2003 compared to net income of
$307,000 and an operating loss of $138,000 for the quarter ended November 30,
2002. Operating revenues decreased by 18.8%, or $1.6 million, to $7.0 million
for the quarter ended November 30, 2003 compared to $8.6 million for the
quarter ended November 30, 2002. This decrease is primarily attributable to the
loss of one major customer in Florida that accounted for $1.7 million of
revenue during the fiscal quarter ended November 30, 2002 and a decrease in
Texas CHIP revenue of approximately $0.8 million during the fiscal quarter
ended November 30, 2003 compared to the same period in Fiscal 2003. These
decreases were partially offset by new business in Indiana and Michigan.

Healthcare operating expenses decreased by approximately $1.6 million, or
20.1%, for the quarter ended November 30, 2003 as compared to the quarter ended
November 30, 2002. This decrease is directly attributable to the loss of
revenue as described above. Healthcare operating expense as a percentage of
operating revenue decreased by 1.5%, from 89.9% for the quarter ended November
30, 2002 to 88.4% for the quarter ended November 30, 2003. This decrease is
primarily due to the termination in January 2003 of one major contract that
consistently returned a high medical loss ratio.

General and administrative expenses increased by $18,000, or 1.9%, for the
quarter ended November 30, 2003 as compared to the quarter ended November 30,
2002. This increase is primarily attributable to increased usage of outside
professional services during the quarter ended November 30, 2003, including
approximately $100,000 of legal and consulting services in connection with one
unsuccessful bid in Tennessee. General and administrative expense as a
percentage of operating revenue increased from 11.0% for the quarter ended
November 30, 2002 to 13.8% for the quarter ended November 30, 2003.

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Other operating expenses decreased by $33,000 for the quarter ended
November 30, 2003 compared to the quarter ended November 30, 2002. This
decrease is directly attributable to a reduction in depreciation expense as a
result of specific assets being fully depreciated.

The Six months Ended November 30, 2003 Compared To The Six months Ended
November 30, 2002:

Consolidated
    
    ConsolidatedContinuing
    
    ContinuingOperations
    
    OperationsFiscal 2004
    
    Fiscal 2003Operating revenues
    
    $
    14,904
    
    
    $
    16,938Healthcare operating expenses
    
    
    13,051
    
    
    
    15,113General/administrative expenses
    
    
    1,878
    
    
    
    1,840Other operating expenses
    
    
    43
    
    
    
    11714,972
    
    
    
    17,070Operating loss
    
    $
    (68
    )
    
    $
    (132
    )


The Company reported an operating loss of $68,000, a loss from continuing
operations of $171,000 and a net loss of $558,000 for the six months ended
November 30, 2003 compared to an operating loss of $132,000 and net income of
$274,000 for the six months ended November 30, 2002, which included a $470,000,
non-operating gain related to one settlement. Operating revenues decreased by
12.0%, or $2.0 million, to $14.9 million for the six months ended November 30,
2003 compared to $16.9 million for the six months ended November 30, 2002. This
decrease is primarily attributable to the loss of one major customer in Florida
that accounted for $3.2 million of revenue during the six months ended November
30, 2002 and a decrease in Texas CHIP revenue of approximately $795,000 during
the six months ended November 30, 2003 compared to the same period in Fiscal
2003. These decreases were partially offset by new business in Indiana and
Michigan.

Healthcare operating expenses decreased by approximately $2.1 million, or
13.6%, for the six months ended November 30, 2003 as compared to the six months
ended November 30, 2002. This decrease is directly attributable to the loss of
revenue as described above. Healthcare operating expense as a percentage of
operating revenue decreased by 1.6%, from 89.2% for the six months ended
November 30, 2002 to 87.6% for the six months ended November 30, 2003. This
decrease is primarily due to the termination in January 2003 of one major
contract that consistently returned a high medical loss ratio.

General and administrative expenses increased by $38,000, or 2.1%, for the
six months ended November 30, 2003 as compared to the six months ended November
30, 2002. This increase is primarily attributable to increased usage of outside
professional services during Fiscal 2004, including approximately $110,000 of
legal and consulting services in connection with one unsuccessful bid in
Tennessee. General and administrative expense as a percentage of operating
revenue increased from 10.9% for the six months ended November 30, 2002 to
12.6% for the six months ended November 30, 2003.

Other operating expenses decreased by $74,000 for the six months ended
November 30, 2003 compared to the six months ended November 30, 2002. This
decrease is directly attributable to a reduction in depreciation expense as a
result of specific assets being fully depreciated.

Seasonality of Business

Historically, we have experienced consistently low utilization during our
first fiscal quarter, which comprises the months of June, July, and August, and
increased utilization during our fourth fiscal quarter, which comprises the
months of March, April and May. Such variations in utilization impact our
costs of care during these months, generally having a positive impact on our
gross margins and operating profits during the first fiscal quarter and a
negative impact on our gross margins and operating profits during the fourth
quarter.

Liquidity and Capital Resources

During the six months ended November 30, 2003, net cash used in continuing
operations amounted to $630,000 and $22,000 was used in discontinued
operations. Additionally, we used $117,000 in connection with our ongoing
implementation of our new, customized management information system. At
November 30, 2003, we have

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cash and cash equivalents of $2.8 million. Giving effect to the private
placement that was completed on December 8, 2003 in which the Company received
net cash proceeds of approximately $1.0 million, our cash and cash equivalents
on a pro forma basis are $3.8 million as of November 30, 2003. Our capital
needs during Fiscal 2004 will include additional installments toward the
$253,000 that remains to be paid in connection with this system, which has
expected total costs of approximately $370,000. Once implemented, this system
will enable us to meet HIPAA requirements, streamline our entire clinical and
claims functions, and offer service improvements to our participating
providers. Further, in addition to amounts already paid during Fiscal 2004, we
may be required to repay the remaining principal balance of approximately
$272,000 plus any accrued interest to Medicare within the current fiscal year
in connection with one Medicare cost report settlement (see Note 4 to the
unaudited, consolidated financial statements  Discontinued Operations). As
of November 30, 2003, the Company has a working capital deficiency of $5.1
million and a stockholders deficit of $5.5 million. In December 2003, we
raised approximately $1.0 million through the sale of an aggregate of 700,000
shares of our common stock in a private transaction thereby reducing our
working capital deficiency and stockholders deficit each by approximately $1.0
million as a result of this transaction. The shares issued in connection with
this private placement have not been registered and may be resold pursuant to
Rule 144 under the general rules and regulations of the Securities Act of 1933
as amended assuming that all of the conditions and provisions of the rule are
complied with. The earliest date that these shares would become eligible for
resale without a registration statement would be December 8, 2004. We are
continuing to pursue additional sources of financing on terms that would
support our future capital needs and provide available funds for working
capital in Fiscal 2004. We cannot state with any degree of certainty whether
any required additional equity or debt financing will be available to us during
Fiscal 2004 and, if available, that the source of financing would be available
on terms and conditions acceptable to us. These conditions raise substantial
doubt about the Companys ability to continue as a going concern, which is
dependent upon our ability to continue to generate sufficient cash flow to meet
our obligations on a timely basis, obtaining additional financing as may be
required and, ultimately, sustaining an operating profit.

Our unpaid claims liability is estimated using an actuarial paid
completion factor methodology and other statistical analyses. These estimates
are subject to the effects of trends in utilization and other factors. Any
significant increase in member utilization that falls outside of our
estimations would increase healthcare operating expenses and may impact our
ability to achieve profitability and positive cash flow. Although considerable
variability is inherent in such estimates, we believe that the unpaid claims
liability is adequate. However, actual results could differ from the $3.9
million claims payable amount reported as of November 30, 2003.

Summary of Significant Accounting Policies

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

We believe the following significant accounting policies involve our most
significant judgments and estimates that are material to our consolidated
financial statements:

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 and is
continually reviewed and adjusted, if necessary, to reflect any change in the
estimated liability. These estimates are subject to the effects of trends in
utilization and other factors. However, actual claims incurred could differ
from the estimated claims payable amount reported as of November 30, 2003.
Although considerable variability is inherent in such estimates, we believe
that the unpaid claims liability is adequate.

Revenue Recognition  Our managed care activities are performed under
the terms of agreements with health maintenance organizations, preferred
provider organizations, and other health plans or payers to provide contracted
behavioral healthcare services to subscribing participants. Revenue under a
substantial portion of these agreements is earned monthly based on the number
of qualified participants regardless of services actually provided (generally

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referred to as capitation arrangements). The information regarding
qualified participants is supplied by our clients and we rely extensively on
the accuracy of the client remittance and other reported information to
determine the amount of revenue to be recognized. Such agreements accounted
for 87.2%, or $13.0 million, of revenue from continuing operations for the six
months ended November 30, 2003. The balance of our revenues is earned on a
fee-for-service basis and is recognized as services are rendered.

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, our success in (i) expanding the
managed behavioral healthcare operations, (ii) effective management in the
delivery of services, and (iii) risk and utilization in context of capitated
payouts.

Concentration of Risk

We currently have contracts with three health plans to provide behavioral
healthcare services under commercial, Medicaid, and CHIP plans to contracted
members in Connecticut, Florida, and Texas. These combined contracts represent
approximately 49.2%, or $7.3 million, of our operating revenue for the six
months ended November 30, 2003 and include one major contract that terminated
effective December 31, 2003, which accounted for 25.3%, or $3.8 million, of our
operating revenue for the six months ended November 30, 2003 (see Note 3(1) to
the unaudited, consolidated financial statements  Major
Customers/Contracts). Although the loss of this customer could have a
material, adverse effect on the Companys financial condition and future
results of operations, we believe the Company will be able to reduce its
internal cost of servicing this account to minimize any effect on future
results of operations. In general, 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. The loss of any one of these
customers or changes in any of these States Medicaid reimbursement rules could
have a material, adverse effect on our working capital and future results of
operations (see Medicaid and Other State Funded Programs below).

History of Operating Losses  Uncertainty of Future Profitability

For each of the fiscal years ending May 31, 2003, 2002 and 2001, we had
operating losses of approximately $608,000, $774,000 and $1,163,000,
respectively. The report of the Companys independent auditors with respect to
their examination of the Companys financial statements for the years ended May
31, 2003, 2002 and 2001 contains an explanatory paragraph relating to the
preparation of the Companys financial statements on a going concern basis
and states that the Companys working capital deficiency and stockholders
deficit raise substantial doubt about its ability to continue as a going
concern. For the six months ended November 30, 2003, the Company reported a
loss from continuing operations of $171,000 and a net loss of $558,000. At
November 30, 2003, the Companys total current liabilities exceeded its total
current assets by approximately $5.1 million and it had an accumulated deficit
of approximately $57.5 million, with a total stockholders deficit of
approximately $5.5 million. Due to the recent loss of business in certain
markets, we reduced our staff by approximately 10% in December 2003.
Additionally, as part of our ongoing expense reduction program to align costs
with expected revenues, we will maintain in effect a temporary salary freeze
applicable to all employees, salary reductions applicable to senior and
executive management personnel, and certain other reductions in operating costs
associated with the specific contracts that have terminated or otherwise cannot
be supported by expected revenues. While our management has addressed the
conditions giving rise to the

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going concern uncertainty, there is no certainty that we will be
successful in implementing any of the plans of management to restore us to
profitability, to achieve and maintain positive cash flow on an ongoing basis,
or otherwise to ensure that we will be able to continue as a going concern.

Costs of Care  Estimated Claims Incurred But Not Reported

Our costs of care include estimated amounts for claims incurred but not
yet reported (IBNR) to us. The IBNR is estimated using an actuarial paid
completion factor methodology and other statistical analyses that we
continually review and adjust, if necessary, to reflect any change in the
estimated liability. These estimates are subject to the effects of trends in
utilization and other factors. Although considerable variability is inherent
in such estimates, we believe that our unpaid claims liability is adequate.
However, actual results may differ materially from the estimated amounts
reported.

Need for Additional Funds; Uncertainty of Future Funding

We believe that our ability to increase business is dependent on our
ability to have available working capital and, therefore, we will require
additional funding. Effective December 8, 2003, we raised approximately $1.0
million through a private transaction of an aggregate of 700,000 shares of our
common stock thereby reducing our working capital deficiency and stockholders
deficit each by approximately $1.0 million as a result of this transaction. The
shares issued in connection with this private placement have not been
registered and may be resold pursuant to Rule 144 under the general rules and
regulations of the Securities Act of 1933 as amended assuming that all of the
conditions and provisions of the rule are complied with. The earliest date
that these shares would become eligible for resale without a registration
statement would be December 8, 2004. We are continuing to pursue additional
sources of financing on terms that would support our future capital needs and
provide available funds for working capital in Fiscal 2004. We cannot state
with any degree of certainty whether any required additional equity or debt
financing will be available to us during Fiscal 2004 and, if available, that
the source of financing would be available on terms and conditions acceptable
to us.

Uncertainties Related to 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 us to the additional
risk that contracts negotiated and entered into may ultimately be determined to
be unprofitable if utilization levels require us to deliver and provide
services at capitation rates which do not account for or factor in such
utilization levels.

We typically contract with small to medium sized HMOs who may be
adversely affected by the continuing efforts of governmental and third party
payers to contain or reduce the costs of healthcare through various means. Our
clients may fall under state supervision or otherwise be subject to state
discipline placing them at risk of losing membership to their competitors in
which case we may be unable to contract with any succeeding HMOs. They may
also determine to manage the behavioral healthcare benefits in house and, as
a result, discontinue contracting with the Company. Additionally, our clients
may be acquired by larger HMOs, in which case there can be no assurance that
the acquiring company would renew our contract.

Medicaid and Other State funded Programs

As of November 30, 2003, we managed approximately 787,000 lives in
connection with behavioral and substance abuse services covered through
Medicaid in Connecticut, Florida, Michigan and Texas. Any changes in Medicaid
reimbursement could ultimately affect the Company through contract bidding and
cost structures with the health plans first impacted by such changes. The State
of Texas recently passed legislation that reduced the amount of funds allocated
to our clients to cover behavioral healthcare services to Childrens Health
Insurance Program (CHIP) recipients in the State of Texas. As a result, two
of the companys existing clients determined not to continue the CHIP portion
of their contracts with us and one existing client renegotiated its contract
with us to reflect the reduced CHIP benefits. The recent CHIP legislation was
subject to pending bills that have since been passed, thereby restoring the
majority of the benefits available to CHIP recipients. As a result, the
Company, our continuing CHIP client, and certain prospective clients are
currently evaluating their existing contractual arrangements given these very
recent developments in Texas. There can be no assurance that we will be
successful in regaining CHIP business from our two existing clients that
recently terminated their CHIP contracts or from the prospective new CHIP
clients with which we are negotiating. We will continue to closely monitor
developments in Texas and to take any

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steps necessary in addition to the current cost restructuring that began
during the quarter ended November 30, 2003 to align costs with expected
revenues. For the six months ended November 30, 2003, we had operating revenue
of $1.0 million specific to contracts covering Texas CHIP recipients. These
changes to Texas CHIP programs could have a material, adverse impact on our
operations.

Seasonality of Business

Historically and during Fiscal 2003, we have experienced consistently low
utilization during our first fiscal quarter, which comprises the months of
June, July, and August, and increased utilization during our fourth fiscal
quarter, which comprises the months of March, April, and May. Such variations
in utilization impact our costs of care during these months, generally having a
positive impact on our gross margins and operating profits during the first
fiscal quarter and a negative impact on our gross margins and operating profits
during the fourth quarter.

Regulatory compliance

We are subject to extensive and evolving state and federal regulations
relating to the nations mental health system as well as changes in Medicaid
and Medicare reimbursement that could have an effect on the profitability of
our contracts. These regulations range from licensure and compliance with
regulations related to insurance companies and other risk-assuming entities, to
licensure and compliance with regulations related to healthcare providers.
These laws and regulations may vary considerably among states. As a result,
CompCare may be subject to the specific regulatory approach adopted by each
state for regulation of managed care companies and for providers of behavioral
healthcare treatment services.

We hold licenses or certificates to perform utilization review and third
party administrator (TPA) services in certain states. Certain of the
services provided by our managed behavioral healthcare subsidiaries may be
subject to such licensing requirements in other states. There can be no
assurance that additional utilization review or TPA licenses will not be
required or, if required, that CompCare will qualify to obtain such licenses.
In many states, entities that assume risk under contract with licensed
insurance companies or health plans have not been considered by state
regulators to be conducting an insurance or HMO business. As a result, we have
not sought licensure as either an insurer or HMO in any state. If the
regulatory positions of these states were to change, our business could be
materially affected until such time as we are able to meet the regulatory
requirements. Currently, we cannot quantify the potential effects of additional
regulation of the managed care industry, but such costs will have an adverse
effect on future operations to the extent that they are not able to be recouped
in future managed care contracts.

We are 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 transactions and, also, to protect the security and privacy of
protected health information. Entities subject to HIPAA include some
healthcare providers and all healthcare plans. To meet the specific
requirements of HIPAA, we recently determined we needed to make a significant
investment in our current information system or in a new information system
that would better meet our future needs. As a result, we entered into a Letter
of Intent with Qualifacts Systems, Inc. (Qualifacts), a vendor that has
provided us with an immediate, temporary solution to meet HIPAA compliance
rules specific to the Electronic Health Care Transactions and Code Sets
Standards Model Compliance Plan with the Centers for Medicare and Medicaid
Services and, additionally, to design a new, customized management information
system that will enable us to continue to meet HIPAA requirements in the
future. While these efforts will be ongoing, we believe we have met
substantially 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.

Dependence on Key Personnel

We currently rely heavily on several key executives and other management,
clinical and technical personnel for our business performance and development.
Recent new hires have included senior management personnel and other essential
employees that are assisting executive management with marketing efforts and
enhancements to our clinical system designs. Our future success will depend in
large part upon our continued ability to attract and retain highly skilled
employees.

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Shares Eligible for Future Sale

As of January 5, 2004, the Company has issued 1,174,724 options, with
exercise prices ranging from $0.25 to $4.00. A total of 885,666 options are
exercisable and in the money as of January 5, 2004 and, accordingly, could be
exercised and resold by optionees. Additionally, in connection with the private
transaction that was completed on December 8, 2003, an aggregate of 700,000
shares of our common stock were issued to two private investors. The shares
issued in connection with this private placement have not been registered and
may be resold pursuant to Rule 144 under the general rules and regulations of
the Securities Act of 1933 as amended assuming that all of the conditions and
provisions of the rule are complied with. The earliest date that these shares
would become eligible for resale without a registration statement would be
December 8, 2004.

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 our 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 November 30, 2003, 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 that result in a change of control of the
Company. Section 203 of the General Corporation Law of Delaware prohibits us
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 our 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 us to alter our 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 our
objectives or plans will be achieved.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

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




Item 4. Controls and Procedures

Evaluation of the Companys Disclosure Controls and Internal Controls.Within
the 90 days prior to filing this report on Form 10-Q, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures (Disclosure Controls), and its internal controls and procedures
for financial reporting (Internal Controls). This evaluation (the Controls
Evaluation) was done under the supervision and with the participation of our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Rules
adopted by the Securities and Exchange Commission (SEC) require that in this
section of the quarterly report on Form 10-Q we present the conclusions of the
CEO and the CFO about the effectiveness of our Disclosure Controls and Internal
Controls based on and as of the date of the Controls Evaluation.

Disclosure Controls and Internal Controls.As provided in Rule 13a-14 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended, Disclosure Controls are defined as meaning controls and procedures
that are designed with the objective of insuring that information required to
be disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, designed and reported
within the time periods specified by the SECs rules and forms. Disclosure
Controls include, within the definition under the Exchange Act, and without
limitation, controls and procedures designed to insure that information
required to be disclosed by us in our reports is accumulated and communicated
to our management including our CEO and CFO, as appropriate, to allow timely
decisions regarding disclosure. Internal Controls are procedures which are

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designed with the objective of providing reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded
and reported, all to permit the preparation of our financial statements in
conformity with accounting principles generally accepted in the United States
of America.

Scope of the Controls Evaluation.The evaluation made by our CEO and CFO of
our Disclosure Controls and our Internal Controls included a review of the
controls objectives and design, the controls implementation by the Company
and the effect of the controls on the information generated for use in this
Form 10-Q. In the course of the Controls Evaluation, we sought to identify
data errors, control problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in our quarterly reports on
Form 10-Q and Annual Report on Form 10-K. The overall goals of these various
evaluation activities are to monitor our Disclosure Controls and our Internal
Controls and to make modifications as necessary; our intent in this regard is
that the Disclosure Controls and the Internal Controls will be maintained as
dynamic systems that change (including with improvements and corrections) as
conditions warrant.

Among other matters, we sought in our evaluation to determine whether there
were any significant deficiencies or material weaknesses in the Companys
Internal Controls, or whether the Company had identified any acts of fraud
involving personnel who have a significant role in the Companys Internal
Controls. In the professional auditing literature, significant deficiencies
are referred to as reportable conditions; these are control issues that could
have a significant adverse effect on the ability to record, process, summarize
and report financial data in the financial statements. A material weakness
is defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
Controls Evaluation, and in each case if a problem was identified, we
considered what revision, improvement and/or correction to make in accordance
with our on-going procedures. Following the completion of the audit of the
Companys financial statements, the Companys external auditors issued their
management letter to the Board of Directors, which did not identify any
significant deficiency or material weakness in the Companys internal controls
but did recommend certain improvements in the Companys existing internal
controls.

The Companys management, including the CEO and CFO, does not expect that our
Disclosure Controls or our Internal Controls will prevent all errors and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control systems objectives
will be met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with its
policies or procedures. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.

In accordance with SEC requirements, our CEO and CFO each have confirmed that,
since the date of the Controls Evaluation to the date of this quarterly report
on Form 10-Q, there have been no significant changes in Internal Controls or in
other factors that could significantly affect Internal Controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Conclusion.Based upon the Controls Evaluation, our CEO and CFO have each
concluded that our Disclosure Controls are effective to ensure that material
information relating to the Company and its consolidated subsidiaries is made
known to management, including the CEO and CFO, particularly during the period
when our periodic reports are being prepared, and that our Internal Controls
are effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with accounting principles generally accepted in
the United States of America.

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PART II  OTHER INFORMATION




Item 1  LEGAL PROCEEDINGS

From time to time, the Company and its subsidiaries may be parties to and
their property is subject to ordinary, routine litigation incidental to their
business, in which case 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 is not aware of any such lawsuits that
could have a material adverse impact on the Companys financial statements.




Item 2  CHANGES IN SECURITIES AND USE OF PROCEEDS

As previously reported in the Companys Current Report on Form 8-K dated
December 9, 2003, the Company, on December 8, 2003, completed the sale of
700,000 shares of its common stock, $.01 par value (the Shares), for an
aggregate of $1,015,000, of which the Company realized net proceeds of
approximately $971,500. The Company intends to utilize the net proceeds for
working capital purposes. The Shares were sold to two individuals in a private
transaction not involving a public offering. The shares issued in connection
with this private placement have not been registered and may be resold pursuant
to Rule 144 under the general rules and regulations of the Securities Act of
1933 as amended assuming that all of the conditions and provisions of the rule
are complied with. The earliest date that these shares would become eligible
for resale without a registration statement would be December 8, 2004. As a
result of this transaction, the number of issued and outstanding shares of the
Companys common stock increased from 3,943,049 shares to 4,643,049 shares.




Item 6  Exhibits and Reports on Form 8-K

EXHIBITNUMBER
    
    DESCRIPTION
    
    PAGE NUMBER31.1
    
    Comprehensive Care Corporation CEO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    2231.2
    
    Comprehensive Care Corporation CFO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    2332.1
    
    Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    2432.2
    
    Comprehensive Care Corporation CFO Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    25




|(b) |  | Reports on Form 8-K   During the quarter ended November 30, 2003, the
following reports on Form 8-K were filed by the Registrant:
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

Date of Report
    
    Item Reported
    
    DescriptionOctober 14, 2003
    
    Item 5 Other Events
    
    Appointment of Steven J. Scheidt as Vice President,
Private Sector Sales for the Company.November 7, 2003
    
    Item 5 Other Events
    
    The Company announced the termination of one
major contract and, also, changes in Texas legislation
whereby the State of Texas will
restore the majority of
the behavioral health benefits
available under the Texas Childrens
Health Insurance Program.


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SIGNATURES

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 CORPORATIONJanuary 9, 2004
    
    By
    
    /s/ MARY JANE JOHNSONMary Jane Johnson
President and Chief Executive Officer
(Principal Executive Officer)By
    
    /s/      ROBERT J. LANDISRobert J. Landis
Chairman, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)


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