##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[X]   |  | Quarterly report pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934  
|     
|      |  | For the period ended August 31, 2001.                                                   
|     
|[   ] |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|     
|      |  | For the transition period from _______ to _______                                       
|     
|      |  | Commission File Number 1-9927                                                           

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

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

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

(813) 288-4808

---

(Registrants telephone number, including area code)


Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [   ]

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

|                                       |  |                                 |           | 
|-------------------------------------- |  | ------------------------------- | --------- | 
|Classes                                |  | Outstanding at October 10, 2001
|                                       |  |                                
|Common Stock, par value $.01 per share |  |                                 | 3,867,303 | 



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TABLE OF CONTENTS



|                                |                                                                                                |                                       |  |  |  |  |  | 
|------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------- |  |  |  |  |  | 
|PART I.  FINANCIAL INFORMATION
|                                | ITEM 1  CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                |                                                                                                | Consolidated Balance Sheets          
|                                |                                                                                                | Consolidated Statements of Operations
|                                |                                                                                                | Consolidated Statements of Cash Flows
|                                | Notes to Consolidated Financial Statements                                                    
|                                | Item 2  Managements discussion and analysis of financial condition and Results of operations
|PART II  OTHER INFORMATION    
|                                | Item 1  LEGAL PROCEEDINGS                                                                    
|                                | Item 6  Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                      



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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Index

|                               |                                            |                                                                                                |                                                                                           |  |       |      | 
|------------------------------ | ------------------------------------------ | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- |  | ----- | ---- | 
|                               |                                            |                                                                                                |                                                                                           |  | Page 
|                               |                                            |                                                                                                |                                                                                           |  |      
|PART I  FINANCIAL INFORMATION |                                            |                                                                                                |                                                                                           | 
|                              
|                               | ITEM 1  CONSOLIDATED FINANCIAL STATEMENTS |                                                                                                |                                                                                           |  |      
|                              
|                               |                                            |                                                                                                | Consolidated Balance Sheets,
August 31, 2001 and May 31, 2001                             |  |       | 3    | 
|                              
|                               |                                            |                                                                                                | Consolidated Statements of Operations for
the Three Months ended August 31, 2001 and 2000 |  |       | 4    | 
|                              
|                               |                                            |                                                                                                | Consolidated Statements of Cash Flows for
the Three Months ended August 31, 2001 and 2000 |  |       | 5    | 
|                              
|                               |                                            |                                                                                                | Notes to Consolidated Financial Statements                                                |  |       | 6-11 | 
|                              
|                               |                                            | ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |                                                                                           |  | 12-14 |     
|                              
|PART II  OTHER INFORMATION    |                                            |                                                                                                |                                                                                           | 
|                              
|                               |                                            | ITEM 1  LEGAL PROCEEDINGS                                                                     |                                                                                           |  | 14-15 |     
|                              
|                               |                                            | ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K                                                      |                                                                                           |  | 15    |     
|                              
|                               |                                            | SIGNATURES                                                                                     |                                                                                           |  | 16    |     

2



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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES




PART I  FINANCIAL INFORMATION




Item 1  Consolidated Financial Statements




Consolidated Balance Sheets

|                                              |                                                                                                             |   |                        |         |         |   |         |         |  
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | - | ---------------------- | ------- | ------- | - | ------- | ------- | -
|                                              |                                                                                                             |   | August 31,             |         | May 31,
|                                              |                                                                                                             |   | 2001                   |         | 2001   
|                                              |                                                                                                             |   |                        |         |        
|                                              |                                                                                                             |   | (unaudited)            |         |         |   |        
|                                              |                                                                                                             |   | (Amounts in thousands)
|Current assets:                               |                                                                                                             |   |                        |         |         |   |         |        
|                                             
|                                              | Cash and cash equivalents                                                                                   |   | $                      | 3,769   |         |   | $       | 2,891   |  
|                                             
|                                              | Restricted cash                                                                                             |   |                        | 49      |         |   |         | 48      |  
|                                             
|                                              | Accounts receivable, less allowance for doubtful accounts of $5 and
$11                                     |   |                        | 455     |         |   |         | 422     |  
|                                             
|                                              | Accounts receivable  managed care reinsurance contract                                                     |   |                        | 746     |         |   |         | 783     |  
|                                             
|                                              | Other receivable                                                                                            |   |                        | 2,548   |         |   |         | 2,548   |  
|                                             
|                                              | Other current assets                                                                                        |   |                        | 492     |         |   |         | 817     |  
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total current assets                          |                                                                                                             |   | 8,059                  |         |         |   | 7,509   |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|                                             
|Property and equipment, net                   |                                                                                                             |   | 464                    |         |         |   | 555     |        
|                                             
|Notes receivable                              |                                                                                                             |   | 163                    |         |         |   | 164     |        
|                                             
|Goodwill, net                                 |                                                                                                             |   | 991                    |         |         |   | 936     |        
|                                             
|Restricted cash                               |                                                                                                             |   | 577                    |         |         |   | 561     |        
|                                             
|Other assets                                  |                                                                                                             |   | 26                     |         |         |   | 29      |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total assets                                  |                                                                                                             | $ | 10,280                 |         |         | $ | 9,754   |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|LIABILITIES AND STOCKHOLDERS DEFICIT         |                                                                                                             |   |                        |         |         |   |         |        
|Current liabilities:                          |                                                                                                             |   |                        |         |         |   |         |        
|                                             
|                                              | Accounts payable and accrued liabilities                                                                    |   | $                      | 3,214   |         |   | $       | 3,302   |  
|                                             
|                                              | Accrued claims payable                                                                                      |   |                        | 2,949   |         |   |         | 3,071   |  
|                                             
|                                              | Accrued reinsurance claims payable                                                                          |   |                        | 1,435   |         |   |         | 783     |  
|                                             
|                                              | Unbenefitted tax refunds received                                                                           |   |                        | 12,092  |         |   |         | 12,092  |  
|                                             
|                                              | Income taxes payable                                                                                        |   |                        | 41      |         |   |         | 31      |  
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total current liabilities                     |                                                                                                             |   | 19,731                 |         |         |   | 19,279  |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Long-term liabilities:                        |                                                                                                             |   |                        |         |         |   |         |        
|                                             
|                                              | Long-term debt                                                                                              |   |                        | 2,244   |         |   |         | 2,244   |  
|                                             
|                                              | Other liabilities                                                                                           |   |                        | 3       |         |   |         | 9       |  
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total long-term liabilities                   |                                                                                                             |   | 2,247                  |         |         |   | 2,253   |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total liabilities                             |                                                                                                             |   | 21,978                 |         |         |   | 21,532  |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Commitments and Contingencies (Notes 4 and 7)
|Stockholders deficit:                        |                                                                                                             |   |                        |         |         |   |         |        
|                                             
|                                              | Preferred stock, $50.00 par value; authorized 60,000 shares; none
issued                                    |   |                        |        |         |   |         |        |  
|                                             
|                                              | Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,867,303 and 3,817,803 |   |                        | 39      |         |   |         | 38      |  
|                                             
|                                              | Additional paid-in-capital                                                                                  |   |                        | 51,838  |         |   |         | 51,813  |  
|                                             
|                                              | Accumulated deficit                                                                                         |   |                        | (63,575 | )       |   |         | (63,629 | )
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total stockholders deficit                   |                                                                                                             |   | (11,698                | )       |         |   | (11,778 | )      
|                                              |                                                                                                             |   |                        |         |         |   |         |        
|Total liabilities and stockholders deficit   |                                                                                                             | $ | 10,280                 |         |         | $ | 9,754   |        
|                                              |                                                                                                             |   |                        |         |         |   |         |        

See accompanying notes.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES




Consolidated Statements of Operations

(Unaudited)

|                                                                |                                                       |   |                        |       |      |   |        |       |  
|--------------------------------------------------------------- | ----------------------------------------------------- | - | ---------------------- | ----- | ---- | - | ------ | ----- | -
|                                                                |                                                       |   | Three Months Ended    
|                                                                |                                                       |   | August 31,            
|                                                                |                                                       |   |                       
|                                                                |                                                       |   | 2001                   |       | 2000
|                                                                |                                                       |   |                        |       |     
|                                                                |                                                       |   | (Amounts in thousands,
|                                                                |                                                       |   | except per share data)
|                                                               
|Operating revenues                                              |                                                       | $ | 6,126                  |       |      | $ | 3,739  |      
|                                                               
|Costs and expenses:                                             |                                                       |   |                        |       |      |   |        |      
|                                                               
|                                                                | Healthcare operating expenses                         |   |                        | 5,210 |      |   |        | 3,217 |  
|                                                               
|                                                                | General and administrative expenses                   |   |                        | 826   |      |   |        | 952   |  
|                                                               
|                                                                | Recovery of doubtful accounts                         |   |                        | (14   | )    |   |        | (15   | )
|                                                               
|                                                                | Depreciation and amortization                         |   |                        | 101   |      |   |        | 172   |  
|                                                                |                                                       |   |                        |       |      |   |        |      
|                                                                |                                                       |   | 6,123                  |       |      |   | 4,326  |      
|                                                                |                                                       |   |                        |       |      |   |        |      
|Operating income (loss) before items shown below                |                                                       |   | 3                      |       |      |   | (587   | )    
|                                                               
|Other income (expense):                                         |                                                       |   |                        |       |      |   |        |      
|                                                               
|                                                                | Non-operating income                                  |   |                        | 15    |      |   |        |      |  
|                                                               
|                                                                | Loss in connection with prepayment of note receivable |   |                        |      |      |   |        | (496  | )
|                                                               
|                                                                | Interest income                                       |   |                        | 33    |      |   |        | 50    |  
|                                                               
|                                                                | Interest expense                                      |   |                        | (45   | )    |   |        | (76   | )
|                                                                |                                                       |   |                        |       |      |   |        |      
|Income (loss) before income taxes                               |                                                       |   | 6                      |       |      |   | (1,109 | )    
|                                                               
|Income tax expense                                              |                                                       |   | 7                      |       |      |   | 1      |      
|                                                                |                                                       |   |                        |       |      |   |        |      
|Loss before cumulative effect of change in accounting principle |                                                       |   | (1                     | )     |      |   | (1,110 | )    
|                                                               
|Cumulative effect of change in accounting principle             |                                                       |   | 55                     |       |      |   |       |      
|                                                                |                                                       |   |                        |       |      |   |        |      
|Net income (loss) attributable to common stockholders           |                                                       | $ | 54                     |       |      | $ | (1,110 | )    
|                                                                |                                                       |   |                        |       |      |   |        |      
|                                                               
|Basic and diluted income (loss) per share:                      |                                                       |   |                        |       |      |   |        |      
|                                                               
|Loss before cumulative effect of change in accounting principle |                                                       | $ |                       |       |      | $ | (0.29  | )    
|                                                               
|Cumulative effect of change in accounting principle             |                                                       |   | 0.01                   |       |      |   |       |      
|                                                                |                                                       |   |                        |       |      |   |        |      
|Net income (loss)                                               |                                                       | $ | 0.01                   |       |      | $ | (0.29  | )    
|                                                                |                                                       |   |                        |       |      |   |        |      

See accompanying notes

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Consolidated Statements of Cash Flows

(Unaudited)

|                                                                                                   |                                                                      |   |                        |      |      |   |        |        |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | - | ---------------------- | ---- | ---- | - | ------ | ------ | -
|                                                                                                   |                                                                      |   | Three Months Ended    
|                                                                                                   |                                                                      |   | August 31,            
|                                                                                                   |                                                                      |   |                       
|                                                                                                   |                                                                      |   | 2001                   |      | 2000
|                                                                                                   |                                                                      |   |                        |      |     
|                                                                                                   |                                                                      |   | (Amounts in thousands)
|Cash flows from operating activities:                                                              |                                                                      |   |                        |      |      |   |        |       
|                                                                                                  
|Net income (loss)                                                                                  |                                                                      | $ | 54                     |      |      | $ | (1,110 | )     
|                                                                                                  
|Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                                      |   |                        |      |      |   |        |       
|                                                                                                  
|                                                                                                   | Depreciation and amortization                                        |   |                        | 101  |      |   |        | 172    |  
|                                                                                                  
|                                                                                                   | Cumulative effect of change in accounting principle                  |   |                        | (55  | )    |   |        |       |  
|                                                                                                  
|                                                                                                   | Compensation expense  stock options issued                          |   |                        |     |      |   |        | 6      |  
|                                                                                                  
|                                                                                                   | Loss in connection with prepayment of note receivable                |   |                        |     |      |   |        | 496    |  
|                                                                                                  
|Changes in assets and liabilities:                                                                 |                                                                      |   |                        |      |      |   |        |       
|                                                                                                  
|                                                                                                   | Accounts receivable                                                  |   |                        | (33  | )    |   |        | (73    | )
|                                                                                                  
|                                                                                                   | Accounts receivable  managed care reinsurance contract              |   |                        | 37   |      |   |        |       |  
|                                                                                                  
|                                                                                                   | Other current assets, restricted funds, and other non-current assets |   |                        | 311  |      |   |        | (376   | )
|                                                                                                  
|                                                                                                   | Accounts payable and accrued liabilities                             |   |                        | (64  | )    |   |        | (264   | )
|                                                                                                  
|                                                                                                   | Accrued claims payable                                               |   |                        | (122 | )    |   |        | 76     |  
|                                                                                                  
|                                                                                                   | Accrued reinsurance claims payable                                   |   |                        | 652  |      |   |        |       |  
|                                                                                                  
|                                                                                                   | Income taxes payable                                                 |   |                        | 10   |      |   |        | (11    | )
|                                                                                                  
|                                                                                                   | Other liabilities                                                    |   |                        | (6   | )    |   |        | (14    | )
|                                                                                                   |                                                                      |   |                        |      |      |   |        |       
|                                                                                                   | Net cash provided by (used in) operations                            |   |                        | 885  |      |   |        | (1,098 | )
|                                                                                                   |                                                                      |   |                        |      |      |   |        |       
|Cash flows from investing activities:                                                              |                                                                      |   |                        |      |      |   |        |       
|                                                                                                  
|                                                                                                   | Payments received on note receivable                                 |   |                        | 1    |      |   |        | 507    |  
|                                                                                                  
|                                                                                                   | Additions to property and equipment                                  |   |                        | (8   | )    |   |        | (6     | )
|                                                                                                   |                                                                      |   |                        |      |      |   |        |       
|                                                                                                   | Net cash provided by (used in) investing activities                  |   |                        | (7   | )    |   |        | 501    |  
|                                                                                                   |                                                                      |   |                        |      |      |   |        |       
|Net increase (decrease) in cash and cash equivalents                                               |                                                                      |   | 878                    |      |      |   | (597   | )     
|                                                                                                  
|Cash and cash equivalents at beginning of year                                                     |                                                                      |   | 2,891                  |      |      |   | 2,518  |       
|                                                                                                   |                                                                      |   |                        |      |      |   |        |       
|Cash and cash equivalents at end of period                                                         |                                                                      | $ | 3,769                  |      |      | $ | 1,921  |       
|                                                                                                   |                                                                      |   |                        |      |      |   |        |       

See accompanying notes

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

The consolidated balance sheet as of August 31, 2001, and the related
consolidated statements of operations and cash flows for the three months ended
August 31, 2001 and August 31, 2000 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 months ended August 31, 2001 are not necessarily indicative of the
results to be expected during the balance of the fiscal year.

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

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

The accrued claims payable liability represents the estimated ultimate net
amounts owed for all behavioral healthcare services provided through the
respective balance sheet dates. The unpaid claims liability is estimated using
an actuarial paid completion factor methodology and other statistical analyses.
These estimates are subject to the effects of trends in utilization and other
factors. Although considerable variability is inherent in such estimates,
management believes that the unpaid claims liability is adequate. The
estimates are continually reviewed and adjusted as experience develops or new
information becomes known with adjustments included in current operations.

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

Note 2  Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations and No. 142,
Goodwill and Other Intangible Assets, which establishes new standards for the
treatment of goodwill and other intangible assets. SFAS 142 is effective for
fiscal years beginning after December 31, 2001 and permits early adoption for
companies with a fiscal year beginning after March 15, 2001. SFAS 142
prescribes that amortization of goodwill will cease as of the adoption date.
The Company has elected to adopt SFAS 142 effective June 1, 2001 and, as a
result, there has been no amortization expense recorded during Fiscal 2002 (see
Note 6). In accordance to SFAS 142, the Company will perform an impairment
test within six months of the adoption date, at least annually thereafter, and
whenever events and circumstances occur that might effect the carrying value of
these assets.

Note 3  Liquidity and Capital Resources

At August 31, 2001, the Company had unrestricted cash and cash equivalents
of $3.8 million. During the three months ended August 31, 2001, $0.9 million
was provided by the Companys operating activities. The Company reported net
income of approximately $0.1 million for the three months ended August 31,
2001, which includes approximately $0.1 million specific to the cumulative
effect of a change in accounting principle (see Note 6). This compares to a net
loss of $1.1 million for the three months ended August 31, 2000. The Company
has an accumulated deficit of $63.6 million and total stockholders deficit of
$11.7 million as of August 31, 2001. Additionally, the Companys current
assets at August 31, 2001 amounted to approximately $8.1 million and current
liabilities were approximately $19.7 million, resulting in a working capital
deficiency of approximately $11.7 million. The working capital deficiency
referred to above results primarily from a $12.1 million liability related to

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Federal income tax refunds received in prior years. The ultimate outcome of
the Internal Revenue Service audit whereby it is seeking recovery of the
refunds from the Company, including the amount to be repaid, if any, and the
timing thereof, is not determinable (see Note 7   Income Taxes).

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

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

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

Note 4  Major Customers/Contracts



|(1) |  | The Company had contracts with Humana Health Plans (Humana) under which
it provided services to members in Florida. Effective June 30, 2000,
Humana completed the sale of its North Florida Medicaid business to
HealthEase of Florida, Inc. Additionally, Humanas contracts with the
Company, which cover specific commercial, Medicaid and Medicare
populations of approximately 60,000 members in Florida terminated
September 30, 2000. Humana contracts accounted for $0.6 million, or
16.8%, of operating revenue for the quarter ended August 31, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective July 1, 2000, the Company entered into a contract with one HMO to
continue to provide behavioral healthcare services to approximately 100,000
of 160,000 Florida members that were managed by the Company under prior
contracts with Humana. The combined revenue from the contracts that were
transitioned from Humana, plus two additional contracts that the Company has
with this HMO, accounted for 15.7%, or $1.0 million, of the Companys
operating revenues during the quarter ended August 31, 2001 compared to
14.8%, or $0.6 million, for the quarter ended August 31, 2000.
Additionally, the Company has one major contract with an affiliate of this
HMO (see Item 2 below).



|(2) |  | During the fourth quarter of the fiscal year ended May 31, 2001, the
Company implemented one new contract to provide behavioral healthcare
services to Connecticut members under contract with one HMO. For the
quarter ended August 31, 2001, this contract represented approximately
15.6%, or $1.0 million, of the Companys operating revenue. Additionally,
this contract provides that the Company, through its contract with this
HMO, receives additional funds directly from a state reinsurance program.
During the quarter ended August 31, 2001, the Company filed reinsurance
claims totaling approximately $1.2 million. Such claims represent cost
reimbursements and, as such, are not included in the reported operating
revenues or healthcare operating expenses. As of August 31, 2001, the
Company has reported $0.7 million as a component of accounts receivable,
with $1.4 million reported as accrued reinsurance claims payable, in the
accompanying balance sheet. In the event that these reinsurance amounts
are not collected by the Company, the Company could remain liable to
perform services for the specific members that qualify for such
reimbursements. For non-reinsurance claims incurred but not reported under
this contract, the Company estimates its claims payable using a similar
method as that used for other existing contracts. As of August 31, 2001,
there was a limited amount of historical data available to the Company for
use in such estimates specific to this contract. Thus, actual results
could differ from the claims payable amount reported as of August 31,
2001. While the Company believes its estimate to be adequate, management
will review and make any necessary changes to its estimate as additional
data becomes available.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | The Company has two contracts with one HMO to provide behavioral
healthcare services to contracted members in Texas. These combined
contracts represented approximately 8.3%, or $0.5 million, and 13.4%, or
$0.5 million, of the Companys operating revenue for the quarter ended
August 31, 2001 and 2000, respectively. The Company renewed these
contracts for two years, with effective dates of February 8, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



|(4) |  | During the fiscal year ended May 31, 2001, the Company implemented five
new contracts to provide behavioral healthcare services to Florida members
under contracts with one HMO. These combined contracts represented
approximately 19.8%, or $1.2 million, and 10.5%, or $0.4 million, of the
Companys operating revenue for the quarter ended August 31, 2001 and
2000, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Note 5  Notes Receivable

In Fiscal 2001, the Company entered into a prepayment agreement and note
modification with Jefferson Hills Corporation (JHC) in connection with the
secured promissory note, which originated out of the sale in Fiscal 1999 of the
Companys Aurora, Colorado facility to JHC. The terms of the prepayment
agreement required JHC to immediately remit $500,000 to the Company as a
prepayment on the note. Additionally, the note was modified to reflect a
remaining balance due totaling $170,000 and to require JHC to make monthly
principal and interest payments until April 2006. One final principal payment
in the amount of approximately $146,000 will be due from JHC in April 2006. As
an inducement to JHC to make such prepayment, the Company credited JHC with an
aggregate of approximately $996,000. As a result, the Company recorded a
non-operating loss during the quarter ended August 31, 2000 of approximately
$496,000 in connection with this transaction.

Note 6  Goodwill

Effective June 1, 2001, the Company adopted, on a prospective basis, SFAS
142, Goodwill and Other Intangible Assets (see Note 2). As a result of the
early adoption of SFAS 142, no amortization expense was recorded during the
quarter ended August 31, 2001 compared to approximately $18,000 of amortization
expense recorded during the quarter ended August 31, 2000. SFAS 142 requires
the elimination of any unamortized deferred credits immediately upon adoption
of SFAS 142 and, as a result, the Company recognized $55,000 as the cumulative
effect of a change in accounting principle.

The following table presents net income (loss) and the earnings (loss) per
basic and diluted share on a pro forma basis, after eliminating Fiscal 2001
amortization expense, making Fiscal 2001 results comparable with Fiscal 2002
(in thousands, except per share amounts):

|                                                                         |  |                    |       |      |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------ | ----- | ---- |  | - | ------ | -
|                                                                         |  | Three Months Ended
|                                                                         |  | August 31,        
|                                                                         |  | 2001               |       | 2000
|                                                                         |  |                    |       |     
|Reported loss                                                            |  | $                  | (1    | )    |  | $ | (1,110 | )
|                                                                        
|Add back: Goodwill amortization                                          |  |                    |      |      |  |   | 18     |  
|                                                                         |  |                    |       |      |  |   |        |  
|Reported loss before cumulative effect of change in accounting principle |  |                    | (1    | )    |  |   | (1,092 | )
|                                                                        
|Cumulative effect of change in accounting principle                      |  |                    | 55    |      |  |   |       |  
|                                                                         |  |                    |       |      |  |   |        |  
|Net income (loss) attributable to common stockholders                    |  | $                  | 54    |      |  | $ | (1,092 | )
|                                                                         |  |                    |       |      |  |   |        |  
|Basic and diluted loss per share:                                        |  |                    |       |      |  |   |        |  
|                                                                        
|Reported loss                                                            |  | $                  |      |      |  | $ | (0.29  | )
|                                                                        
|Goodwill                                                                 |  |                    |      |      |  |   |       |  
|                                                                         |  |                    |       |      |  |   |        |  
|Reported loss before cumulative effect of change in accounting principle |  |                    |      |      |  |   | (0.29  | )
|                                                                        
|Cumulative effect of change in accounting principle                      |  |                    | 0.01  |      |  |   |       |  
|                                                                         |  |                    |       |      |  |   |        |  
|Net income (loss)                                                        |  | $                  | 0.01  |      |  | $ | (0.29  | )
|                                                                         |  |                    |       |      |  |   |        |  
|Weighted
Average Common Shares Outstanding - basic                       |  |                    | 3,834 |      |  |   | 3,818  |  
|                                                                         |  |                    |       |      |  |   |        |  
|Weighted
Average Common Shares Outstanding - diluted                     |  |                    | 3,989 |      |  |   | 3,818  |  
|                                                                         |  |                    |       |      |  |   |        |  

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Note 7  Income Taxes

The Companys provision for income taxes differs from the statutory rate
of 34% due, primarily, to the Companys increased valuation allowance for
losses generated during the three months ended August 31, 2000.

In connection with the filing of its Federal income tax returns for fiscal
year 1995 and 1996, the Company filed a tentative refund claim to carry back
losses described in Section 172(f) of the Internal Revenue Code (IRC),
requesting a refund of $9.4 million and $5.5 million, respectively, of which
refunds of $9.4 million and $5.4 million were received. In addition, the
Company also filed amended Federal income tax returns for fiscal years prior to
1995, requesting similar refunds for losses carried back under Section 172(f)
of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and
$0.4 million for 1982, a total of $7.7 million.

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

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

On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be
upheld the Company would be required to repay $12.4 million in refunds
previously received, plus accrued interest of approximately $7.1 million
through August 31, 2001. Accordingly, the Company would be entitled to a
repayment of the fees advanced to its tax advisor relating to these refunds of
approximately $2.5 million, which is reported as other receivable in the
accompanying balance sheets. This report commenced the administrative appeals
process. The Company filed a protest letter with the IRS on November 6, 1998.
The IRS reserves the right to assess and collect the tax previously refunded to
the Company at any time during the appeals process.

On July 11, 2000, the Company submitted an Offer in Compromise (the
Offer) to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. The IRS is currently
evaluating the Offer. A preliminary meeting with the IRS with respect to the
Offer took place in October 2000 and, subsequent to this meeting, the Company
has provided additional documents to the IRS. The Company has continued its
discussions with the IRS during the first quarter of Fiscal 2002 and expects
to continue such discussions during the second quarter of Fiscal 2002. There
can be no assurance that the IRS will accept the Offer.

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

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

|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------ | - | ---------------------- | --------- | ---- | - | ----- | ------ | -
|                                                                                                                                                 |                                                                                                              |   | Three Months Ended    
|                                                                                                                                                 |                                                                                                              |   | August 31,            
|                                                                                                                                                 |                                                                                                              |   |                       
|                                                                                                                                                 |                                                                                                              |   | 2001                   |           | 2000
|                                                                                                                                                 |                                                                                                              |   |                        |           |     
|                                                                                                                                                 |                                                                                                              |   | (Amounts in thousands,
|                                                                                                                                                 |                                                                                                              |   | except per share data)
|                                                                                                                                                 |                                                                                                              |   | (Unaudited)           
|Numerator:                                                                                                                                       |                                                                                                              |   |                        |           |      |   |       |       
|                                                                                                                                                
|                                                                                                                                                 | Loss before cumulative effect of change in accounting principle                                              |   | $                      | (1        | )    |   | $     | (1,110 | )
|                                                                                                                                                
|                                                                                                                                                 | Cumulative effect of change in accounting principle                                                          |   |                        | 55        |      |   |       |       |  
|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|Numerator for diluted earnings (loss) per share available to common
stockholders                                                                 |                                                                                                              | $ | 54                     |           |      | $ | 1,110 |       
|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|Denominator:                                                                                                                                     |                                                                                                              |   |                        |           |      |   |       |       
|                                                                                                                                                
|                                                                                                                                                 | Weighted average shares                                                                                      |   |                        | 3,834     |      |   |       | 3,818  |  
|                                                                                                                                                
|Effect of dilutive securities:                                                                                                                   |                                                                                                              |   |                        |           |      |   |       |       
|                                                                                                                                                
|                                                                                                                                                 | Employee stock options                                                                                       |   |                        | 155       |      |   |       |       |  
|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|                                                                                                                                                 | Denominator for diluted earnings (loss) per share-adjusted weighted
average
shares after assumed conversions |   |                        | 3,989     |      |   |       | 3,818  |  
|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|Basic earnings (loss) per share:                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|                                                                                                                                                
|Income (loss) before cumulative effect of change in accounting principle                                                                         |                                                                                                              | $ |                       |           |      | $ | (0.29 | )     
|                                                                                                                                                
|Cumulative effect of change in accounting principle                                                                                              |                                                                                                              |   | 0.01                   |           |      |   |      |       
|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|Net income (loss)                                                                                                                                |                                                                                                              | $ | 0.01                   |           |      | $ | (0.29 | )     
|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|Diluted earnings (loss) per share:                                                                                                               |                                                                                                              |   |                        |           |      |   |       |       
|                                                                                                                                                
|Income (loss) before cumulative effect of change in accounting principle                                                                         |                                                                                                              | $ |                       |           |      | $ | (0.29 | )     
|                                                                                                                                                
|Cumulative effect of change in accounting principle                                                                                              |                                                                                                              |   | 0.01                   |           |      |   |      |       
|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|Net income (loss)                                                                                                                                |                                                                                                              | $ | 0.01                   |           |      | $ | (0.29 | )     
|                                                                                                                                                 |                                                                                                              |   |                        |           |      |   |       |       
|Authorized shares of common stock reserved for possible issuance for
convertible debentures and stock options are as follows at August 31, 2001: |                                                                                                              |   |                        |           |      |   |       |       
|
|                                                                                                                                                
|                                                                                                                                                
|Outstanding stock options                                                                                                                        |                                                                                                              |   | 884,475                |          
|                                                                                                                                                
|Possible future issuance under stock option plans                                                                                                |                                                                                                              |   | 218,234                |          
|                                                                                                                                                 |                                                                                                              |   |                        |          
|                                                                                                                                                 | Total                                                                                                        |   |                        | 1,111,753 |     
|                                                                                                                                                 |                                                                                                              |   |                        |          

Note 9  Commitments and Contingencies



|(1) |  | During the fiscal year ended May 31, 2001, the Company implemented a
major contract for one new client requiring that the Company maintains a
$600,000 performance bond throughout the term of the contract. This bond,
which was issued in September 2001 with an effective date of April 1,
2001, is unsecured and is automatically renewable as long as the contract
remains in force.                                                                                                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | During the fiscal year ended May 31, 2000, the Company renewed one
contract, which included a requirement that the Company maintains a
$550,000 performance bond throughout the two-year renewal term of the
contract. This bond is secured by a $150,000 cash deposit, which is
included in the non-current, restricted cash balance at August 31, 2001
and May 31, 2001. The original term of the bond was for one year and the
bond is automatically renewable as long as the contract remains in force.
|   
|(3) |  | On February 19, 1999, the California Superior Court denied the Companys
Petition for Writ of Mandate of an adverse administrative appeal decision
regarding application of the Maximum Inpatient Reimbursement Limitation to
Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its
fiscal periods 1983                                                                                                                                                                                    

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | through 1986. This facility was owned by the Company until its disposal
in fiscal year 1991. The subject matter of the Superior Court action
involved the refusal of the administrative law judge to order further
reductions in the liability for costs associated with treating high cost,
long stay Medi-Cal patients, which are commonly referred to as
outliers. The Company does not plan to appeal the California Superior
Court decision for which the Notice of Entry of Judgment was entered on
February 26, 1999.                                                
|
| | During the year ended May 31, 2001, the Company lowered its estimate by
approximately $0.3 million specific to interest charges that were
previously accrued in connection with this liability. This change in
estimate was based on information provided to the Company by the
California Department of Health Services. As of May 31, 2001, the
Company has approximately $1.0 million accrued relating to this matter.                                                                                                                                                     
|
| | On March 29, 2001, the Company submitted an offer to the State of
California to resolve this liability at a substantially reduced amount.
On April 23, 2001, the Company received a letter, dated April 11, 2001,
from the State of California advising the company that its proposed
settlement offer was not accepted and, additionally, requesting payment
of approximately $0.8 million. The Company is contemplating a second
settlement offer. There can be no assurance that the State of California
will give consideration to such offer or agree to alternate terms.



|(4) |  | With respect to the contingency related to prior years income taxes, see
Note 7, Income Taxes.                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | The Company would remain liable to perform the services covered under
subcapitation agreements if the parties with which the Company
subcapitates were unable to fulfill their responsibilities under such
agreements.

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

Regulatory Monitoring and Compliance

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

The Company is subject to the requirements of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA). The purpose of the HIPAA
provisions is to improve the efficiency and effectiveness of the healthcare
system through standardization of the electronic data interchange of certain
administrative and financial transactions and, also, to protect the security
and privacy of transmitted information. Entities subject to HIPAA include all
healthcare providers and all healthcare plans. To meet the specific
requirements of HIPAA, the Company will incur costs to insure the adequacy and
security of its healthcare information system and communication networks.
Additionally, the Company may incur costs to implement the specific transaction
codes required by HIPAA for claims, payment, enrollment, eligibility, or to
become compliant with security and privacy rules, which may be more stringent
for providers of certain behavioral healthcare services. The expected
timetable to be compliant is currently October 2002 for transaction code
changes and April 2003 for compliance with the privacy rules. The Company is
currently evaluating its systems and policies that are impacted by HIPAA.
While these efforts will be ongoing, the Company expects to meet all compliance
rules and timetables with respect to the HIPAA regulations. Failure to do so
may result in penalties and have a material adverse effect on the Companys
ability to retain its customers or to gain new business.

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

This Quarterly Report on Form 10-Q includes forward-looking statements,
the realization of which may be impacted by certain important factors discussed
below under Risk Factors  Important Factors Related to Forward-Looking
Statements and Associated Risks (page 13).

General

Results of Operations

The following table summarizes the Companys financial data for the three
months ended August 31, 2001 and 2000 (in thousands):

The Three Months Ended August 31, 2001 Compared To The Three Months Ended August 31, 2000:

|                                |  |              |       |              |  |   |       |  
|------------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | -
|                                |  | Consolidated |       | Consolidated
|                                |  | Operations   |       | Operations  
|                                |  | Fiscal 2002  |       | Fiscal 2001 
|                                |  |              |       |             
|Operating revenues              |  | $            | 6,126 |              |  | $ | 3,739 |  
|                               
|                               
|Healthcare operating expenses   |  |              | 5,210 |              |  |   | 3,217 |  
|                               
|General/administrative expenses |  |              | 826   |              |  |   | 952   |  
|                               
|Other operating expenses        |  |              | 87    |              |  |   | 157   |  
|                                |  |              |       |              |  |   |       |  
|                                |  |              | 6,123 |              |  |   | 4,326 |  
|                                |  |              |       |              |  |   |       |  
|Operating income (loss)         |  | $            | 3     |              |  | $ | (587  | )
|                                |  |              |       |              |  |   |       |  

The Company reported operating income of $3,000 for the quarter ended
August 31, 2001. Additionally, operating revenues increased by $2.4 million,
or 63.8%, for the quarter ended August 31, 2001 compared to the quarter ended
August 31, 2000. This increase is attributable to two major contracts
implemented during Fiscal 2001 and significant growth in membership specific to
the Childrens Health Insurance Program in Texas.

Healthcare operating expenses increased by approximately $2.0 million, or
62.0%, for the quarter ended August 31, 2001 as compared to the quarter ended
August 31, 2000. This increase is directly attributable to revenue growth as
described above. Healthcare operating expense as a percentage of operating
revenue decreased slightly from 86.0% for the quarter ended August 31, 2000 to
85.0% for the quarter ended August 31, 2001.

General and administrative expenses decreased by approximately $0.1
million, or 13.2%, for the quarter ended August 31, 2001 as compared to the
quarter ended August 31, 2000. This decrease is attributable to the Companys
continuing efforts to reduce general and administrative costs. General and
administrative expense as a percentage of operating revenue decreased from
25.5% for the quarter ended August 31, 2000 to 13.5% for the quarter ended
August 31, 2001.

Other operating expenses decreased by $0.1 million for the quarter ended
August 31, 2001 compared to the quarter ended August 31, 2000. This decrease is
primarily attributable to a reduction in depreciation expense, which results
from assets being fully depreciated and, also, from decreases in capital
spending.

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Except for historical
information, the matters discussed that may be considered forward-looking
statements may be subject to certain risks and uncertainties that could cause
the actual results to differ materially from those projected, including
uncertainties in the market, pricing, competition, procurement efficiencies,
other matters discussed in this quarterly report on Form 10-Q, and other risks
detailed from time to time in the Companys SEC reports.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Risk Factors

Important Factors Related to Forward-Looking Statements and Associated Risks

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

Concentration of Risk

The Company currently has thirteen contracts with four HMOs to provide
behavioral healthcare services under commercial, Medicaid, and Medicare plans,
to contracted members in Connecticut, Florida and Texas. These combined
contracts represent approximately 59.3% and 38.7% of the Companys operating
revenue for the three months ended August 31, 2001 and 2000, respectively. The
terms of each contract are generally for one-year periods and are automatically
renewable for additional one-year periods unless terminated by either party.

Uncertainty of Future Profitability

As of August 31, 2001, the Company had stockholders deficit of $11.7
million and a working capital deficiency of approximately $11.7 million. The
Company reported net income for the three months ended August 31, 2001 of
approximately $0.1 million. There can be no assurance that the Company will be
able to sustain profitability or that the Company can maintain positive cash
flow on an ongoing basis. Present results of operations are not necessarily
indicative of anticipated future results of operations.

Need for Additional Funds; Uncertainty of Future Funding

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

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

Uncertainty of Pricing; Healthcare Reform and Related Matters

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

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

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Shares Eligible for Future Sale

The Company has issued or committed to issue 9,000 shares related to the
7 1/2% convertible subordinated debentures due April 15, 2010, and options or
other rights to purchase approximately 1,103,000 shares. The Company may
contemplate issuing additional amounts of debt, equity or convertible
securities in public or private transactions for use in fulfilling its future
capital needs (see Need for Additional Funds; Uncertainty of Future Funding).
Issuance of additional equity could adversely affect the trading price of 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 that could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. As of August 31, 2001, there are no outstanding
shares of Preferred Stock. The Companys Restated Certificate of Incorporation
also provides for a classified board of directors with directors divided into
three classes serving staggered terms. The Companys stock option plans
generally provide for the acceleration of vesting of options granted under such
plans in the event of certain transactions which result in a change of control
of the Company. Section 203 of the General Corporation Law of Delaware
prohibits the Company from engaging in certain business combinations with
interested stockholders. 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.

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.




PART II  OTHER INFORMATION




Item 1  LEGAL PROCEEDINGS



|(1) |  | On February 19, 1999, the California Superior Court denied the Companys
Petition for Writ of Mandate of an adverse administrative appeal decision
regarding application of the Maximum Inpatient Reimbursement Limitation
to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its
fiscal periods 1983 through 1986. The Company owned this facility until
its disposal in fiscal year 1991. The subject matter of the Superior
Court action involved the refusal of the administrative law judge to
order further reductions in the liability for costs associated with
treating high cost, long stay Medi-Cal patients, which are commonly
referred to as outliers. The Company does not plan to appeal the
California Superior Court decision for which the Notice of Entry of
Judgment was entered on February 26, 1999.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the quarter ended November 30, 2000, the Company lowered its
estimate by approximately $0.3 million specific to interest charges that
were previously accrued in connection with this liability. This change in
estimate was based on information provided to the Company by the California
Department of Health Services. As of August 31, 2001, the Company has
approximately $1.0 million accrued relating to this matter.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2001, the Company submitted an offer to the State of California to
resolve this liability at a substantially reduced amount. On April 23,
2001, the Company received a letter, dated April 11, 2001, from the State
of California advising the company that its proposed settlement offer was
not accepted and, additionally, requesting payment of approximately $0.8
million. The Company is contemplating a second settlement offer. There
can be no assurance that the Sate of California will give consideration to
such offer or agree to alternate terms.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



|(2) |  | In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed a tentative refund claim to
carry back losses described in Section 172(f) of the Internal Revenue
Code (IRC), requesting a refund to the Company of $9.4 million and $5.5
million, respectively, of which refunds of $9.4 million and $5.4 million
were received. In addition, the Company also filed amended Federal
income tax returns for fiscal years prior to 1995, requesting similar
refunds of losses carried back under Section 172(f) of $6.2 million for
1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for
1982, a total of $7.7 million.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During fiscal years 1997 and 1996, the Company recognized a portion of the
refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is
recorded as a deferred liability, Unbenefitted tax refunds received
pending resolution by the Internal Revenue Service (IRS) of the
appropriateness of the Section 172(f) carryback. The additional refunds
requested under Section 172(f) for prior years of $7.7 million have not
been received, nor has the Company recognized any tax benefit related to
these potential refunds.                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or
(2) a liability arising under a federal or state law or out of any tort if
the act giving rise to such liability occurs at least three years before
the beginning of the taxable year. The applicability of Section 172(f) to
the type of business in which the Company operates is unclear. No
assurance can be provided that the Company will be able to retain the
refunds received to date or that the additional refunds requested will be
received.                                                                                                                                                                                                                                                                                                                                                                                           
|
| | As a result of the Section 172(f) carryback claims filed by the Company,
and the tentative refunds received, the Company came under audit with
respect to the tax years previously mentioned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing
$12.4 million of the $14.8 million of refunds previously received, and the
additional refunds requested of $7.7 million. If the position of the IRS
were to be upheld, the Company would be required to repay $12.4 million in
refunds previously received, plus accrued interest of approximately $7.1
million through August 31, 2001. Accordingly, the Company would be
entitled to a repayment of the fees advanced to its tax advisor relating to
these refunds of approximately $2.5 million, which is reported as other
receivable in the accompanying balance sheets. This report commenced the
administrative appeals process. The Company filed a protest letter with
the IRS on November 6, 1998. The IRS reserves the right to assess and
collect the tax previously refunded to the Company at any time during the
appeals process.
|
| | On July 11, 2000, the Company submitted an Offer in Compromise (the
Offer) to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. The IRS is
currently evaluating the Offer. A preliminary meeting with the IRS with
respect to the Offer took place in October 2000 and, subsequent to this
meeting, the Company has provided additional documents to the IRS. The
Company has continued its discussions with the IRS during the first quarter
of Fiscal 2002 and expects to continue such discussions during the second
quarter of Fiscal 2002. There can be no assurance that the IRS will accept
the Offer.                                                                                                                                                                                                                                                                                                             

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




Item 6  Exhibits and Reports on Form 8-K

Reports on Form 8-K

None.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES




SIGNATURE

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

|                 |  |                                |  |     |  |                                       
|---------------- |  | ------------------------------ |  | --- |  | --------------------------------------
|                 |  | COMPREHENSIVE CARE CORPORATION
|                
|October 12, 2001 |  | by                             |  | /s/ |  | ROBERT J. LANDIS                      
|                 |  |                                |  |    
|                 |  |                                |  |     |  | Robert J. Landis                      
|                
|                 |  |                                |  |     |  | Chairman of the Board of Directors,   
|                
|                 |  |                                |  |     |  | Chief Financial Officer, and Treasurer

16