<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                   FORM 10-Q




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

      For the period ended February 28, 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                              (I.R.S. Employer 
 of incorporation or organization)                       Identification No.)



        1111 Bayside Drive, Suite 100, Corona del Mar, California 92625
--------------------------------------------------------------------------------
        (Former address of the 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 April 10, 1997
--------------------------------------            -----------------------------
Common Stock, par value $.01 per share                      3,423,852
<PAGE>   2
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                     Index


                                                                       Page
                                                                       ----
Part I -- Financial Information

    Item 1. -- Condensed Consolidated Financial Statements

        Condensed consolidated balance sheets,
            February 28, 1997 and May 31, 1996  . . . . . . . . . .      3
        Condensed consolidated statements of operations for
            the three and nine months ended February 28, 1997 
            and February 29, 1996 . . . . . . . . . . . . . . . . .      4

        Condensed consolidated statements of cash flows for
            the nine months ended February 28, 1997 and 
            February 29, 1996 . . . . . . . . . . . . . . . . . . .      5

        Notes to condensed consolidated financial statements  . . .      6

    Item 2. -- Management's discussion and analysis of financial 
                  condition and results of operations . . . . . . .     14

Part II -- Other Information  . . . . . . . . . . . . . . . . . . .     27

    Item 1. -- Legal Proceedings  . . . . . . . . . . . . . . . . .     27

    Item 3. -- Defaults Upon Senior Securities  . . . . . . . . . .     28

    Item 4. -- Submission of Matters to a Vote of Security 
                   Holders  . . . . . . . . . . . . . . . . . . . .     28

    Item 6. -- Exhibits and Reports on Form 8-K . . . . . . . . . .     28

    Signatures  . . . . . . . . . . . . . . . . . . . . . . . . . .     29



                                       2
<PAGE>   3
PART I. -- FINANCIAL INFORMATION

ITEM 1. -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                  February 28,      May 31,
                                                                                       1997           1996      
                                                                                  ------------    -----------
                                                                                  (Unaudited)       (Note)
<S>                                                                               <C>              <C>
                                  ASSETS
Current assets:
     Cash and cash equivalents  . . . . . . . . . . . . . . . . . . . . . .          $ 3,766         $ 4,433
     Accounts receivable, less allowance for
          doubtful accounts of $1,061 and $877  . . . . . . . . . . . . . .            2,322           2,476
     Other receivables  . . . . . . . . . . . . . . . . . . . . . . . . . .            2,483           1,478
     Property and equipment held for sale . . . . . . . . . . . . . . . . .            1,221           1,233
     Other current assets                                                                285             352
                                                                                     -------         -------
Total current assets  . . . . . . . . . . . . . . . . . . . . . . . . . . .           10,077           9,972
                                                                                     -------         -------

Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . .            9,888           9,863
Less accumulated depreciation and amortization  . . . . . . . . . . . . . .           (3,659)         (3,590)
                                                                                     -------         ------- 
Net property and equipment  . . . . . . . . . . . . . . . . . . . . . . . .            6,229           6,273
                                                                                     -------         -------

Property and equipment held for sale  . . . . . . . . . . . . . . . . . . .            4,708           6,915
Notes receivable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            1,958             212
Other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            2,693           1,746
                                                                                     -------         -------
Total assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $25,665         $25,118
                                                                                     =======         =======

                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued liabilities . . . . . . . . . . . . . . .          $12,343         $10,714
     Long-term debt in default (see Note 2) . . . . . . . . . . . . . . . .               --           9,538
     Current maturities of long-term debt . . . . . . . . . . . . . . . . .               48           2,464
     Unbenefitted tax refunds received  . . . . . . . . . . . . . . . . . .           12,092           7,018
     Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . .              360             410
                                                                                     -------         -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . .           24,843          30,144
                                                                                     -------         -------

Long-term debt, excluding current maturities  . . . . . . . . . . . . . . .            2,692              24
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              668             749
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               --           1,000
Commitments and contingencies (see Notes 3 and 7)
Stockholders' equity:
     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 . . . . . . . . . . . .            2,073              --
     Common Stock, $.01 par value; authorized 12,500,000 shares;
          issued and outstanding 3,365,354 and 2,848,685 shares . . . . . .               34              28
     Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . .           47,801          43,931
     Accumulated deficit  . . . . . . . . . . . . . . . . . . . . . . . . .          (52,446)        (50,758)
                                                                                     -------         -------
        Total stockholders' equity (deficit)  . . . . . . . . . . . . . . .           (2,538)         (6,799)
                                                                                     -------         ------- 
Total liabilities and stockholders' equity  . . . . . . . . . . . . . . . .          $25,665         $25,118
                                                                                     =======         =======
</TABLE>

Note: The balance sheet at May 31, 1996 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           Nine Months Ended
                                                        --------------------------  ---------------------------
                                                        February 28,  February 29,  February 28,   February 29,
                                                           1997           1996         1997           1996
                                                        ------------  ------------  ------------   ------------
<S>                                                      <C>            <C>                        <C>
Revenues and gains:
    Operating revenues  . . . . . . . . . . . . .        $ 9,438        $ 7,584       $28,141        $23,964

Costs and expenses:
    Direct healthcare expenses  . . . . . . . . .          8,101          6,687        24,690         21,493
    General and administrative expenses 
      (see Note 10) . . . . . . . . . . . . . . .          2,269          2,120         6,079          5,825
    Provision for doubtful accounts   . . . . . .            (12)           251           189            920
    Depreciation and amortization   . . . . . . .            182            300           520            983
    Restructuring expenses  . . . . . . . . . . .             --             --           195             --
                                                         -------        -------       -------        -------
                                                          10,540          9,358        31,673         29,221
                                                         -------        -------       -------        -------

Loss from operations  . . . . . . . . . . . . .           (1,102)        (1,774)       (3,532)        (5,257)

    Gain on sale of assets  . . . . . . . . . .               16             --            42          1,067
    Loss on sale of assets  . . . . . . . . . .               --            (13)          (12)           (44)
    Non-recurring gain (loss)   . . . . . . . .               --            860          (250)           860
    Interest income   . . . . . . . . . . . . .               62            100           212            164
    Interest expense  . . . . . . . . . . . . .              (74)          (310)         (670)        (1,053)
                                                         -------        -------       -------        -------
Loss before income taxes  . . . . . . . . . . .           (1,098)        (1,137)       (4,210)        (4,263)

Benefit (provision) for income taxes  . . . . .               (4)           (30)          341          2,506
                                                         -------        -------       -------        -------
    Loss before extraordinary item  . . . . . .           (1,102)        (1,167)       (3,869)        (1,757)

Extraordinary item - gain on debenture exchange            2,191             --         2,191             --
                                                         -------        -------       -------        -------
    Net earnings/(loss)   . . . . . . . . . . .            1,089         (1,167)       (1,678)        (1,757)

    Dividends on convertible preferred stock  .               10             --            10             --
                                                         -------        -------       -------        -------
    Net earnings (loss) attributable to common
       stockholders   . . . . . . . . . . . . .          $ 1,079        $(1,167)      $(1,688)       $(1,757)
                                                         =======        =======       =======        ======= 

Earnings/(loss) per common share:

    Primary:
       Net earnings/(loss) before
          extraordinary item  . . . . . . . . .          $ (0.36)       $ (0.44)      $ (1.29)       $ (0.67)
        Extraordinary item  . . . . . . . . . .             0.70             --          0.73             --
                                                         -------        -------       -------        -------
        Net earnings/(loss)   . . . . . . . . .          $  0.34        $ (0.44)      $ (0.56)       $ (0.67)
                                                         =======        =======       =======        ======= 

    Fully-diluted:
        Net earnings/(loss) before
          extraordinary item  . . . . . . . . .          $ (0.30)       $    --       $    --        $    --
        Extraordinary item  . . . . . . . . . .             0.59             --            --             --
                                                         -------        -------       -------        -------
        Net earnings  . . . . . . . . . . . . .          $  0.29        $    --       $    --        $    --
                                                         =======        =======       =======        =======
</TABLE>

                            See accompanying notes.


                                       4
<PAGE>   5
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                                                                                      Nine Months Ended
                                                                                 ----------------------------
                                                                                 February 28,    February 29,
                                                                                     1997            1996
                                                                                 ------------    ------------
                                                                                   (Note 9)
<S>                                                                                <C>              <C>
Cash flows from operating activities:
     Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $(1,688)         $(1,757)
Adjustments to reconcile net loss to net
     cash used in operating activities:
     Depreciation and amortization  . . . . . . . . . . . . . . . . . . . .            520              983
     Provision for doubtful accounts  . . . . . . . . . . . . . . . . . . .            189              920
     Gain on debenture conversion . . . . . . . . . . . . . . . . . . . . .         (2,191)              --
     Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . .            (42)          (1,057)
     Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . .             12               37
     Carrying costs incurred on property and equipment held for sale  . . .             --             (293)
     Changes in assets and liabilities net of effect of acquisitions:
         Decrease (increase) in accounts receivable . . . . . . . . . . . .              9             (451)
         Decrease (increase) in notes and other receivables . . . . . . . .           (733)           1,064
         Decrease (increase) in other current assets and other assets . . .           (137)            (227)
         Increase (decrease) in accounts payable and accrued liabilities  .          1,069             (157)
         Decrease in other liabilities  . . . . . . . . . . . . . . . . . .           (208)            (865) 
         Increase in unbenefitted tax refunds received  . . . . . . . . . .          5,074            7,018
     Increase (decrease) in income taxes payable  . . . . . . . . . . . . .            (50)              81
                                                                                    ------           ------

          Net cash provided by operating activities . . . . . . . . . . . .          1,824            5,296
                                                                                    ------           ------

Cash flows from investing activities:
     Net proceeds(loss) from sale of property and equipment 
     (operating and held for sale)  . . . . . . . . . . . . . . . . . . . .            409              (41)
     Additions to property and equipment  . . . . . . . . . . . . . . . . .           (293)            (530)
                                                                                    ------            ----- 
          Net cash provided by (used in) investing activities . . . . . . .            116             (571)
                                                                                    ------            ------

Cash flows from financing activities:
     Bank and other borrowings  . . . . . . . . . . . . . . . . . . . . . .             --            1,000
     Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . .             10               --
     Proceeds from the issuance of Common Stock . . . . . . . . . . . . . .          2,756              961
     Repayment of debt  . . . . . . . . . . . . . . . . . . . . . . . . . .         (5,373)          (5,014)
                                                                                    ------           ------ 
          Net cash used in financing activities . . . . . . . . . . . . . .         (2,607)          (3,053)
                                                                                    ------           ------ 
Net increase (decrease) in cash and cash equivalents  . . . . . . . . . . .           (667)           1,672

Cash and cash equivalents at beginning of period  . . . . . . . . . . . . .          4,433            1,542
                                                                                    ------           ------

Cash and cash equivalents at end of period  . . . . . . . . . . . . . . . .         $3,766           $3,214
                                                                                    ======           ======

</TABLE>




                            See accompanying notes.


                                       5
<PAGE>   6
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               FEBRUARY 28, 1997
                                  (Unaudited)


NOTE 1--BASIS OF PRESENTATION

        The condensed consolidated balance sheet as of February 28, 1997, and
the related condensed consolidated statements of operations and cash flows for
the three and nine month periods ended February 28, 1997 and February 29, 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 nine months ended
February 28, 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.  The notes to consolidated financial statements
included in Form 10-K for the year ended May 31, 1996 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 losses from operations in fiscal 1996 and continues to report
operating losses through the third quarter of fiscal 1997.  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 substantial 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 
3--"Operating Losses and Liquidity").

        The weighted average number of shares outstanding used to compute loss
per common share were 3,151,000 and 2,657,000 for the three months ended
February 28, 1997 and February 29, 1996, respectively; and 3,002,000 and
2,637,000 for the nine months ended February 28, 1997 and February 29, 1996,
respectively.  The fully-diluted weighted average number of shares outstanding
used to compute fully-diluted earnings per share was 3,742,000 for the three
months ended February 28, 1997.  Fully-diluted loss per share for the remaining
periods reported is anti-dilutive and is not reported.

NOTE 2--DEBENTURE EXCHANGE OFFER

        The Company did not make its payment of interest on its 7 1/2%
Convertible Subordinated Debentures (the "Debentures") when such payment was
scheduled on October 17, 1994.  In early February 1995, a group of holders and
purported holders of the Debentures gave notice of acceleration of the entire
amount of principal and interest due under the Debentures, and on February 24,
1995, a subset of such persons filed an involuntary petition in the United
States Bankruptcy Court for the Northern District of Texas under Chapter 7 of
the U.S. Bankruptcy Code.  On March 3, 1995, the Company entered into a letter
agreement with a representative of the certain holders of the Debentures who
had taken such actions.  The agreement provided for a consensual, out-of-court
resolution that the Company's Board of Directors approved as in the best
interests of the Company, its stockholders and other stakeholders.  The
holders' representative agreed to use best efforts to provide notices of waiver
of the interest non-payment default, notices of rescission of the Debenture
acceleration and the effects thereof, and consent to the immediate dismissal of
the involuntary Chapter 7 petition.  In return, the Company agreed to use best
efforts to provide an opportunity to holders of Debentures to tender their
Debentures to the Company pursuant to an exchange offer to be made by the
Company to the holders of the Debentures.


                                       6
<PAGE>   7
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               FEBRUARY 28, 1997
                                  (Unaudited)



        On November 14, 1996, the Company commenced a consent solicitation
pursuant to a proxy statement addressed to its Debentureholders (the "Consent
Solicitation").  The Company simultaneously initiated an exchange offer (the
"Debenture Exchange Offer").  In addition, the Debenture Exchange Offer
required the holders of a majority of the Debentures to give their approval to
rescind the acceleration and waive the defaults described above.  The Debenture
Exchange Offer to the holders of Debentures exchanged $500 in cash plus sixteen
(16) shares of Common Stock designated aggregately as payment of principal,
plus $80 in cash plus eight (8) shares of Common Stock, designated aggregately
as a payment of interest for each $1,000 of the outstanding principal amount of
its Debentures and the waiver by the Debentureholder of all interest accrued
and unpaid on such principal amount as of the date of the Exchange.

        On December 30, 1996, the Company completed the Debenture Exchange
Offer with its Debentureholders.  The Company was advised by the Exchange Agent
that affirmative consents of Debentureholders in excess of 82% had been
received, and that all propositions had been consented to and approved by
Debentureholders.  An aggregate of $6,846,000 of principal amount of Debentures
(the "Tendered Debentures"), representing 72% of the issued and outstanding
Debentures, were tendered for exchange to the Company pursuant to the terms of
the Exchange Offer.  With respect to the Tendered Debentures, the Company paid
the Exchange Agent, on behalf of tendering Debentureholders, an aggregate
amount of $3,970,680 and requisitioned for issue 164,304 shares of the
Company's Common Stock, representing the stock portion of the Exchange Offer.
The distribution of the exchange consideration to tendering Debentureholders
was made by the Exchange Agent within five days after the closing date of
December 30, 1996.  With respect to the $2,692,000 of principal amount of
Debentures which were not tendered for exchange, the Company paid an aggregate
of $552,701 of interest and default interest to such non-tendering
Debentureholders.  Due to the affirmative result of the Consent Solicitation
and the payment by the Company of interest and default interest with respect to
all Debentures which have not been tendered for exchange, the Company is no
longer in default with respect to such Debentures.

        The resulting gain on the Debenture Exchange was $2.5 million less
approximately $0.3 million in related costs and expenses for a net gain of $2.2
million with the remaining amount of $1.9 million being recorded to additional
paid-in capital.  The aggregate principal amount of Debentures which were not
tendered was $2,692,000 and is reflected in long-term debt.

NOTE 3--OPERATING LOSSES AND LIQUIDITY

        At February 28, 1997, the Company had cash and cash equivalents of $3.8
million.  During the nine months ended February 28, 1997, the Company provided
$1.8 million from its operating activities, provided $0.1 million from its
investing activities and utilized $2.6 million in its financing activities.
The Company reported net income of $1.1 million for the quarter ended February
28, 1997, versus a net loss of $1.2 million for the quarter ended February 29,
1996.  As a result, the Company has an accumulated deficit of $52.4 million and
total stockholders' deficit of $2.5 million as of February 28, 1997.
Additionally, the Company's current assets at February 28, 1997 amounted to
approximately $10.1 million and current liabilities were approximately $24.8
million, resulting in a working capital deficiency of approximately $14.8
million and a negative current ratio of 1:2.5.  Included in current liabilities
is $12.1 million of unbenefitted tax refunds received (see Note 6--"Income
Taxes").  Exclusive of this amount, the Company's working capital deficiency is
$2.6 million resulting in a negative current ratio of 1:1.3.  The Company's
primary use of available cash resources is to expand its behavioral medicine
managed care and contract management businesses and fund operations while it
seeks to dispose of certain of its freestanding facilities.

         Included in current and non-current assets are three hospital
facilities designated as property and equipment held for sale with a total
carrying value of $5.9 million.  In previous years, the Company was obligated
to support and fund certain poorly performing freestanding facilities that now
have been closed, including two such facilities closed in fiscal 1996 and
another in fiscal 1997 (see Note 5--"Property and Equipment Held for Sale").
As a result, the Company will no longer be burdened with the negative cash flow
requirements associated with such facilities.


                                       7
<PAGE>   8
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               FEBRUARY 28, 1997
                                  (Unaudited)


        During the third quarter of 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.  During
the third quarter of fiscal 1997, the Company also exchanged its $2.0 million
Secured Convertible Note into Series A Non-Voting 4% Cumulative Convertible
Preferred Stock.  This exchange further reduces the Company's future debt
obligations.  The Company also exchanged a minority interest in one of its
subsidiaries into 100,000 shares of its Common Stock (see Note 4--"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' equity was improved by $5.3 million.  These
transactions also reduced the Company's future cash obligations with the
significant reduction in debt and interest expense.

        Based upon current levels of operation and cash on hand of $3.8 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 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 or the inability to conclude pending
contract proposals may adversely affect the adequacy of such working capital.
Such anticipated cash resources to fund additional operating needs include:

        o    The Company has received a firm commitment from a mutual fund to
             purchase in a private placement at least $5.0 million of 15% fully
             secured Company notes due no earlier than April 1998 if offered by
             the Company.

        o    The Company filed its fiscal 1995 Federal tax return, and a Form
             1139 "Corporate Application for Tentative Refund" in the amount of
             $9.4 million.  The Company received the full refund claim for
             fiscal 1995 in October 1995.  In September 1996, the Company filed
             its fiscal 1996 Federal tax return and also filed a Form 1139.
             The Company received a refund in the amount of $5.4 million during
             the second quarter of fiscal 1997.  The Company has also filed
             amended Federal tax returns for prior years to claim refunds for
             an additional $7.7 million.  These refund claims have been made
             under Section 172(f) of the Internal Revenue Code, an area of the
             tax law without significant precedent, and there may be
             substantial opposition by the IRS to the Company's refund claims.
             The Company is currently under audit by the IRS regarding its 1995
             and 1996 Federal tax returns and the amended returns for prior
             years.  Accordingly, no assurances can be made as to the Company's
             entitlement to such refunds or the timing of the receipt thereof
             (see Note 6--"Income Taxes").

        o    Included in current property and equipment held for sale is one
             hospital facility currently under contract to be sold.  The sale
             of this facility closed during the fourth quarter of fiscal 1997.
             The proceeds from the sale were $1.2 million.

        o    Included in assets held for sale (non-current) are two hospital
             facilities designated as property and equipment held for sale with
             a total carrying value of $4.7 million.  The Company expects to
             sell these facilities during the next six months.

        All of these potential sources of additional cash in fiscal 1997 are
subject to variation due to business and economic influences outside the
Company's control.  There can be no assurance that during fiscal 1997 the
Company will complete the transactions required to fund its working capital
deficit.

NOTE 4--ACQUISITIONS AND DISPOSITIONS

        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


                                       8
<PAGE>   9
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               FEBRUARY 28, 1997
                                  (Unaudited)


Healthcare Management, Inc. (hereafter collectively referred to as "HMS").  The
Company consented to the closing reserving its rights to assert certain claims
against the former owners (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 nine months ended
February 28, 1997 reflect the results of operations for HMS for the period of
July 25, 1996 through February 28, 1997.  In conjunction with this acquisition,
the Company issued 16,000 shares of its Common Stock.  In addition, certain
provisions of the employment agreements with the Sellers provide for an
additional earn out of  stock warrants based on performance.  The Company
recorded $1.0 million in goodwill related to the acquisition which will be
amortized on a straight line basis over 20 years.

        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% of the selling price.  This note provided the buyer with an
incentive option should the note be paid off in full on or before six months
from closing.  In the event the buyer elected this option, he would receive a
21% discount on the note.  The buyer did not elect this incentive option.
Given that this sale is highly leveraged, the Company has elected not to
recognize any income on this sale.  The Company would recognize a gain on the
sale of $127,000 using the installment method of accounting.  Under the
installment method, the Company would have recognized a gain on the disposal of
assets of approximately $21,600 for the first nine months of fiscal 1997.

        On May 22, 1995, the Company and its subsidiary, Comprehensive
Behavioral entered into an agreement with Physicians Corporation of America
("PCA"), providing for PCA to invest $1.0 million in Comprehensive Behavioral
for 13 1/2% of the voting power of Comprehensive Behavioral represented by all
of the Series A Preferred Stock of Comprehensive Behavioral which is also
exchangeable at the option of PCA for 100,000 shares of the Company's Common
Stock.  In February 1997, PCA exercised its option to exchange 135 shares of
Series A Non-Voting 4% Cumulative Convertible Preferred Stock of Comprehensive
Behavioral, representing 13 1/2% of the voting power of Comprehensive
Behavioral, into 100,000 shares of the Company's Common Stock.

NOTE 5--PROPERTY AND EQUIPMENT HELD FOR SALE

        The Company has decided to dispose of certain freestanding facilities
and other assets (see Note 3-- "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 $11.4 million at
February 28, 1997, is carried at estimated net realizable value of
approximately $5.9 million.  Direct expenses for the facilities designated for
disposition were approximately $0.2 million for the three months ended February
28, 1997.  There were no operating revenues related to facilities designated
for disposition for this period.

        Property and equipment held for sale, that 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.  One of the three closed freestanding
facilities included in property and equipment held for sale as of February 28,
1997 was sold during the fourth quarter.  There were no transactions affecting
the carrying value of current and non-current property and equipment held for
sale for the three months ended February 28, 1997.


                                       9
<PAGE>   10
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               FEBRUARY 28, 1997
                                  (Unaudited)


NOTE 6--INCOME TAXES

         On July 20, 1995, the Company filed its Federal income tax return for
fiscal 1995.  On August 4, 1995, the Company filed Form 1139 "Corporate
Application for Tentative Refund" to carry back losses under Section 172(f)
requesting a refund to the Company in the amount of $9.4 million.  On August
30, 1995, the Company also filed amended Federal tax returns for several prior
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.  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 in Section 172(f) requesting a refund to the Company in the
amount of $5.5 million.  The Company has requested refunds totalling $22.6
million as follows: $7.7 million for amended prior years' returns, $9.4
million for fiscal year 1995, and $5.5 million for fiscal year 1996.  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 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 third quarter of fiscal 1996.  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 third quarter of fiscal
1997.  Receipt of the 1995 and 1996 Federal tax refunds does not imply IRS
approval.  Due to the lack of legal precedent regarding Section 172(f), the
unbenefitted amounts from fiscal 1995 and 1996 of $7.0 million and $5.1
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 $1.9 million and $1.1 million
relating to the fiscal 1995 and 1996 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
1995 and fiscal 1996 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 7--COMMITMENTS AND CONTINGENCIES

         On October 30, 1992, the Company filed a complaint in the United
States District Court for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare") seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4:92CV002194 CAS).  The Company sought damages for the lost
benefit of certain stockholder appreciation rights in an amount in excess of
$3.6 million and punitive damages.  On March 8, 1995, the jury returned its
verdict awarding the Company $2,681,250 in damages, plus interest and the costs
of the action against RehabCare for securities fraud and for breach of
contract.  RehabCare posted a bond in the amount of $3.0 million and filed a
motion for new trial or in the alternative, for judgment as a matter of law,
which the court denied in its entirety on August 4, 1995.  On September 1,
1995, RehabCare filed a notice of appeal with the District Court indicating its
intent to appeal the matter to the United States Court of Appeals.  On October
22, 1996, the U.S. Court of Appeals for the Eighth Circuit reversed the
judgment in favor of the Company and against RehabCare entered by the District
Court following the jury's verdict in favor of the Company.  On November 5,
1996, the Company filed a Petition for Rehearing with the Eighth Circuit.  Any
effect from the outcome of this lawsuit will not have a material adverse impact
on the Company's results of operations.

         The Company entered into a Stock Purchase Agreement on April 30, 1996
to purchase the outstanding stock of HMS (see Note 4--"Acquisitions and
Dispositions").  The Stock Purchase Agreement was subject to certain escrow


                                       10
<PAGE>   11
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               FEBRUARY 28, 1997
                                  (Unaudited)


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, against the Company claiming, among other things,
interference with the contract between Emerald and HMS and seeking unspecified
damages and other relief.  Discovery has been initiated by all parties and the
Company believes it has good and meritorious defenses and that HMS has
meritorious claims in its arbitration.  In November 1996, Emerald moved the
court for summary judgment.  The hearing on such motion has been adjourned and
the Company's response is pending.  The Company believes that it has claims
arising from this transaction against the accountants and legal counsel of HMS
as well as HMS's lending bank.  On October 1, 1996, the Company filed a claim
of malpractice against the legal counsel of HMS.  These claims are presently
being investigated and have not as yet been quantified.  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 Sellers of HMS with the American Arbitration Association in Orange County,
California seeking, among other things, damages from the Sellers 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.  The
Sellers have not interposed their answers to the arbitration, and the
arbitration is therefore in its formative stages.  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
criteria 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 recent 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 a liability that is not
covered by insurance. Management believes that the outcome of such lawsuits
will not have a material adverse impact on the Company's financial statements.

NOTE 8--SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

         During fiscal 1997, the Company purchased all of the capital stock of
HMS.  In conjunction with this acquisition, the assets acquired and liabilities
assumed were as follows (in thousands):

Fair value of assets acquired  . . . . . . . . . . . . . . . .    $   356
Purchased goodwill . . . . . . . . . . . . . . . . . . . . . .      1,000
Liabilities assumed  . . . . . . . . . . . . . . . . . . . . .     (1,236)
Issuance of Common Stock . . . . . . . . . . . . . . . . . . .       (120)
                                                                  ------- 
                                                                  $    --
                                                                  =======

NOTE 9--RESTRUCTURING CHARGES

         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.  Many of the
Company's inpatient freestanding facilities


                                       11
<PAGE>   12
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               FEBRUARY 28, 1997
                                  (Unaudited)


have been sold or are in the process of being closed or sold as management
continues to implement plans for expanding the Company's managed care and
behavioral medicine contract management operations.  During fiscal 1996, the
Company established an additional restructuring reserve of $0.1 million for
severance and other cash outlays related to the planned facility closure and
disposition which occurred during the first quarter of fiscal 1997.  In
addition, in July 1996, the Company closed the administrative offices of
Comprehensive Care Integration located in San Ramon, California.  Closure of
this office and several non-performing contract units was part of the planned
restructuring of these operations.  The impact of this restructuring was
approximately $0.2 million and was recorded during the first quarter of fiscal
1997.  The following table sets forth the activity to the restructuring reserve
during the third quarter of fiscal 1997:

<TABLE>
<CAPTION>
                                                        CHARGES
                                    NOVEMBER 30,   -----------------                FEBRUARY 28,
                                       1996        INCOME    EXPENSE     PAYMENTS       1997
                                    ------------   ------    -------     --------   ------------
                                                     (Amounts in thousands)
                                                                           
 <S>                                  <C>           <C>       <C>          <C>        <C>              
 Restructuring Reserve:
 --------------------- 
 Severance  . . . . . . . . . . . . .  $ 87         $ --      $ --         $(10)       $ 77
 Operations/corporate relocation. . .   325           --        --          (69)        256
                                       ----         ----      ----         ----        ----
                                       $412         $ --      $ --         $(79)       $333
                                       ====         ====      ====         ====        ====

</TABLE>

NOTE 10--STOCKHOLDERS' EQUITY

         On January 15, 1997, the Company exchanged its $2.0 million Secured
Convertible Note into 40,000 shares of newly designated Series A Non-Voting 4%
Cumulative Convertible Preferred Stock (the "Preferred Stock").  In addition,
the holder of the Note was also issued an additional 1,260 shares of Preferred
Stock in lieu of approximately $63,000 of accrued interest.

         In February 1997, Physician Corporation of America ("PCA") exercised
an option to exchange 135 shares of Series A Non-Voting 4% Cumulative
Convertible Preferred Stock of Comprehensive Behavioral into 100,000 shares of
the Company's Common Stock (see Note 4--"Acquisitions and Dispositions").

         In September 1995, the Board of Directors granted and issued to its
President and Chief Executive Officer, 100,000 restricted shares of its Common
Stock, $0.01 par value (the "Restricted Shares").  Such grant of Restricted
Shares was issued from the Company's 1995 Incentive Plan and was ratified by
the stockholders at the 1995 Annual Meeting.  The Restricted Shares are subject
to vesting at the rate of 5,000 shares per fiscal year (the "Annual Vested
Shares") over a 20-year period.  The vesting of the Restricted Shares is
subject to acceleration upon the occurrence of certain events of acceleration
as described below.  With respect to all Restricted Shares which may become
vested, the Company is to pay to the Chief Executive Officer a bonus equivalent
to the amount of the combined federal and applicable state and city income
taxes associated with the Restricted Shares that have become vested.  While the
Restricted Shares have been issued and the Chief Executive Officer is entitled
to vote said shares, all Restricted Shares are held in escrow until their
vesting and said shares may not be sold, assigned, transferred or hypothecated
until the time they have become vested.

         In addition to the vesting of the Annual Vested Shares, an additional
number of Restricted Shares vest as follows: (i) for each fiscal year of the
Company, 1,000 additional Restricted Shares vest for each $1,000,000 of net
pre-tax profit of the Company as reported for that fiscal year; (ii) in the
event the Company effects a merger, acquisition, corporate combination or
purchase of assets (an "Acquisition Event") 1,000 additional Restricted Shares
vest for each $1,000,000 of Acquisition Event value paid for the Company; and
(iii) as of May 31st of each year, for each 1% of increase of market value of
the Company's voting securities above 110% of the market value as of May 31st
of the preceding year, 1,000 additional Restricted Shares vest.


                                       12
<PAGE>   13
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               FEBRUARY 28, 1997
                                  (Unaudited)


         In addition, upon the occurrence of (a) the approval by the
stockholders of the Company of an Approved Transaction, as defined; (b) a
Control Purchase, as defined; (c) a Board change; or (d) the failure by the
Company to renew the Chief Executive Officer's Employment Agreement on the
conclusion of its term on December 31, 1998, or any subsequent or renewed term,
on terms identical to those in the Employment Agreement then prevailing, all
Restricted Shares become vested.  Upon the death or total disability of the
Chief Executive Officer prior to the complete vesting of the Restricted Shares,
all Restricted Shares not theretofore vested shall become vested.

         The grant has been accounted for as an increase in Common Stock and as
additional paid-in capital at the fair value of the shares at the date of grant
(modified periodically to reflect current valuations offset by an equal charge
to equity (recorded as an Unvested Common Stock Grant).  The Company accounts
for the annual grant utilizing the estimated fair value on the date of vesting
(May 31st).  In addition, estimated bonus payments for income taxes as provided
by the Agreement are accrued in accordance with the vesting schedule.

         During the third quarter of fiscal 1997, the Company determined that
certain conditions for acceleration were achieved, and that it was probable
that such conditions would also be present on May 31, 1997.  Based on increases
in the fair market value of the Company's Common Stock, the Company has
provided for compensation expenses for the acceleration of approximately 43,000
Restricted Shares; estimated to be earned in the fiscal year ended May 31,
1997; this calculation will be adjusted periodically to reflect current
valuations.  In addition, the estimated bonus payments for income taxes as
provided by the Agreement also have been accrued during the third quarter of
fiscal 1997.  Included in the results for the nine months ended February 28,
1997 are compensation expenses related to the Chief Executive Officer's Annual
Grant and acceleration of Restricted Shares of $55,000 and $0.5 million,
respectively.  Compensation expenses related to the reimbursement of income
taxes to the Chief Executive Officer related to the Annual Grant and
acceleration of Restricted Shares were $27,000 and $0.2 million, respectively,
for the nine months ended February 28, 1997.

         The Company entered into an Employment Agreement effective January 1,
1997, with its Chief Operating Officer.  In conjunction with this Employment
Agreement, the Company granted its Chief Operating Officer options to purchase
120,000 shares of the Company's Common Stock from the Company's 1995 Incentive
Plan.  The vesting of 100,000 options is subject to certain performance-related
criteria relating to quarterly revenues from operations and net earnings before
taxes.  If the Chief Operating Officer is terminated for cause or resigns
without Good Reason (as defined), any unvested options would be forfeited.  As
consideration for entering into the Employment Agreement, the Chief Operating
Officer has agreed not to disclose confidential information and not to compete
with the Company for a one-year period following termination.  In addition, in
the event of a Transaction (as defined), all stock options granted shall
immediately vest.

         During the third quarter of fiscal 1997, the Company recognized
$17,500 in compensation expense related to the vesting of options for the Chief
Operating Officer which were not performance-related.  The Company determined
that the performance-related criteria had not been met by the Chief Operating
Officer as of February 28, 1997 and, as a result no compensation expense
related to the vesting of such options for the Chief Operating Officer was
recognized during the third quarter of fiscal 1997.  The Company continues to
evaluate the performance-related criteria and in the event that conditions for
achievement of such performance-related criteria appear to be present and are
probable to be present for the quarter ended May 31, 1997, the Company will
recognize the applicable compensation expense related to the vesting of options
for the Chief Operating Officer.  Such compensation expense will utilize the
estimated fair market value on the date of evaluation.

NOTE 11--EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE

         On April 3, 1997, the Company sold its freestanding facility located
in Jacksonville Beach, Florida.


                                       13
<PAGE>   14
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

         This Quarterly Report on Form 10-Q contains or may contain 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 certain remaining facilities on
acceptable terms, (ii) expanding the behavioral medicine managed care and
contract management portions of the Company's business, (iii) securing and
retaining certain refunds from the IRS and recovering monetary damages from
adverse parties in pending legal proceedings, (iv) the ability to obtain and
perform risk-based capitation contracts at profitable levels, (v) maintaining
the listing of the Company's Common Stock on the New York Stock Exchange, Inc.,
(vi) obtaining additional equity capital to fund losses from operations and to
expand the Company's principal behavioral healthcare business, as to which no
assurance can be given that such additional equity may be obtained on terms
favorable to the Company, and (vii) the impact and consideration of other
business, economic or other considerations discussed below.

         The forward-looking statements included herein are based on current
assumptions including that competitive conditions within the healthcare
industry will not change materially or adversely, that the Company will retain
existing key management personnel, that the Company's forecasts will accurately
anticipate market demand for its services, 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.

General

         In response to continuing changes in the behavioral healthcare
industry, the Company has made significant changes in its operations, including
the divestiture of many freestanding facilities, so that the Company can focus
on its network solutions related to managed care and behavioral medicine
contract management operations.  During fiscal 1996 and 1997, managed care
operations experienced significant growth through internal development and the
expansion into new managed care behavioral health markets and products.  The
following table sets forth operating revenues of the Company's managed care,
behavioral medicine contracts and hospital operations for the selected periods:

<TABLE>
<CAPTION>
                                                       Three months ended                  
                                              -----------------------------------
                                              February 28,  May 31,  February 29,
                                                  1997       1996        1996      
                                              ------------  -------  ------------
<S>                                           <C>           <C>      <C>
Managed care  . . . . . . . . . . . . . . . .     79%         56%         56%
Corporate services  . . . . . . . . . . . . .      2           1           1
Behavioral medicine contract  . . . . . . . .      6          17          16
Freestanding operations   . . . . . . . . . .     13          26          27
                                                 ---         ---         ---
                                                 100%        100%        100%
                                                 ===         ===         === 

</TABLE>

        As a result of the Company's continued negative results from
operations, the Company has had difficulty generating sufficient cash flows
from operations to meet its obligations and sustain its operations.  During the
third quarter of fiscal 1997, the Company has utilized the proceeds from income
tax refunds and available cash on hand to fund its working capital deficit, as
well as the restructuring of the Company's 7 1/2% Convertible Subordinated
Debentures (see Note 2 to the Company's Condensed Consolidated Financial
Statements included herein).


                                       14
<PAGE>   15
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.  The restructuring of the
Company's financial obligations represented by the Company's 7 1/2%
Convertible Subordinated Debentures (the "Debentures") occurred during the
third quarter of fiscal 1997 (see Note 2 to the Company's Condensed
Consolidated Financial Statements included herein).

           During fiscal 1996, the Company recorded $0.1 million in
restructuring charges related to the Company's  planned closure and disposition
of its freestanding facility in Cincinnati, Ohio which occurred during the
first quarter of fiscal 1997.  The components of this charge are predominately
severance payments to hospital employees.  Closure of this facility is
consistent with the Company's global restructuring plans and will eliminate the
funding of operating losses and cash flow deficits required by this facility.

        In addition, in July 1996, the Company closed the administrative
offices of Comprehensive Care Integration located in San Ramon, California.
Closure of this office and several non-performing contract units was part of
the planned restructuring of these operations.  The impact of this
restructuring was approximately $0.2 million and was recorded during the first
quarter of fiscal 1997.  The following table sets forth the activity to the
restructuring reserve during the third quarter of fiscal 1997:

<TABLE>
<CAPTION>
                                                       CHARGES
                                  NOVEMBER 30,    -----------------                 FEBRUARY 28,          
                                      1996        INCOME    EXPENSE     PAYMENTS       1997
                                  ------------    ------    -------     --------    ------------
                                                    (Amounts in thousands)
<S>                                   <C>          <C>       <C>         <C>        <C>
Restructuring Reserve:
--------------------- 
Severance  . . . . . . . . . . .      $ 87         $ --      $ --        $(10)          $ 77
Operations/corporate relocation        325           --        --         (69)           256
                                      ----         ----      ----          --             --
                                      $412         $ --      $ --        $(79)          $333
                                      ====         ====      ====        ====           ====
</TABLE>

         In August 1996, the Company sold its non-operating freestanding
facility in Costa Mesa, California which had been closed in November 1995 due
to poor performance.  The Company utilized the proceeds received from the sale
to reduce secured debt and fund working capital.  One of the three remaining
non-operating freestanding facilities is under contract to be sold and closed
escrow during the fourth quarter of fiscal 1997.

         During the third quarter of fiscal 1997, the Company restructured its
obligations under the Debentures, and cured the default due to the Company's
failure to make scheduled payments of interest.  On November 14, 1996, the
Company commenced a Consent Solicitation pursuant to a proxy statement
addressed to its Debentureholders.  The Company simultaneously initiated the
Debenture Exchange Offer to exchange cash and Common Stock of the Company for
its Debentures.  As a result of the completion of the Debenture Exchange Offer
on December 30, 1996, the Company's debt obligations have been reduced by
$6,846,000.  The remaining $2,692,000 of the Company's debt obligations
represented by untendered Debentures is reflected in long term debt.

         During the third quarter of fiscal 1997, the Company also exchanged
its $2.0 million Secured Conditional Note into Preferred Stock, and exchanged a
minority interest in one of its subsidiaries into 100,000 shares of the
Company's Common Stock.  These transactions and the Debenture Exchange Offer
significantly reduced the Company's debt obligations and improved equity.


                                       15
<PAGE>   16
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                    Nine months ended            
                                      ------------------------------------------------- -------------------------
                                      February 28, November 30, August 31, February 29, February 28, February 29,
                                          1997         1996        1996        1996         1997         1996  
                                      ------------ ------------ ---------- ------------ ------------ ------------
<S>                                   <C>          <C>          <C>        <C>          <C>          <C>
MANAGED CARE OPERATIONS:
   Covered lives . . . . . . . . . .   1,531,215    1,331,155   1,147,664    907,578      1,531,215     907,578


PATIENT DAYS:
   Freestanding facilities . . . . .       1,470        1,591       1,516      1,747          4,577       7,558
   Behavioral medicine contracts . .       1,281        2,256       2,986      2,986          6,451      12,903

FREESTANDING FACILITIES:
   Occupancy rate. . . . . . . . . .          43%          47%         29%        23%            38%         15%
   Admissions. . . . . . . . . . . .         301          301         312        375            914       1,301
   Average length of stay (days) . .           5            5           5          5              5           6

BEHAVIORAL MEDICINE CONTRACTS:
   Avg. occupied beds per contract .           3            5           5          4              4           5
                                                                                                          
   Admissions. . . . . . . . . . . .         334          358         464        458          1,156       1,812
   Average length of stay (days) . .           4            6           6          7              6           7

TOTAL BEDS AVAILABLE AT END OF PERIOD:
   Freestanding facilities . . . . .          38           38          58         88             45          88
   Behavioral medicine contracts . .          55           55          82        102             55         102
</TABLE>

NINE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO NINE MONTHS ENDED 
FEBRUARY 29, 1996

         The Company reported a pretax loss of approximately $4.2 million for
the nine months ended February 28, 1997 which was comparable to the pretax loss
of $4.3 million reported for the same period for fiscal 1996, an improvement of
$0.1 million.  Included in the results for fiscal 1996 is a gain of $1.0
million related to the sale of an operating facility in October 1995, a
non-operating gain of $0.9 million and a credit of $0.4 million related to a
settlement with the Company's fidelity bond carrier.  Included in the results
for fiscal 1997 are a restructuring charge of $0.2 million, a legal settlement
of $0.3 million, and $0.8 million in compensation expense related to the
probable vesting of restricted common shares granted to the Chief Executive
Officer  (see Note 10 to the Company's Condensed Consolidated Financial
Statements included herein).  Exclusive of these non-recurring items, the
pretax loss for the nine months ended February 28, 1997 was $2.9 million
compared to the pretax loss of $6.6 million for the same period a year ago.

         Included in the nine months ended February 28, 1997 is an extraordinary
gain of $2.2 million.  This gain is related to the Company's Debenture Exchange
Offer which closed on December 30, 1996 (see Note 2 to the Company's Condensed
Consolidated Financial Statements included herein).  As a result, the Company
reported a net loss of $1.7 million or $0.56 loss per share for the nine months
ended February 28, 1997 versus a net loss of $1.8 million or $0.67 loss per
share for the same period a year ago.

         Operating revenues increased by 17% or $4.2 million for the nine months
ended February 28, 1997 compared to the nine months ended February 29, 1996.
The increase in operating revenues is primarily attributable to an increase in
managed care operations which was offset by a decline in freestanding
operations.  Direct healthcare expenses increased by 15% or $3.2 million as
compared to the same period a year ago.  This increase is attributable to a
decrease in direct healthcare expenses for hospital operations which was offset
by an increase in direct healthcare expenses for managed care operations.
General and administrative expenses for the nine months ended February 28, 1997
increased $0.3 million from the nine months ended February 29, 1996.  General
and administrative expenses for the nine months ended February 29, 1996 include
$0.5 million related to the Company's fiscal 1995 Federal tax refund.  General
and administrative expenses for the nine months ended February 28, 1997 includes
an increase in managed care operations offset by decreases in contract
operations and  corporate general and administrative expenses (which included
$0.1 million for fees paid related to the Company's fiscal 1996 Federal tax
refund).  Also included in general and administrative expenses for fiscal 1997
is $0.8 million in compensation expense related to the probable vesting of
restricted common shares granted to the Chief Executive Officer (see Note 10 to
the Company's Condensed Consolidated Financial Statements included herein).
Exclusive of these charges, general and administrative expenses decreased $0.1
million for the nine months ended February 28, 1997 as compared to the same
period a year ago.  The


                                       16
<PAGE>   17
provision for doubtful accounts declined $0.7 million or 80% for the nine
months ended February 28, 1997 as compared to the same period a year ago and is
attributable to the decline in hospital operations.  Depreciation expense
decreased $0.5 million or 47% as compared to the same period a year ago, which
is primarily due to the closure and or sale of freestanding hospitals.  In
addition, interest expense decreased by $0.4 million or 36% for the nine months
ended February 28, 1997 compared to the nine months ended February 29, 1996.

Managed Care Operations

         The number of covered lives increased to 1,531,215 or by 69% as of
February 28, 1997 compared to 907,578 for the same period a year ago.  Covered
lives for contracts existing at February 29, 1996 increased by 297,000 lives or
33%.  In addition, new contracts implemented after February 29, 1996
contributed an additional 370,000 lives representing 59% of the growth in
covered lives through February 28, 1997.  The majority of growth in covered
lives is predominately related to new contracts implemented in Florida, Puerto
Rico and Texas.  During fiscal 1997, managed care operations added
approximately 236,000 lives under Administrative Service Organization ("ASO")
contracts.  Under an ASO contract, the Company provides overall care management
services; however, the Company is not at risk.  The Company has commenced the
review of its current "carve-out" contracts and may amend or revise the terms
of such contracts, or cancel any unprofitable contracts, to ensure the ability
to obtain and perform risk-based capitation contracts at profitable levels.

         Operating revenues increased by $8.3 million to $19.5 million for the
nine months ended February 28, 1997 compared to the nine months ended February
29, 1996.  Direct healthcare expenses also increased for the nine months ended
February 28, 1997 by $7.8 million compared to the same period a year ago.  In
addition, general and administrative expenses increased by $0.8 million for the
nine months ended February 28, 1997.  Included in general and administrative
expenses for the nine months ended February 28, 1997 is $0.6 million in
non-recurring legal expenses. As a result, the net operating loss for managed
care operations for the nine months ended February 28, 1997 was $1.2 million,
an increase of $0.7 million from the same nine month period for fiscal 1996.

Behavioral Medicine Contracts

         CCI operating revenues decreased by $0.4 million for the nine months
ended February 28, 1997 or 10% from the same period of fiscal 1996 and direct
healthcare expenses decreased $0.9 million or 23% for the same period.  General
and administrative expenses decreased $0.4 million to $0.5 million, compared to
the same fiscal period a year ago.  In addition, a restructuring charge of $0.2
million was recorded in the nine months ended February 28, 1997.  The net result
of these items was a net operating loss of $0.7 million compared to the loss
for the same period a year ago of $1.9 million, an improvement of 61%.  Patient
days of service for behavioral medicine contracts for the nine months ended
February 28, 1997 declined by approximately 50% from 12,903 patient days to
6,451 patient days for the same period a year ago.  The decline in patient days
is a result of the planned closure of 13 behavioral health contracts during
fiscal 1997 (see Note 9 to the Company's Condensed Consolidated Financial
Statements included herein).

         Units which were operational for both the nine months ended February
28, 1997 and February 29, 1996, experienced a 15% decrease in utilization to
4,420 patient days.  Average net revenue per patient day at these units
increased by 26% from the previous period resulting in an increase in overall
net inpatient operating revenues of 8% to $0.8 million.  Net outpatient
revenues for programs operational for both periods at these units increased 15%
from approximately $236,000 for the nine months ended February 29, 1996 to
approximately $271,000 for the nine months ended February 28, 1997.  Although
utilization decreased overall, net revenue increased due to changes in payor
mix.

         The following table sets forth utilization data on a "same store"
basis:

<TABLE>
<CAPTION>
                                                      Same Store Utilization  
                                                   ----------------------------
                                                    Nine Months    Nine Months
                                                        Ended         Ended
                                                   Feb. 28, 1997  Feb. 29, 1996
                                                   -------------  -------------
<S>                                                <C>            <C>
Admissions . . . . . . . . . . . . . . . . . . . .     1,038          993
Average length of stay . . . . . . . . . . . . . .         4            5
Patient days . . . . . . . . . . . . . . . . . . .     4,420        5,170
Average occupancy rate . . . . . . . . . . . . . .        26%          34%
</TABLE>


                                       17
<PAGE>   18
         For units operational for both periods, direct healthcare expenses
decreased slightly and, when combined with the 10% increase in operating
revenues, resulted in operating income at the unit level increasing by 94% or
$0.1 million for the nine months ended February 28, 1997 compared to the nine
months ended February 29, 1996.  This increase is due predominately to an
increase in the utilization for the partial hospitalization program.

Freestanding Operations

         The Company currently operates one freestanding hospital in Aurora,
Colorado.  This facility offers both inpatient, partial/day treatment and
outpatient services.  For the same period in fiscal 1996, the Company also
operated a freestanding facility in Cincinnati, Ohio.  This facility closed
operations in August, 1996 due to poor performance and continued operating
losses.  Two other freestanding hospitals were closed during the second and
third quarters of fiscal 1996.  Therefore, the overall results of freestanding
operations declined predominately due to the closure of these three facilities.

         Operating revenues decreased by $3.8 million or 46% for the nine
months ended February 28, 1997 compared to the nine months ended February 29,
1996.  In addition to the closure of a freestanding facility during the first
quarter of fiscal 1997, the Company sold one non- operating facility.  Direct
healthcare expenses declined 51% or $4.4 million in the nine months ended
February 28, 1997.  The provision for doubtful accounts declined by $0.7
million.  The decrease in operating revenues combined with the decline in
expenses resulted in a net operating loss from hospital operations for the nine
months ended February 28, 1997 of $0.5 million, and improvement of 76% or $1.7
million from the nine months ended February 29, 1996.  Admissions for the nine
months ended February 28, 1997 decreased to 914 from 1,301 for the same period
of fiscal 1996 as a result of the closure of several facilities.  The following
table sets forth quarterly utilization data for the remaining freestanding
facility ("continuing operations"):

                                                    Nine Months    Nine Months
                                                        Ended         Ended
                                                   Feb. 28, 1997  Feb. 29, 1996
                                                   -------------  -------------
Admissions . . . . . . . . . . . . . . . . . . . .      914             537
Average length of stay . . . . . . . . . . . . . .        5               5
Patient days . . . . . . . . . . . . . . . . . . .    4,577           2,742

         Net revenue per patient day for continuing operations decreased to
$965 for the nine months ended February 28, 1997 from $1,542 for the nine
months ended February 29, 1996.  Admissions for continuing operations increased
for the period from 537 in the nine months ended February 29, 1996 to 914 for
the nine months ended February 28, 1997.  The increase in admissions combined
with no change in length of stay, and an increase in outpatient revenues,
resulted in an increase in net operating revenues for the nine months ended
February 28, 1997 of $0.2 million as compared to the same period for fiscal
1996.  Direct healthcare expenses at the Company's freestanding facility
increased $0.5 million as a result of the 67% increase in patient days to
4,577, and bad debt expense decreased $0.2 million for the nine months ended
February 28, 1997 compared to the same period for fiscal 1996.  Therefore, net
operating income decreased $84,000 for the nine months ended February 28, 1997
compared to the nine months ended February 29, 1996.

         The following table illustrates revenues in partial/day treatment and
outpatient programs offered by continuing operations:

<TABLE>
<CAPTION>
                                                      Net Outpatient/Daycare Revenues
                                                      -------------------------------
                                                       Nine Months       Nine Months
                                                          Ended             Ended
                                                      Feb. 28, 1997     Feb. 29, 1996
                                                      -------------     -------------
                                                          (Dollars in thousands)
<S>                                                   <C>               <C>
Facilities offering . . . . . . . . . . . . . . . . .         1              1
Net outpatient/daycare revenues . . . . . . . . . . .    $3,594         $2,944
% of total "same store" net operating revenues  . . .        78%            75%
</TABLE>

        The Company believes that the increasing role of HMO's, reduced
benefits from employers and indemnity companies, and a shift to outpatient
programs continue to impact utilization.  The Company continues to focus its


                                       18
<PAGE>   19
efforts toward providing effective, lower cost outpatient, partial
hospitalization and daycare programs, the establishment of relationships and
contracts with managed care and other organizations which pay for or broker
such services.

THREE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THREE MONTHS ENDED 
FEBRUARY 29, 1996

         The Company reported a loss before extraordinary item and taxes of
$1.1 million for the third quarter of fiscal 1997, which was comparable to the
pretax loss reported for the third quarter of fiscal 1996.  Included in
revenues for the third quarter of fiscal 1996 is a gain of $1.0 million related
to the sale of an operating facility in October 1995.  Included in general and
administrative expenses for the third quarter of fiscal 1997 is a charge of
$0.8 million in compensation expenses related to the probable vesting of
restricted common shares granted to the Chief Executive Officer (see Note 10 to
the Company's Condensed Consolidated Financial Statements included herein).
Included in the results for the third quarter of fiscal 1996 is a non-operating
gain of $0.9 million.  Exclusive of these items, the Company's loss before
extraordinary item and taxes for the third quarter of fiscal 1997 was $0.3
million as compared to a pretax loss of $2.1 million for the third quarter of
fiscal 1996.

         Included in the results for the third quarter of fiscal 1997 is an
extraordinary gain of $2.2 million.  This gain is related to the Debenture
Exchange Offer which closed on December 30, 1996 (see Note 2 to the Company's
Condensed Consolidated Financial Statements included herein).  As a result, the
Company reported net income of $1.1 million or $0.34 earnings per share for the 
quarter ended February 28, 1997 versus a net loss of $1.2 million or $0.44 
loss per share for the quarter ended February 29, 1996.

         Operating revenues for the third quarter of fiscal 1997 increased by
$1.9 million or 24% from the third quarter of fiscal 1996.  The third quarter
of fiscal 1997 reflects an increase in managed care operating revenues of $3.2
million or 77% as compared to the third quarter of fiscal 1996.  This increase
in managed care operating revenues was offset by the decline in operating
revenues from freestanding facilities due to the closure of a freestanding
facility during the first quarter of fiscal 1997, and the closure of two
behavioral health contracts during the second quarter of fiscal 1997.

         Direct healthcare expenses increased by approximately $1.4 million or
21% from the third quarter of fiscal 1996 compared to the third quarter of
fiscal 1997.  The increase in direct healthcare expenses is primarily
attributable to an increase in direct healthcare expenses related to managed
care operations which was partially offset by a decline in direct healthcare
expenses for freestanding operations.  General and administrative expenses
increased by approximately $0.2 million from the third quarter of fiscal 1996
primarily as a result of an increase in corporate overhead expenses.  The third
quarter of fiscal 1997 includes $0.8 million in compensation expense related to
the probable vesting of restricted common shares granted to the Chief
Executive Officer (see Note 10 to the Company's Condensed Consolidated
Financial Statements included herein).  Exclusive of this charge, general and
administrative expenses for the quarter ended February 28, 1997, decreased by
$0.6 million from the third quarter of fiscal 1996.  The provision for doubtful
accounts decreased by $0.3 million during the third quarter of fiscal 1997
compared to the same period for fiscal 1996 as a result of the significant
decline in freestanding operations and the recovery of bad debt related to
behavioral medicine contracts.

Managed Care Operations

         The following table reflects covered lives by major product provided:

                                 February 28,     November 30,   February 29,
                                    1997             1996           1996      
                                 ------------     ------------   ------------
Carve-out (capitated)  . . . . .  1,232,068        1,184,324       815,230
Blended products . . . . . . . .      4,632            4,585         4,230
EAP services . . . . . . . . . .     66,998           66,343        81,677
ASO services . . . . . . . . . .    227,517           75,903         6,411
                                  ---------        ---------       -------
    Total covered lives  . . . .  1,531,215        1,331,155       907,548
                                  =========        =========       =======

         At February 28, 1997, the number of covered lives increased to
1,531,215 from 907,578 a year ago or by 68%.  This increase is primarily
attributable to new contracts added during the period in South Florida, Puerto
Rico and Texas.


                                       19
<PAGE>   20
         In the third quarter of fiscal 1997, operating revenues increased by
$3.2 million compared to the third quarter of fiscal 1996.  Direct healthcare
expenses also increased by $3.0 million in the third quarter of fiscal 1997
compared to the same period a year ago.  In addition, general and
administrative expenses increased by $0.1 million in the third quarter of
fiscal 1997 as compared to the third quarter of fiscal 1996.  Included in the
results for the third quarter of fiscal 1997 are $0.4 million in legal fees
related to litigation.  As a result, the net operating income for managed care
operations for the third quarter of fiscal 1997 was approximately $0.1 million
which was comparable to the same quarter a year ago.

Behavioral Medicine Contracts

         In the third quarter of fiscal 1997, due primarily to the planned
closure of 13 programs during fiscal 1997, Comprehensive Care Integration
operating revenues decreased by $0.6 million or by 50% from the third quarter
of fiscal 1996, while direct healthcare expenses decreased 66%.  In addition,
general and administrative expenses decreased $0.3 million or 80% in the third
quarter of fiscal 1997 compared to the third quarter of fiscal 1996.  The
provision for doubtful accounts declined by $0.2 million during the third
quarter of fiscal 1997 as compared to the same period a year ago due to the
recovery of bad debt written off in a prior period.  The decrease in operating
revenues during the third quarter of fiscal 1997 combined with the decrease in
expenses resulted in a net operating income of approximately $0.1 million, an
improvement of $1.0 million as compared to the same period for fiscal 1996.

         During the third quarter of fiscal 1997, CCI closed two contract
units.  These units were closed due to poor performance or were at the end of
the term of their contract.  As a result, during the third quarter of fiscal
1997, patient days of service for behavioral medicine contracts declined by
approximately 57% from 2,986 patient days to 1,281 patient days as compared to
the same period a year ago.

         Units which were operational for both the third quarter of fiscal 1997
and 1996 experienced a 17% decline in utilization to 1,281 patient days.
Average net revenue per patient day at these units increased by 68% from the
same quarter a year ago resulting in an increase in overall net inpatient
operating revenues of 39% to $0.3 million.  Net outpatient revenues for
programs operational for both quarters at these units increased 31% from
approximately $0.3 million in the third quarter of fiscal 1996 to approximately
$0.4 million in the third quarter of fiscal 1997.  The increase in net
outpatient revenues is predominately a result of an increase in utilization of
partial hospitalization programs.

         The following table sets forth quarterly utilization data on a "same
store" basis:

                                                      Same Store Utilization  
                                                     -------------------------
                                                     Fiscal 1997   Fiscal 1996
                                                     3rd Quarter   3rd Quarter
                                                     -----------   -----------
Admissions . . . . . . . . . . . . . . . . . . . . .     334           310
Average length of stay . . . . . . . . . . . . . . .       4             5
Patient days . . . . . . . . . . . . . . . . . . . .   1,281         1,547
Average occupancy rate . . . . . . . . . . . . . . .      26%           32%

         For units which were operational for the third quarters of fiscal 1997
and 1996, direct healthcare expenses decreased 12%, which was offset by a 31%
increase in operating revenues.  This resulted in an increase in operating
income of $0.1 million.

Freestanding Operations

         Operating revenues for freestanding operations decreased by $0.7
million or by 36% during the third quarter of fiscal 1997 compared to the third
quarter of fiscal 1996.  In addition, direct healthcare expenses declined 38%
or $0.8 million in the third quarter of fiscal 1997 and general and
administrative expenses declined by $0.1 million.  The decrease in operating
revenues when combined with the significant decrease in direct healthcare
expenses, resulted in an improvement in hospital operations net operating loss
for the third quarter of fiscal 1997 of $0.8 million to $0.2 million as
compared to the loss of $1.0 million reported for the same quarter a year ago.


                                       20
<PAGE>   21
         Admissions in the third quarter of fiscal 1997 decreased to 301 from
375 in the third quarter of fiscal 1996, an overall decline of 20%.  This
decline is primarily due to the closure of an operating freestanding facility
during the first quarter of fiscal 1997.

         The following table sets forth selected quarterly utilization data for
continuing operations:

                                                       Fiscal 1997   Fiscal 1996
                                                       3rd Quarter   3rd Quarter
                                                       -----------   -----------
Admissions . . . . . . . . . . . . . . . . . . . . .         301           251
Average length of stay . . . . . . . . . . . . . . .           5             5
Patient days . . . . . . . . . . . . . . . . . . . .       1,470         1,231


        Net revenue per patient day for continuing operations decreased to $782
for the third quarter of fiscal 1997 from $1,239 for the third quarter of
fiscal 1996.  Admissions increased for the quarter from 251 in the third
quarter of fiscal 1996 to 301 in the third quarter of fiscal 1997.  Patient
days increased from 1,231 in the third quarter of fiscal 1996 to 1,470 in the
third quarter of fiscal 1997.  The increase in admissions combined with an
increase in patient days was offset by an increase in Medicare contractual
allowances resulting in a decrease in net operating revenues for the third
quarter of fiscal 1997 of $0.4 million.

        The following table illustrates revenues in outpatient and day care
programs (including partial hospitalization programs) offered by continuing
operations:

                                                Net Outpatient/Daycare Revenues
                                                -------------------------------
                                                  Fiscal 1997     Fiscal 1996
                                                  3rd Quarter     3rd Quarter
                                                --------------   --------------
                                                      (Dollars in thousands)
Facilities offering . . . . . . . . . . . . . .        1                 1
Net outpatient/daycare revenues . . . . . . . .     $778            $1,164
% of total "same store" net operating 
    revenues. . . . . . . . . . . . . . . . . .       60%               76%

        Direct healthcare expenses at the Company's freestanding facility
decreased $0.1 million and bad debt expense decreased $0.1 million in the third
quarter of fiscal 1997 from the third quarter of fiscal 1996.  As a result, net
operating income decreased $0.2 million in the third quarter of fiscal 1997
from the same period a year ago.

LIQUIDITY AND CAPITAL RESOURCES

         During the nine months ended February 28, 1997, the Company provided
$1.8 million from its operating activities, provided $0.1 million from its
investing activities and utilized $2.6 million in its financing activities.
The Company reported net income of $1.1 million for the quarter ended February
28, 1997, versus a net loss of $1.2 million for the quarter ended February 29,
1996.  As a result, the Company has an accumulated deficit of $52.4 million and
total stockholders' deficit of $2.5 million as of February 28, 1997.
Additionally, the Company's current assets at February 28, 1997 amounted to
approximately $10.1 million and current liabilities were approximately $24.8
million, resulting in a working capital deficiency of approximately $14.8
million and a negative current ratio of 1:2.5.  Included in current liabilities
is $12.1 million of unbenefitted tax refunds received (see Note 6--"Income
Taxes").  Exclusive of this amount, the Company's working capital deficiency is
$2.6 million resulting in a negative current ratio of 1:1.3.  The Company's
primary use of available cash resources is to expand its behavioral medicine
managed care and contract management businesses and fund operations while it
seeks to dispose of certain of its freestanding facilities.

         Included in operating activities for the first nine months of fiscal
1997 is an increase in notes and other receivables of $0.7 million and
unbenefitted tax refunds received of $5.1 million.  The increase in other
receivables and unbenefitted tax refunds received is related to the Company's
1996 Federal income tax refund (see Note 6 to the Company's Condensed
Consolidated Financial Statements included herein).  Also included in operating
activities for the first nine months of fiscal 1997 is an increase in accounts
payable and accrued liabilities of $1.1 million.  This represents an increase
of accounts payable and accrued expenses of $2.8 which was offset by a decrease
in accrued


                                       21
<PAGE>   22
interest and expenses of $1.7 million, paid as a result of the Debenture
Exchange Offer (see Note 2 to the Condensed Consolidated Financial Statements
included herein).  Included in the increase in accounts payable and accrued
expenses is $0.8 million related to compensation expense for the probable
vesting of restricted common shares granted to the Chief Executive Officer (see
Note 10 to the Company's Condensed Consolidated Financial Statements included
herein). Also included in operating activities is the gain on the Debenture 
Exchange of $2.2 million.  

         Included in the Company's investing activities for the first nine
months of fiscal 1997 are the proceeds from the sale of property and equipment
of $0.4 million which was partially offset by the additions to property and
equipment of $0.3 million.  These proceeds are related to the sale of the
Company's freestanding facility in Costa Mesa, California in August 1996.

         Included in the cash flows from financing activities for the nine
months of fiscal 1997 is repayment of debt in the amount of $5.4 million of
which $0.7 million is primarily related to debt secured by the Company's
freestanding facility which was sold in August 1996 and $4.7 million is related
to the Debenture Exchange Offer.  Also included in financing activities are the
proceeds from the issuance of the Company's Common Stock of $2.8 million. These
issuances are related to the exercise of employee stock options in the amount
of $0.9 million and issuance of Common Stock in connection with the Debenture
Exchange Offer of $1.9 million (see Note 2 to the Condensed Consolidated
Financial Statements included herein).  The cumulative effect of the above
resulted in an ending cash position for the Company on February 28, 1997 of
$3.8 million, a decrease of $0.7 million from May 31, 1996.

         During fiscal 1997, the Company acquired HMS.  In conjunction with this
acquisition, the Company acquired assets and assumed liabilities.  For a
supplemental schedule of the noncash investing and financing activities related
to this acquisition, see Note 8 to the Company's Condensed Consolidated
Financial Statements included herein.

         Current assets as of February 28, 1997 increased by $0.1 million as
compared to May 31, 1996.  This immaterial increase is predominately related to
an increase in other receivables which was partially offset by a decrease in
cash and cash equivalents.  Non-current property and equipment held for sale
declined by $2.2 million and non-current notes receivable increased by $1.7
million.  These changes are related to the sale of the Company's non-operating
facility in Costa Mesa, California, which occurred in the first quarter of
fiscal 1997.  The increase in other assets as of February 28, 1997 is related
to the goodwill recorded in conjunction with the acquisition of HMS and other
receivables of $1.7 million related to the Company's 1996 Federal tax refund.

         Current liabilities as of February 28, 1997 decreased $5.3 million as
compared to May 31, 1996.  This decrease is primarily a result of an increase
in accounts payable and accrued liabilities of $1.6 million and unbenefitted
tax refunds received of $5.1 million which was offset by the decreases in
long-term debt due to the Debenture Exchange Offer which provided for curing of
the default and exchange of $6.8 million of Debentures (see Note 2 to the
Condensed Consolidated Financial Statements included herein). In October 1996,
the Company received a refund of $5.4 million related to its 1996 Federal tax
return (see Note 6 to the Company's Condensed Consolidated Financial Statements
included herein).  In addition, during the third quarter, the Company exchanged
its $2.0 million Secured Convertible Note into Preferred Stock, and exchanged a
minority interest in one of its subsidiaries into 100,000 shares of Common
Stock (see Note 4 to the Company's Condensed Consolidated Financial Statements
included herein).

          Included in current and non-current assets are three hospital
facilities designated as property and equipment held for sale with a total
carrying value of $5.9 million.  In previous years, the Company was obligated
to support and fund certain poorly performing freestanding facilities that now
have been closed, including two such facilities closed in fiscal 1996 and
another in fiscal 1997 (see Note 5 to the Company's Condensed Consolidated
Financial Statements included herein).  As a result, the Company will no longer
be burdened with the negative cash flow requirements associated with such
facilities.

         During the third quarter of 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.  During
the third quarter of fiscal 1997, the Company also exchanged its $2.0 million
Secured Convertible Note into Series A Non-Voting 4% Cumulative Convertible
Preferred Stock.  This exchange further reduces the Company's future debt
obligations.  The Company also exchanged a minority interest in one of its
subsidiaries into 100,000 shares of its Common Stock (see Note 4 to the
Company's Condensed Consolidated Financial Statements included herein).  As a
result of the above transactions, current liabilities were reduced by $13.5
million, non-current liabilities were increased by $1.6 million, and
stockholders' equity was improved by $5.3 million.  These transactions also
reduced the Company's future cash obligations with the significant reduction in
debt and interest expense.


                                       22
<PAGE>   23
        Based upon current levels of operation and cash on hand of $3.8 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 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 or the inability to conclude pending
contract proposals may adversely affect the adequacy of such working capital.
Such anticipated cash resources to fund additional operating needs include:

        o    The Company has received a firm commitment from a mutual fund to
             purchase in a private placement at least $5.0 million of 15% fully
             secured Company notes due no earlier than April 1998 if offered by
             the Company.

        o    The Company filed its fiscal 1995 Federal tax return, and a Form
             1139 "Corporate Application for Tentative Refund" in the amount of
             $9.4 million.  The Company received the full refund claim for
             fiscal 1995 in October 1995.  In September 1996, the Company filed
             its fiscal 1996 Federal tax return and also filed a Form 1139.
             The Company received a refund in the amount of $5.4 million during
             the third quarter of fiscal 1997.  The Company has also filed
             amended Federal tax returns for prior years to claim refunds for
             an additional $7.7 million.  These refund claims have been made
             under Section 172(f) of the Internal Revenue Code, an area of the
             tax law without significant precedent, and there may be
             substantial opposition by the IRS to the Company's refund claims.
             The Company is currently under audit by the IRS regarding its 1995
             and 1996 Federal tax returns and the amended returns for prior
             years.  Accordingly, no assurances can be made as to the Company's
             entitlement to such refunds or the timing of the receipt thereof
             (see Note 6 to the Company's Condensed Consolidated Financial
             Statements included herein).

        o    Included in property and equipment held for sale is one hospital
             facility currently under contract to be sold.  The sale of this
             facility closed during the fourth quarter of fiscal 1997.  The
             proceeds from the sale were $1.2 million.

        o    Included in assets held for sale (non-current) are two hospital
             facilities designated as property and equipment held for sale with
             a total carrying value of $4.7 million.  The Company expects to
             sell these facilities during the next six months.

        All of these potential sources of additional cash in fiscal 1997 are
subject to variation due to business and economic influences outside the
Company's control.  There can be no assurance that during fiscal 1997 the
Company will complete the transactions required to fund its working capital
deficit.

RISK FACTORS

IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

        This Quarterly Report on Form 10-Q includes forward-looking statements,
the realization of which may be impacted by certain important factors discussed
under "Item 2--Management's Discussions and Analysis of Financial Conditions."

HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY; FAILURE TO MEET NEW YORK STOCK EXCHANGE LISTING CRITERIA

        As of February 28, 1997, the Company had a stockholders' deficiency of
$2.5 million, a working capital deficiency of approximately $14.8 million and a
negative current ratio of 1:2.5.  The net loss from operations for the nine
months ended February 28, 1997 was $3.5 million.

        There can be no assurance that the Company will be able to achieve
profitability and maintain positive cash flows from operations or that
profitability and positive cash flow from operations can be sustained on an
ongoing basis.  Moreover, if achieved, the level of that profitability or that
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.


                                       23
<PAGE>   24
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN

        The Company's independent auditors have included an explanatory
paragraph in their report 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

        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 $4.5 million of default
interest and/or payment in exchange for surrender of Debentures which resulted
in a depletion of the Company's cash resources (see Note 2 to the Company's
Condensed Consolidated Financial Statements included herein).

        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 1995 and 1996 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.

DISPOSITION OF ASSETS

        The Company has been required to dispose of various properties in order
to raise working capital, and no assurance can be made that such dispositions
will not have adverse effects on the Company's financial condition or that the
Company has additional assets that could be disposed of or utilized as
collateral in order to fund its capital requirements.

TAXES

        The Company has received tax refunds of approximately $9.4 million and
$5.4 million from the carry back of specified losses for fiscal 1995 and 1996,
respectively, as defined in Section 172(f) of the Internal Revenue Code.
Receipt of the 1995 and 1996 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, $1.9 million and $1.1 million
contingency fees were paid to Deloitte & Touche, LLP from the refund proceeds
for fiscal 1995 and 1996, respectively.  Section 172(f) is an area of the tax
law without significant 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.

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


                                       24
<PAGE>   25
and services.  As a result of reimbursement changes and competitive pressures,
the contractual obligations of the Company have been subject to intense
evaluation.

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.

SHARES ELIGIBLE FOR FUTURE SALE

        The Company has issued or committed to issue approximately 150,000
shares available for future issuances related to business transactions; debt
convertible or exchangeable into approximately 344,000 shares; and options or
other rights to purchase approximately 1,133,000 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 Future Funding: 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.  The Company has determined, based upon inquiry made to the NYSE,
that a "short position" has existed with respect to the Company's Common Stock.
This "short position" has varied from time to time and the Company has been
advised that the net of "short position" as of March 31, 1997 was approximately
797,000 shares.  The Company cannot predict the effect, if any, that such
"short position" may have on either the market or prices for the Company's
Common Stock.

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 (see "Description of Securities").  The Company's
Restated Certificate of Incorporation also provides for a classified board of
directors, with directors divided 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.


                                       25
<PAGE>   26
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 1996
would be non-deductible.


                                       26
<PAGE>   27
PART II. -- OTHER INFORMATION

ITEM 1. -- LEGAL PROCEEDINGS

        On October 30, 1992, the Company filed a complaint in the United States
District Court for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare") seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4:92CV002194 CAS).  The Company sought damages for the lost
benefit of certain stockholder appreciation rights in an amount in excess of
$3.6 million and punitive damages.  On March 8, 1995, the jury returned its
verdict awarding the Company $2,681,250 in damages, plus interest and the costs
of the action against RehabCare for securities fraud and for breach of
contract.  RehabCare posted a bond in the amount of $3.0 million and filed a
motion for new trial or in the alternative, for judgment as a matter of law,
which the court denied in its entirety on August 4, 1995.  On September 1,
1995, RehabCare filed a notice of appeal with the District Court indicating its
intent to appeal the matter to the United States Court of Appeals.  On October
22, 1996, the U.S. Court of Appeals for the Eighth Circuit reversed the
judgment in favor of the Company and against RehabCare entered by the District
Court following the jury's verdict in favor of the Company.  On November 5,
1996, the Company filed a Petition for Rehearing with the Eighth Circuit.  Any
effect from the outcome of this lawsuit will not have a material adverse impact
on the Company's results of operations.

        The Company entered into a Stock Purchase Agreement on April 30, 1996
to purchase the outstanding stock of HMS (see Note 4 to the Company's Condensed
Consolidated Financial Statements included herein).  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, against the
Company claiming, among other things, interference with the contract between
Emerald and HMS and seeking unspecified damages and other relief.  Discovery
has been initiated by all parties and the Company believes it has good and
meritorious defenses and that HMS has meritorious claims in its arbitration.
In November 1996, Emerald moved the court for summary judgment.  The hearing on
such motion has been adjourned and the Company's response is pending.  The
Company believes that it has claims arising from this transaction against the
accountants and legal counsel of HMS as well as HMS's lending bank.  On October
1, 1996, the Company filed a claim of malpractice against the legal counsel of
HMS.  These claims are presently being investigated and have not as yet been
quantified.  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
Sellers of HMS with the American Arbitration Association in Orange County,
California seeking, among other things, damages from the Sellers 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.  The
Sellers have not interposed their answers to the arbitration, and the
arbitration is therefore in its formative stages.  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.

OTHER LITIGATION

        In October 1994, the NYSE notified the Company that it was below
certain quantitative and qualitative listing criteria 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 recent 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 a liability that is not
covered by insurance.  Management believes that the outcome of such lawsuits
will not have a material adverse impact on the Company's financial statements.


                                       27
<PAGE>   28
ITEM 3. -- DEFAULTS UPON SENIOR SECURITIES

        See the discussion contained in Note 2 to the Company's Condensed
Consolidated Financial Statements included herein for a discussion of the
Company's default in the payment of interest on its 7 1/2% Convertible
Subordinated Debentures, the acceleration thereof, and the affirmative consents
of Debentureholders which waived such default and acceleration.

        In October 1994, the New York Stock Exchange, Inc. notified the Company
that it was below certain quantitative and qualitative listing criteria 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 recent 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.

ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        The results of the Company's Annual Shareholders' Meeting were reported
in the Company's Report on Form 8-K dated December 10, 1996.

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

   (a)  Exhibits

        10.72   Employment Agreement effective January 1, 1997, between the
                Company and Stuart J. Ghertner, Ph.D. (filed herewith).

        10.73   Letter Agreement dated April 4, 1997 between the Company and
                Chriss W. Street (filed herewith).

        27      Financial Data Schedules (filed herewith).

   (b)  Reports on Form 8-K

        1)  The Company filed a current report on Form 8-K dated December 10,
            1996, to report under Item 5, the results of its Annual Meeting of
            Stockholders which included the election of a Class II Director.

        2)  The Company filed a current report on Form 8-K dated December 23,
            1996, to report under Item 5 that the Company had elected to extend
            the expiration date of its Debenture Exchange Offer from 2:00 p.m.
            (Central Time) on December 23, 1996 to 2:00 p.m. (Central Time) on
            December 30, 1996.

        3)  The Company filed an amended report to Form 8-K dated December 30,
            1996 to report under Item 5 the completion of the Debenture
            Exchange Offer on December 30, 1996 at 2:00 p.m. (Central) and the
            final results of such exchange offer and consent solicitation.

        4)  The Company filed a current report on Form 8-K dated January 30,
            1997, under Item 5, to report the exchange of the Company's $2.0
            million Secured Convertible Note into newly designated Series A
            Non-Voting 4% Cumulative Convertible Preferred Stock.


                                       28
<PAGE>   29
                                    SIGNATURE


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


                                       COMPREHENSIVE CARE CORPORATION





April 10, 1997                         By  /s/ CHRISS W. STREET
                                           -------------------------------------
                                           Chriss W. Street
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)





April 10, 1997                         By  /s/ KERRI RUPPERT
                                           ------------------------------------
                                           Kerri Ruppert
                                           Senior Vice President and 
                                           Chief Financial Officer
                                           (Principal Financial Officer)
                                           (Principal Accounting Officer)


                                       29