UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549







FORM
10-K





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the fiscal year ended
December 31,
2008





Commission
file number 0-26168





CAREADVANTAGE,
INC.


(Exact
name of registrant as specified in its charter)





Delaware
                    
                    52-1849794(State
      or other jurisdiction of incorporation or organization)
                    
                    (I.R.S.
      Employer Identification Number)485-C Route 1 South, Iselin, New
      Jersey
                    
                    08830(Address
      of principal executive offices)
                    
                    (Zip
      Code)





Registrant’s
telephone number, including area code:  (732) 362-5000





Securities
registered pursuant to Section 12(b) of the Act:  None


Securities
registered pursuant to Section 12(g) of the Act:  Common Stock, par value $.001 per
share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes £ No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.  Yes £ No x





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 such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No
£





Indicate
by check mark if disclosures of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. (See
definition of “accelerated filer”, “large accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act).  (check
one):  Large accelerated filer £Accelerated
filer £Non-accelerated filer £Smaller
reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).Yes £ No x





The
aggregate market value of the registrant’s outstanding voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such
common equity, as of June 30, 2008:  $186,348.48.





The
number of shares of the registrant’s common stock outstanding as of February 27,
2009:  62,284,442





Documents
Incorporated by Reference





None









This Annual Report of CareAdvantage,
Inc. (“CareAdvantage” or the “Company”) on Form 10-K contains forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995.  Readers of this report should be aware of the speculative
nature of “forward-looking statements”.  Statements that are not
historical in nature, including the words “anticipate”, “estimate”, “should”,
“expect”, “believe”, “intend”, and similar expressions, are based on current
expectations, estimates and projections about (among other things) the industry
and the markets in which the Company and its subsidiaries operate; they are not
guarantees of future performance.  Whether actual results will conform
to expectations and predictions is subject to known and unknown risks and
uncertainties, including risks and uncertainties discussed in this Form 10-K,
particularly relating to revenues from performance-based services and
re-negotiations of existing and new contracts with customers, general economic,
market or business conditions; changes in our competitive position or
competitive actions by other companies; changes in laws or regulations or
policies of federal and state regulators and agencies; and other circumstances
beyond the Company’s control.  Consequently, all of the
forward-looking statements made in this document are qualified by these
cautionary statements, and there can be no assurance that the actual results
anticipated will be realized, or if substantially realized, will have the
expected consequences on the Company’s business or operations.  For a
more complete discussion of these and other risk factors, see Item 1A of Part I
of this report.  Except as required by applicable laws, we do not
intend to publish updates or revisions of forward-looking statements it makes to
reflect new information, future events or otherwise.





Except as expressly provided otherwise,
the terms “CareAdvantage” and “Company” as used in this report refers to
CareAdvantage, Inc. and the terms “we”, “us” and “our” refer collectively to
CareAdvantage, Inc. and its consolidated subsidiaries.





PART
I





ITEM
1.         BUSINESS





Introduction
and Background





CareAdvantage, Inc. (“CareAdvantage” or
the “Company”) and its direct and indirect subsidiaries, CareAdvantage Health
Systems, Inc. (“CAHS”) and Contemporary HealthCare Management, Inc. (“CHCM”),
are in the business of providing healthcare consulting services, data
warehousing and analytic services designed to enable integrated health care
delivery systems, healthcare plans, employee benefit consultants, other care
management organizations, self-insured employers and unions to reduce the costs,
while improving the quality of medical services provided to the health plan
participants. The services include care management program enhancement services,
executive and clinical management services, training programs, risk
stratification and predictive modeling. The Company operates in one business
segment.





As part of offering its healthcare
consulting services, the Company has developed RightPath®
Navigator (“RPNavigator”), a proprietary tool to help its customers better
understand and forecast resource consumption, risk, and costs associated with
their respective populations. In providing its services, the Company licenses
RPNavigator to its customers and provides consulting services in connection with
that licensing. The tool uses 3M Company’s (“3M”) Clinical Risk Groups (CRGs), a
classification methodology that groups members according to risk related to the
individual’s clinical history and demographic information. RPNavigator, offers
customers:





•
            actionable
      financial and utilization data
analytics;





•
            clinical
      analyses of health status and medical cost
  trends;





•
            identification
      of key management and quality
opportunities;





•
            enhanced
      group-/segment-specific reporting;





•
            transparent
      methodology;





•
            measurement
      of internal and external vendors;





•
            reduced
      dependence on internal resources to develop and produce required reports
      to accomplish these tasks




With respect to RPNavigator license
fees, most of the Company’s customers that license RPNavigator are required, as
part of their agreements with the Company, to receive consulting services from
the Company. All contracts provide for licensing of RPNavigator and consulting
services at a fixed monthly fee, a per member per month fee, or a combination of
both. The Company earns the revenue from licensing and consulting services on a
monthly basis and recognizes revenue from both sources on a monthly basis at
either a fixed monthly fee, a per member per month fee or a combination of both.
Additionally, the Company provides separate consulting services on a fee for
service basis. Revenue for these consulting services is recognized as the
services are provided.









Management believes it must continue
refinement of its current service lines in order to continue adding value to
existing and potential customers. Management intends to continue its evaluation
of each service in light of anticipated changes in the health care industry, the
cost to enter each such service line as well as the availability and timeliness
of competent resources. To further expand its line of services, the Company
contemplates pursuing alternatives to its internal product and service
development efforts by entering into strategic alliances and joint
ventures.





The
Company was incorporated in August 1994 as a wholly owned subsidiary of Primedex
Health Systems, Inc. (“PMDX”), a publicly traded New York corporation. In
October 1994, the Company acquired CAHS (under its prior corporate name,
Advantage Health Systems, Inc., (“AHS”)), from PMDX.  On June 12,
1995, a stock dividend of all of the issued and outstanding shares of common
stock of the Company was declared effective by PMDX.  As a result, the
Company commenced trading as a public company on that date.





Initially,
the Company relied on PMDX to provide the bulk of its working
capital.  In addition to transferring all of its AHS stock to the
Company, PMDX made a total of $9,700,059 in working capital advances to the
Company (the last such advance being made in July 1995).  Pursuant to
a revised separation agreement between the Company and PMDX dated April 20,
1995, PMDX agreed to capitalize all such advances in connection with the
Company’s separation from PMDX.





On
February 22, 1996, the Company completed a series of transactions with CW
Ventures II, L.P. (“CW Ventures”) and with Horizon Blue Cross and Blue Shield of
New Jersey, formerly known as Blue Cross Blue Shield of New Jersey, Inc.
(“Horizon BCBSNJ”).





Concurrently
with the February 22, 1996 closing of the transaction with CW Ventures, CAHS
purchased all of the outstanding capital stock of CHCM from a wholly owned
Horizon BCBSNJ subsidiary, Enterprise Holding Company, Inc.
(“EHC”).  Although this acquisition was consummated on February 22,
1996, results of operations of CHCM have been reflected in the Company’s
financial statements since April 30, 1995 pursuant to an Interim Services
Agreement between the Company and Horizon BCBSNJ (as amended from time to time,
the “Services Agreement”) whereby the Company had effective control and
responsibility of the day-to-day operations of CHCM pending a sale of CHCM to
the Company.





On August
16, 2001, pursuant to a Satisfaction of Debt Agreement dated November 1, 2000,
among the Company, Horizon BCBSNJ and one of Horizon BCBSNJ’s subsidiaries,
Horizon Healthcare of New Jersey, Inc., the Company issued 15,777,400 shares of
its Common Stock in exchange for the cancellation of approximately $1.6 million
owed by it.





The
foregoing transactions with CW Ventures and Horizon BCBS resulted in CW Ventures
owning approximately 38% of the outstanding shares of the Company’s common
stock, par value $.001 per share (“Common Stock”), and Horizon BCBSNJ owning
approximately 54% of outstanding shares of the Company’s Common
Stock.





Prior to
January 1, 2003, the Company provided, principally to Horizon BCBSNJ and another
Blue Cross Blue Shield organization, certain health care cost containment
services, including utilization review, case management and disease management
and independent reviews.  During 2002, the Company ceased providing
these services to the other Blue Cross Blue Shield organization, and as of
December 31, 2002, to Horizon BCBSNJ on account of Horizon BCBSNJ’s termination
of the Services Agreement as of that date.  As a result, beginning
January 1, 2003, the Company ceased offering these services to new customers,
since it no longer maintained the employees and infrastructure necessary to
support their delivery.




On
October 1, 2004, as partial settlement of litigation between the Company and
Horizon BCBSNJ, Horizon BCBSNJ transferred to the Company all of the Company’s
common stock then held by it (i.e., 53,394,820 shares).  On October 6,
2004, CW Ventures made a pro rata distribution of all of the 37,617,420 shares
of Common Stock of the Company that it owned to the partners of CW
Ventures.




The
Company’s executive offices are located at 485-C Route 1 South, Metropolitan
Corporate Plaza, Iselin, New Jersey 08830 and its telephone number is (732)
362-5000.





Industry
Overview: Consumerism, Health Care Expenditures and Managed Care





The
American health care market continues to evolve within the environmental
emphases on consumer choice and confidentiality protections, and is still
battling the double challenge of accelerating costs and an aging population.Employer groups are
still trying to find a balance, providing health insurance to employees in order
to attract the highest quality human capital, while developing strategies to
control escalating costs.  In addition to the previous considerations,
the latest emphasis is shifting towards the principle of data transparency on
the part of insurers, HMOs and providers.




2




Data
transparency has several key characteristics, which include easy accessibility,
standardized performance metrics, nationally recognized/MD-approved set of rules
governing claim coding/grouping procedures, automated data sharing/integration
availability via the Internet, an underlying reward system using chronic disease
in lieu of episodic management/efficiency and demonstration of intervention
benefits in a credible way.  So crucial is this factor that all of the
major forces within the business, labor and health care community have come
together in an attempt to provide the elements of structure and process that are
the underpinnings of data transparency.  The Consumer-Purchaser
Disclosure Project (“CPDP”), underwritten by the Robert Wood Johnson Foundation,
had as its goal “to provide all Americans with publicly reportedhealth care performance
information by January 1, 2007.” The “ shared vision [of this
project] is that Americans will be able to select hospitals, physicians, and
treatments based on nationally standardized measures for clinical quality,
consumer experience, equity, and efficiency.”1  During
2007, the CPDP produced a white paper and set of guidelines governing the use of
Electronic Files to:





·
            Encourage
      the adoption of health information technology by
  providers


·
            Ensure
      data fields that support performance measurements are incorporated into
      Health Information Technology


·
            Participate
      in Regional Health Organizations
(RHIO’s)





The above
focus of the marketplace points to an increased emphasis on health care quality
and cost-benefit.  Tools that provide clear and defensible information
that is based on best practice and express results based on the relative
severity of disease of the underlying population provide full and accurate
disclosure.  The Gartner Group has stated, “Without severity adjusted
data, no comparison can be made between entities within any stakeholder category
(e.g. hospital vs. hospital or MCO vs. MCO) because all differences may be
completely attributable to variations among the types and intensities of
diseases underlying the data.”2  Increasingly
consumers, purchasers, insurers and providers will need tools that provide
severity-adjusted data in order to provide a clear and accurate picture of
health care quality attributable to different health plans and
groups.





Services
and Products




The
Company is a management consulting firm specializing in the improvement of
health care delivery and quality while reducing unnecessary cost.  The
Company has a proven track record for detecting and reducing unnecessary
utilization while optimizing program performance and quality of
care.  Program performance and quality of care are measured not only
on the basis of reduced costs but also using the context of a population’s
relative disease burden/severity, the rate at which it has progressed and the
degree to which the interventions of particular providers and programs have had
an impact on that  progression rate.




CareAdvantage
clients include health plans, employer, hospital systems, providers and other
purchaser groups.  For the past 14 years, the Company has worked with
many leading health plans to develop effective, affordable and timely
data-driven strategies that improve case, disease and utilization, as well as
operations and network management.  These strategies have helped
CareAdvantage clients to more effectively:





·
            Identify
      and quantify disease burden and associated risk with their entire
      population and sub-populations;


·
            Improve
      member care quality through the defensible evaluation of health care
      providers and facilities;


·
            Facilitate
      provider cooperation and collaboration based on case mix and
      severity-adjusted data;


·
            Forecast
      resource consumption based on disease burden;
  and


·
            Optimize
      allocation of resources.





Recently,
the Company has also assisted health plan clients with respect to further
validating the value that they bring to purchasers and have had a demonstrable
impact on sales retention and attraction of new sales.





In
addition, this expertise has been applied to help employers assess the
efficiency and effectiveness of their present health care insurers, carriers and
supporting vendors.  CareAdvantage achieves this by empowering
employers with the information, skills and guidance necessary to facilitate
future purchasing decisions and optimize managerial and administrative
practices.





In order
to deliver these solutions, CareAdvantage utilizes experienced health plan
executives and medical directors as well as a wide range of care management
operations, clinical data analysis and information technology (IT)
subject-matter experts.  It is this vast array of experience that
enables CareAdvantage to benefit clients with objective and quantifiable insight
to develop the strategies and tactical initiatives that combine care management
processes with a deep understanding of medical and health care insurance-related
best practices.


1
www.healthcaredisclosure.org
  2 The
Gartner Report  - The Gartner Group - 1999




3




Operations




The
Company utilizes a multi-disciplinary team approach in providing its healthcare
consulting services, data warehousing and analytic services.  The
Company, through its employees and independent contractors, assesses care
management operations, systems resources, integration and
outcomes.  Typically, assessment occurs on the client’s site, through
interviews and data analysis.  At the center of CareAdvantage’s
data-driven analyses is RPNavigator, the next generation software
solution.  RPNavigator categorizes and quantifies a population’s
disease burden and provides a clear picture of the health status and severity
associated with its clients’ member populations.  RPNavigator’s
underlying infrastructure incorporates classification methodologies from 3M
Health Information Systems along with various analytical techniques to stratify
the population and describe the individual member’s associated risks in
intuitive ways.  It also enables the valid assessment of existing
health care quality and cost as well as projection of future risk from a
resource consumption, disease progression and mortality perspective. RPNavigator
includes a data mining tool (RPN3) that employs
multi-dimensional “cubes” (data structures) for online analytic processing
(OLAP). RPN3
references the same data set within RPNavigator and allows power users
additional flexibility in querying that data.





RPNavigator
utilizes this information to stratify its clients’ members, groups and providers
through the use of a wide range of clinical and demographic descriptors to
quantify their risk as well as evaluate the impact of key interventions and
programs.  These descriptors and the underlying logic increase the
associated transparency of the resulting analyses and support the new direction
of the industry.   Among the benefits of this solution is the
ability of CareAdvantage clients to:





·
            Access
      meaningful information via an Internet-based
  portal;


·
            Track
      population and member-related changes in disease status and severity over
      time;


·
            Compare
      client sub-populations;


·
            Profile
      provider using case mix and severity-adjusted
  techniques;


·
            Select
      and prioritize members who would best benefit from care management
      interventions;


·
            Understand
      adverse selection associated with existing and/or newly-obtained business
      as well as understand the impact of a plan’s overall turnover in terms of
      stayers and leavers; and


·
            Reduce
      the dependence on internal resources to develop and produce required
      reports to accomplish these tasks.





There are
several related efforts that result in additional sources of revenue for
CareAdvantage, including:




·
            Developing
      new standardized analyses on a client-specific basis to meet a particular
      need for that client;




·
            Undertaking
      broader analytic consulting projects, using the methodology and logic
      within RPNavigator, on behalf of clients that need CareAdvantage’s
      expertise in analyzing and interpreting the
  data;





·
            Offering
      experienced health care executives for care management program leadership,
      internal physician review services, and mentoring of less experienced
      health plan staff (“Executive and Clinical Management
      Services”).





CareAdvantage
also supports its clients through the provision of a wide range of consulting
services to develop and implement the right solutions.  These
solutions provide the health care industry with strategies and tactical
initiatives for effectively managing health care consumption, reducing costs and
improving the quality and cost benefit of care.





For its
services, the Company seeks to be compensated either (i) on a fee-for-service
basis; (ii) per member per month (PMPM); or (iii) on the basis of a combination
of both fee-for-service and PMPM.





Customers
and Marketing





The
Company currently provides its services to Blue Cross Blue Shield (“BCBS”)
organizations and other health plans, employers, organized labor, other health
care purchasers and the State of Utah Department of Health pursuant to one or a
combination of the compensation arrangements described above.





The
Company markets its services to the health insurance industry, health service
organizations, hospitals, insurance carriers, employers and unions.





Competition





The
Company faces intense competition in a highly fragmented market of managed care
services firms.  Several managed care service firms currently provide
and aggressively market services, which are in some respects similar to the
Company’s services. There are also a number of organizations developing a
variety of approaches that are in competition with the Company’s products and
services.  Some of the Company’s competitors have substantially
greater financial resources and employ substantially greater numbers of
personnel.




4




The
Company intends to compete by offering what it believes to be the most
comprehensive approach in the marketplace to address the medical cost and
quality of care issues.  Further, it believes that its competitive
position is enhanced by its ability to develop tailored programs for large
clients.





Government
Regulation





Health
Care Regulation





Government
regulation of health care cost containment services, such as those provided by
the Company, is a changing area of law that varies from jurisdiction to
jurisdictionand
generally gives responsible administrative agencies broad
discretion.  The Company is subject to extensive and frequently
changing federal, state and local laws and regulations concerning company
licensure,conduct of
operations, acquisitions of businesses operating within its industry, the
employment of physicians and other licensed professionals by business
corporations and the reimbursement for services.  Regulatory
compliance could have an adverse effect on the Company’s present business and
future growth by restricting or limiting the manner in which it can acquire
businesses, market its services, and contract for services with other health
care providers by limiting or denying licensure or by limiting its reimbursement
for services provided.





It should
be noted that in providing utilization review and case management services, the
Company made recommendations regarding what is considered appropriate medical
care based upon professional judgments and established
protocols.  However, the ultimate responsibility for all health care
decisions is with the health care provider.  Furthermore, the Company
is not an insurer, and the ultimate responsibility for the payment of medical
claims is with the insurer.





Although
the Company is not a health care provider, it could have potential liability for
adverse medical consequences.  The Company could also become subject
to claims based upon the denial of health care services and claims such as
malpractice arising from the acts or omissions of health care
professionals.  Its exposure in this regard is substantially reduced
since it ceased providing utilization review and case management services as of
December 31, 2002.  Nonetheless, until the applicable statutes of
limitations have run, the Company retains exposure for past activities as well
as on account of its continued internal physician review services offered as
part of its Executive and Clinical Management Services.





The
Company’s operations in a particular state are typically subject to
certification by the appropriate state agency.  The Company has
received or has filed the necessary application for such certification where
required.  In addition, various state and federal laws regulate the
relationships between providers of health care services and physicians and other
clinicians, including employment or service contracts, investment relationships
and referrals for certain designated health services.  These laws
include the fraud and abuse provisions of the Medicare or Medicaid statutes,
which prohibit the solicitation, payment, receipt or offering of any direct or
indirect remuneration for the referral of Medicare or Medicaid patients or for
the ordering or providing of Medicare or Medicaid covered services, items or
equipment.  Violations of these provisions may result in civil or
criminal penalties for individuals or entities including exclusion from
participation in the Medicare and Medicaid programs.  Several states
have adopted similar laws that cover patients in private programs as well as
government programs.  Because the anti-fraud and abuse laws have been
broadly interpreted, they may limit the manner in which the Company can acquire
businesses and market its services to, and contract for services with, other
health care providers.





The
Company’s management believes that its present operations are in compliance with
all applicable laws and regulations and that it maintains sufficient
comprehensive general liability and professional liability insurance coverage to
mitigate claims to which the Company may be subject in the future. The Company
is unable to predict what, if any, government regulations affecting its business
may be enacted in the future or how existing or future regulations may be
interpreted.  To maintain future compliance, it may be necessary for
the Company to modify its services, products, structure or marketing
methods.  This could increase the cost of compliance or otherwise
adversely affect the Company’s operations, products, profitability or business
prospects.





Proposed
Health Care Reform





If
proposed federal and state health care reform initiatives are enacted, the
payments for and the availability of health care services may be
affected.  Aspects of certain proposals, such as reductions in
Medicare and Medicaid payments, could adversely affect the
Company.  The Company is unable to predict what impact, if any, future
enacted health care reform legislation may have on its current and future
business, and no assurance can be given that any such reforms will not have an
adverse impact on its business operations or potential
profitability.




5




Employees





At
December 31, 2008, we employed a total of 13 employees, of which 12 were
employed on a full-time basis.  Of the full-time employees, nine
employees are engaged in servicing its clients and three are administrative
support, finance and human resources personnel.  None of the Company’s
employees are party to any collective bargaining agreements.





ITEM
1A.     RISK FACTORS





Company
Risk





The Company has a
history of losses.At December 31, 2008, the Company had
negative working capital of approximately $240,000, stockholders’ deficit of
approximately $379,000 and an accumulated deficit of approximately
$24,370,000.  At December 31, 2007, the Company had working capital of
approximately $558,000, stockholders’ equity of approximately $399,000 and an
accumulated deficit of approximately $23,538,000.  The losses in
recent years were attributable in large part to, legal fees incurred in
protecting the Company’s intellectual property, rent for space in excess of the
Company’s needs and the difficulty in obtaining revenue from a new
product.  We may not be able to increase profitability on a quarterly
or an annual basis in the future.  If we continue to experience net
losses in future periods, we may not be able to timely satisfy our
obligations.  The Company has sustained recurring losses and
decreasing operating cash flows, and, accordingly the Company’s independent
registered public accounting firm has issued a report included herein that
contains an explanatory paragraph expressing substantial doubt about the
Company’s ability to continue as a going concern.  The Company’s
recurring losses and the decreasing operating cash flows raises substantial
doubt about its ability to continue as a going concern.  The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.





We face
aggressive competition because new competitors can enter our field
easily.The Company faces intense competition in a highly
fragmented market of managed care services and new competitors can enter our
field easily.  We believe our ability to compete will depend in part
upon our ability to:





·
            enhance
      our current technology and
services;





·
            respond
      effectively to technological
changes;





·
            introduce
      new technologies; and





·
            meet
      the increasingly sophisticated needs of our
  customers.





Increased
competition may result in price reductions, reduced gross margins, and loss of
market share, any of which could have a material adverse effect on our results
of operations. In addition, pricing, gross margin, and market share could be
negatively impacted further as a greater number of available products in the
marketplace increases the likelihood that product and service offerings in our
markets become more fungible and price sensitive.





Due to increased
merger and acquisition activity, we may face stronger competition in the
future.Our industry, as well as many of our customers’
industries (i.e.,
health insurers and HMOs), have experienced significant merger and acquisition
activity.  Merger and acquisition activity may result in decreased
opportunities to provide our services.  The acquisition of a customer
could reduce our revenue and have a negative impact on our results of operation
and financial condition. A smaller overall market for our products and services
could also result in lower revenue and margins.





Revenue from a
limited number of customers comprises a significant portion of our total
revenue.  Two customers, BCBS organizations, accounted for
approximately 53 % and 25 % of license fees and service revenue for the year
ended December 31, 2008.  If the BCBS customers terminate or modify
existing contracts or experience business difficulties, it could adversely
affect our operations.





We could incur
significant additional costs as a result of litigation based on the adverse
medical consequences of our recommendations.Until December 31, 2002, we
provided cost containment services for health care
organizations.  These services included:





·
            utilization
      review, which is the review of the appropriateness of a particular medical
      event, such as a hospital admission, a particular medical procedure or an
      additional day of inpatient care;





·
            case
      management services, which provide alternative plans for patient treatment
      and examine how the attending physician is managing the care of patients
      with chronic diseases on an ongoing
basis;




6




·
            outpatient
      care coordination, which allows patients to access services such as home
      health care, rehabilitation and infusion therapy services;
    and





·
            disease
      management services, which provide patients with expert consensus on the
      most appropriate treatment alternatives for patients at different disease
      stages.





We based
our recommendations for patient benefit plan coverage on judgments and
established protocols as to the appropriateness of the proposed medical
treatment.  Our judgments and established protocols were based on data
gathered through case studies on the treatment and care of patients over a
number of years.  As a result, we may be liable for adverse medical
consequences of our recommendations.  We could become subject to
claims for the costs of services denied and malpractice claims arising from the
acts or omissions of health care professionals.  Although we do not
believe that we are engaged in the practice of medicine or that we delivered
medical services directly, we may become subject to litigation or
liability.  Although we maintain comprehensive general liability and
professional liability insurance coverage, including coverage for liability in
connection with the performance of medical utilization review services, we
cannot be certain that coverage will be adequate in the event we become subject
to a claim. The Company’s exposure for these activities is substantially reduced
since it stopped providing utilization review and case management services as of
December 31, 2002.  Nonetheless, until all the applicable statutes of
limitations have run, the Company retains exposure for past activities as well
as on account of its continued internal physician review services offered as
part of its Executive and Clinical Management Services.





We depend on
effective information systems to deliver products and services to
customers.We depend on effective information systems and have
linked our computer systems with our customers’ computer systems in order to
conduct and deliver our products and services.  Our information
systems require an ongoing commitment of resources to maintain and enhance
existing systems and develop new systems in order to keep pace with continuing
changes in information processing technology, evolving industry standards, and
changing customer preferences.  Our failure to maintain effective and
efficient information systems could cause loss of existing customers, difficulty
in attracting new customers, customer disputes, regulatory problems and
increases in administrative expenses.





Our RPNavigator
tool is dependent upon third-party risk stratification
software.  The Company currently has a license from 3M to use
its Clinical Risk Grouping SoftwareTM, which license expires on April 1, 2013,
and renews automatically thereafter for successive one-year terms unless
terminated by either party by written notice at least one year in
advance.  In the event that 3M terminates its license at the end of
the term, the Company would be required to license other third-party risk
stratification software and would be required to reconfigure RPNavigator to
accommodate such other software. Moreover, although risk stratification software
is available from other third parties, including Johns Hopkins University and/or
its affiliates, the Company believes that the 3M software is more robust than
its competitors because it considers the severity of illnesses and
diseases.  Because our RPNavigator tool depends on the integrity of
third-party-risk stratification software, if the information contained in that
software was found or perceived to be inaccurate, or if the information is
generally perceived to be unreliable, we may not be able to maintain commercial
acceptance.





The introduction
of software products incorporating new technologies and the emergence of new
industry standards could render the Company’s existing software products less
competitive, obsolete or unmarketable.There can be no
assurance that the Company will be successful in developing and marketing new
software products that respond to technological changes or evolving industry
standards. If the Company is unable, for technological or other reasons, to
develop and introduce new software products cost-effectively in a timely manner
in response to changing market conditions or customer requirements, the
Company’s business, results of operations and financial condition may be
adversely affected.





Developing
or implementing new or updated software products and services may take longer
and cost more than expected. The Company relies on a combination of internal
development, strategic relationships, and licensing to develop its software
products and services. The cost of developing new healthcare information
services and technology solutions is inherently difficult to
estimate.  If the Company is unable to develop new or updated software
products and services cost-effectively on a timely basis and implement them
without significant disruptions to the existing systems and processes of the
Company’s customers, the Company may lose potential sales and harm its
relationships with current or potential customers.





To succeed, we
must maintain the confidential nature of criteria that we have acquired or
developed for the delivery of health care services in medical specialty
areas.The success of our knowledge and information-related
business depends on our ability to maintain the ownership rights to our
products.  We rely on agreements with customers, confidentiality
agreements with employees, trade secrets, trademarks and patents to protect our
ownership rights.  These legal protections and precautions may not
prevent misappropriation of our intellectual property.  In addition,
substantial litigation regarding intellectual property rights exists in the
software industry, and we expect software products to be increasingly subject to
third-party infringement claims as the number of products and competitors in our
industry segment grows.




Federal and state
laws that protect patient health information may increase our costs and limit
our ability to collect and use that information.   There
is substantial state and federal regulation of the confidentiality of patient
health information and the circumstances under which such information may be
used by, disclosed to, or processed by us as a consequence of our contacts with
various health plans and healthcare providers. Although compliance with these
laws and regulations is presently the principal responsibility of the health
plan, hospital, physician or other healthcare provider, regulations governing
patient confidentiality rights are dynamic and rapidly evolving.  As
such, laws and regulations could be modified so that they could directly apply
to us.  Also, changes to the laws and regulations that would require
us to change our systems and our methods may be made in the future, which could
require significant expenditure of capital and decrease future business
prospects.  Furthermore, additional federal and state legislation
governing the dissemination of patient health information may be proposed and
adopted, which may also significantly affect our business.  Finally,
certain existing laws and regulations require healthcare entities to
contractually pass on their obligations to other entities with which they do
business; as such, we are indirectly impacted by various additional laws and
regulations.




7




The
Company and the healthcare industry generally are impacted by the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”), which mandates,
among other things, the adoption of standards to enhance the efficiency and
simplify the administration of the healthcare system.  HIPAA is a
federal law that affects the use, disclosure, transmission and storage of
individually identifiable health information referred to as “protected health
information.”  As directed by HIPAA, the United States Department of
Health and Human Services (“DHHS”) must promulgate standards or rules for
certain electronic health transactions, code sets, data security, unique
identification numbers, and privacy of protected health
information.  DHHS has issued some of these rules in final form, while
others remain in development. In general, under these rules, we function as a
“business associate” to some of our customers (who are considered to be “covered
entities” under HIPAA). The two rules relevant to us and our customers—the
Privacy Rule, and the Security Rule—are discussed below.  It is
important to note that DHHS could, at any time in the future, modify any
existing final rule in a manner that could require us to change our systems or
operations.




First,
DHHS has published a final HIPAA privacy rule (“Privacy Rule”) which had a
compliance date of April 14, 2003.  The Privacy Rule is complex and
far reaching.  The Privacy Rule directly applies to covered entities
which, in most instances, are required to execute a contract with any business
associate that performs certain services on the covered entity’s behalf
involving the exchange or creation of protected health information. Our health
plan customers are covered entities, and to the extent that we are required by
our customer contracts to ensure that we comply with various aspects of the
Privacy Rule, we believe that we meet the requirements of the Privacy
Rule.  The Privacy Rule and other similar state healthcare privacy
regulations could materially restrict the ability of healthcare providers and
health plans to disclose protected health information from patient records using
our products and services, or it could require us to make additional capital
expenditures to be in compliance.  Accordingly, the Privacy Rule and
state privacy laws may significantly impact our products’ use in the healthcare
delivery system and, therefore, decrease our revenue, increase working capital
requirements and decrease future business prospects.




Second,
DHHS has published the final HIPAA security rule (“Security Rule”) with a
compliance date of April 20, 2005.  The Security Rule applies to the
use, disclosure, transmission, storage and destruction of electronic protected
health information by covered entities. The Security Rule requires that covered
entities must implement administrative, technical and physical security measures
to safeguard electronic protected health information.  Also, as with
the Privacy Rule, under the Security Rule, covered entities are required to
contractually bind their business associates to certain aspects of the Security
Rule.  As such, where we function as a business associate to a
customer that is a covered entity, we are required to enter into a business
associate contract with that customer.  Implementing such measures may
require us to expend substantial capital due to required product, service, and
procedure changes.




We
believe our business practices and software offerings are consistent with the
Privacy Rule and Security Rule. However, DHHS continues to publish change
notices to the existing rules and propose new rules. There is no certainty that
we will be able to respond to all such rules in a timely manner and our
inability to do so could adversely affect our business.





A breach of
security may cause the Company’s customers to curtail or stop using the
Company’s services.  Accidental or
willful security breaches or other unauthorized access by third parties to the
Company’s information systems, the existence of computer viruses in the
Company’s data or software and misappropriation of the Company’s proprietary
information could expose the Company to a risk of information loss, litigation
and other possible liabilities which may have a material adverse effect on the
Company’s business, financial condition and results of operations. If security
measures are breached because of third-party action, employee error, malfeasance
or otherwise, or if design flaws in the Company’s software are exposed and
exploited, and, as a result, a third party obtains unauthorized access to any
customer data, the Company’s relationships with its customers and its reputation
will be damaged, the Company’s business may suffer and the Company could incur
significant liability.  Because techniques used to obtain unauthorized
access or to sabotage systems change frequently and generally are not recognized
until launched against a target, the Company may be unable to anticipate these
techniques or to implement adequate preventative measures.





Investment
Risks





The market price
of the Company’s Common Stock has been extremely volatile.The
market price of the Company’s Common Stock has shown volatility and sensitivity
in response to many factors, including general market trends, public
communications regarding managed care, legislative or regulatory actions, health
care cost trends, pricing trends, competition, earnings or membership reports of
particular industry participants, and acquisition activity.




8




Because the
Common Stock is traded in the over-the-counter market in the OTC Bulletin Board,
our stock is illiquid.The Company’s Common Stock is not
listed on any exchange.  Rather, shares of Common Stock are traded
through The NASDAQ Stock Market’s Over-the-Counter Bulletin Board, or “OTC
Bulletin Board,” in the over-the-counter market.  The OTC Bulletin
Board is a regulated quotation service that displays real-time quotes, last-sale
prices and volume information in over-the-counter equity
securities.  It is a quotation medium for subscribing members, not an
issuer listing service, and should not be confused with national stock exchanges
such as The NASDAQ Stock Market.  As a result, an investor may find it
more difficult to dispose, or to obtain accurate quotations as to the value, of
our Common Stock.  Because our Common Stock is subject to federal
securities rules affecting “penny stock,” the market liquidity for our Common
Stock is adversely affected.





The Common Stock
is subject to additional sales practice requirements for low priced
securities.The Company’s Common Stock is currently subject to
Rule 15g-9 under the Securities Exchange Act of 1934, which imposes additional
sales practice requirements on broker-dealers that sell shares of the Common
Stock to persons other than established customers and “accredited investors” or
individuals with net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses.





The
rule:





·
            requires
      a broker-dealer to make a special suitability determination for the
      purchaser and have received the purchaser’s written consent to the
      transaction prior to sale.  Consequently, the rule may affect
      the ability of broker-dealers to sell the Company’s Common Stock and may
      affect the ability of the Company’s shareholders to sell any of their
      shares of Common Stock in the secondary
market;





·
            generally
      defines a “penny stock” to be any non-NASDAQ equity security that has a
      market price less than $5.00 per share or an exercise price of less than
      $5.00 per share, subject to certain
exceptions;





·
            requires
      broker-dealers to deliver, prior to a transaction in a “penny stock”, a
      risk disclosure document relating to the “penny stock”
    market.





Disclosure
is also required to be made about compensation payable to both the broker-dealer
and the registered representative and current quotations for the
securities.  In addition, the rule requires that broker-dealers
deliver to customers monthly statements that disclose recent price information
for the “penny stock” held in the account and information on the limited market
in penny stocks.  Because of these regulations, broker-dealers may
encounter difficulties in their attempt to sell shares of the Company’s Common
Stock, which may affect the ability of selling shareholders or other holders to
sell their shares in the secondary market and have the effect of reducing the
level of trading activity in the secondary market.  These additional
sales practice and disclosure requirements could impede the sale of the Common
Stock.  In addition, this rule may decrease the liquidity of the
Company’s Common Stock, with a corresponding decrease in the price of our
securities.





ITEM
1B.      UNRESOLVED STAFF COMMENTS





None.





ITEM
2.         PROPERTIES





The
Company’s executive offices and operations, comprising approximately 28,000
square feet of office space, are located in the Metropolitan Corporate Plaza in
Iselin, New Jersey.   The Company had executed a six-year lease
for this facility commencing June 15, 1995, which was extended during 2000 for
ten additional years.  The extended lease provides for an annual base
rent of approximately $668,000 with annual escalations based on increases in
real estate taxes and operating expenses.





On
January 10, 2005, the Company entered into a Second Amendment to Lease Agreement
commencing January 1, 2005 to provide for the reduction in base rent and the
waiver of escalations based on increases in real estate taxes and operating
expenses, and to provide the landlord with the option to recapture up to 50% of
the leased premises at any time.  (With respect to the option granted
the landlord, as a result of the Company’s ceasing to provide services to
Horizon BCBSNJ, the Company no longer needed this space.)  The
expiration date of the lease, March 31, 2011, remains unchanged by this Second
Amendment.





Under the
Second Amendment to Lease Agreement, the Company is required to meet the
following conditions: (1) the Company cannot assign the lease except for an
assignment of the lease or a sublet provided under the original lease; (2) the
Company is not in default under any terms and conditions of the original
lease.  In the event the Company fails to meet these conditions, the
reduction in base rent, real estate taxes and operating expenses will be
nullified and entirely forfeited, and the Company will be immediately required
to pay the landlord additional rent for the difference in the base rent, and
additional rent for all escalations provided in the Second Amendment to Lease
Agreement and the original lease as extended.  As of January 1, 2005,
the additional rent attributable to the difference in base rent is
$1,257,000.




9




Effective April 19, 2007 (the
“Recapture Date”), the landlord “recaptured” certain portions of the leased
premises pursuant to the provisions of the Second Amendment to Lease
Agreement.  This recapture does not reduce or modify, in any respect,
the Company’s obligations to pay to the landlord monthly rent or, in the event
the Company fails to meet above conditions, additional
rent.  Effective as of the Recapture Date, the premises leased by the
Company under the lease is deemed to be and refer only to 15,629 rentable square
feet.





As of March 26, 2008, the Company and
landlord entered into a Third Amendment of Lease which provided that the
reduction in base rent and the waiver of escalations based on increases in real
estate taxes and operating expenses shall be deemed to be amortized on a
straight line basis over the period commencing January 1, 2005 and ending March
31, 2011.





At
December 31, 2008, the additional rent that would be due if the Company failed
to meet the conditions of the Second Amendment to Lease Agreement would be
$452,000.  The additional base rent that would be due at December 31
of the next two years if the Company failed to meet the conditions of the Second
Amendment are as follows:





Year
                            
                            AdditionalEnding
                            
                            Rent2009
                            
                            
                            251,0002010
                            
                            
                            50,000





The
Company maintains rent-free operation offices in Vermont pursuant to an informal
arrangement with its customer there, Blue Cross Blue Shield of
Vermont.





ITEM
3.         LEGAL
PROCEEDINGS





CareAdvantage, Inc. v. Blue Cross
& Blue Shield of Rhode Island and Coordinated Health Partners,
commenced March 2002 in the Superior Court of the State of Rhode Island, arises
out of the defendants’ termination of an Agreement effective as of January 1,
2000, among the parties pursuant to which the Company had been providing
services. The Company was seeking declaratory relief, including damages arising
out the termination of the Agreement, and equitable relief and damages with
respect to defendants’ hiring a physician formerly employed by the Company.
  On January 21, 2009, the partiesagreed to dismiss with
prejudice all claims and counterclaims.





Alan Fontes v. CareAdvantage,
Inc., pending in Superior Court of New Jersey, Chancery Division,
Monmouth County, was commenced in June 2004 by a former employee of the Company
seeking compensation under various legal theories.  In October 2005,
the court dismissed the claim under all theories except express
contract.  The Company believes that Mr. Fontes’s claim is without
merit and is contesting the matter vigorously.  Moreover, the Company
filed a counterclaim for damages against Mr. Fontes claiming Mr. Fontes induced
another employee to quit his employment with the Company and in October 2005,
pursuant to court order, amended its counterclaim to seek equitable relief and
damages against Mr. Fontes and Integrated eCare Solutions, LLC, claiming Mr.
Fontes misappropriated and used certain Company property.  This matter
is presently being tried before a chancery judge.





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





None.





10




PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Market
Information





The
Company’s Common Stock has traded in the over-the-counter market since June 12,
1995 and is currently quoted on the OTC Bulletin Board under the symbol
“CADV”.  The following table shows the range of the high and low bid
prices for each quarter of the Company’s two most recent calendar years. The
prices reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.





2008
                    
                    
                    2007Quarter Ended
                    
                    High
                    
                    
                    Low
                    
                    
                    High
                    
                    
                    LowMarch
      31,
                    
                    $
                    .014
                    
                    
                    $
                    .011
                    
                    
                    $
                    .03
                    
                    
                    $
                    .02June
      30,
                    
                    $
                    .013
                    
                    
                    $
                    .003
                    
                    
                    $
                    .02
                    
                    
                    $
                    .02September
      30,
                    
                    $
                    .010
                    
                    
                    $
                    .003
                    
                    
                    $
                    .02
                    
                    
                    $
                    .01December
      31,
                    
                    $
                    .009
                    
                    
                    $
                    .001
                    
                    
                    $
                    .04
                    
                    
                    $
                    .01





Holders





As of
February 27, 2009, there were approximately 2,485 holders of record of the
Company’s Common Stock.  No shares of the Company’s preferred stock
have been issued.





Dividends





During
the two most recent fiscal years, the Company paid no cash dividends on its
Common Stock.  The payment of future dividends on its Common Stock is
subject to the discretion of the Board of Directors, out of funds legally
available for dividends, and is dependent on several factors, including the
Company’s earnings and capital needs.





Securities
Authorized for Issuance Under Equity Compensation Plans





Information
about the Company’s equity compensation plans is contained in the table
captioned “Equity Compensation Plans” in Item 12 of Part III of this Form 10-K,
which table is incorporated herein by reference.





Issuer
Purchases of Equity Securities





No shares
of the Common Stock were purchased by or on behalf of the Company and its
affiliates (as defined by Exchange Act Rule 10b-18) during the fourth quarter of
2008.





ITEM
      6.
            SELECTED
      FINANCIAL DATA





The
Company is a smaller reporting company and is not required to provide the
information contemplated by this item.





ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Executive
Overview





The
Company and its direct and indirect subsidiaries, CAHS and CHCM, are in the
business of providing management and consulting services designed to enable
integrated health care delivery systems and other care management organizations
to reduce the costs, while improving the quality, of medical services provided
to their subscribers. The management and consulting services include care
management program enhancement services, executive and clinical management
services, and training programs. The Company’s management and consulting
services have been and continue to be provided to integrated health care
delivery systems and other care management organizations. The Company operates
in one business segment.





The
Company focuses on offering its healthcare consulting, data warehousing and
analytic services. As part of this effort, the Company has developed
RPNavigator, a proprietary tool to help managed care plans and employers better
understand and forecast resource consumption, risk, and costs associated with
their respective populations. In providing its consulting services, the Company
licenses RPNavigator to its customers. The Company recognizes revenue as
services are performed or ratably under contract terms. For a further discussion
of considerations relating to this business, see “Liquidity, Financial Condition
and Capital Resources – General Overview”.




11




Management
believes it must continue to refine its current service lines in order to
continue to add value to existing and potential customers.  In
addition, the Company intends to broaden the services offered with unique and
complementary cost-containment strategies.  Management intends to
evaluate each service in light of anticipated changes in the health care
industry, the cost to enter each such service line as well as the availability
and timeliness of competent resources.  To further expand its line of
services, the Company contemplates pursuing alternatives to its internal product
and service development efforts by entering into strategic alliances and joint
ventures as well as through acquisitions.





Critical
Accounting Policies





The Company’s financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Estimates and assumptions about future
events and their effects cannot be determined with certainty. These estimates
may change as new events occur, as additional information is obtained and as our
operating environment changes. These changes have historically been minor and
have been included in the consolidated financial statements as soon as they
became known. In addition, our management is periodically faced with
uncertainties, the outcomes of which are not within our control and will not be
known for prolonged periods of time. Actual results may differ from these
estimates under different assumptions or conditions.





Certain
accounting policies have a significant impact on amounts reported in financial
statements.  A summary of those significant accounting policies can be
found in Note B to the Company’s financial statements





A
critical accounting policy is one that is both important to the portrayal of the
Company’s financial condition or results of operations and requires significant
judgment or a complex estimation process. The Company believes the following fit
that definition:





Revenue
recognition





With
respect to RPNavigator license fees, most of the Company’s customers licensing
RPNavigator are required, as part of their agreements with the Company, to
receive consulting services from the Company. All contracts provide for
licensing of RPNavigator and consulting services at a fixed monthly fee, a per
member per month fee, or a combination of both. The Company earns the revenue
from licensing and consulting services on a monthly basis and recognizes revenue
from both services on a monthly basis at either a fixed monthly fee, a per
member per month fee or a combination of both. Additionally, the Company
provides separate consulting services on a fee for service basis. Revenue for
these consulting services is recognized as the services are
provided.





Accounting
for stock-based compensation





The
Company accounts for stock based compensation in accordance with Statement of
Financial Accounting Standard No. 123R, “Share Based Payment” (FAS123R), which
requires that all share-based payments, including grants of stock options, be
recognized in the statement of operations as compensation expense, based on
their fair values at the date of grant. Under the provisions of FAS 123R, the
estimated fair value of options granted under the Company’s Employee Stock
Option Plan and Director Stock Option Plan are recognized as compensation
expense over the service period which is generally the same as the
option-vesting period.





For the
purposes of determining estimated fair value under FAS 123R, the Company has
computed the fair values of all share-based compensation using the Black-Scholes
option pricing model. This model requires the Company to make certain estimates
and assumptions. The Company calculated expected volatility based on the
Company’s historical stock volatility. The computation of expected life is
determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting
schedules and expectations of future employee behavior. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of grant.
Under FAS 123R, forfeitures are estimated at the time of valuation and reduce
expense ratably over the vesting period. This estimate is adjusted periodically
based on the extent to which the actual forfeitures differ, or are expected to
differ, from the previous estimate.





Recent
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
“Fair Value Measurements,” to define fair value, establish a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expand disclosures about fair value measurements. SFAS No. 157
is effective for fiscal years beginning after November 15, 2007. The provisions
under SFAS No. 157 were effective for the Company beginning January 1, 2008. In
February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of
FASB Statement No. 157,” which defers the effective date of SFAS No. 157 for all
nonrecurring fair-value measurements of nonfinancial assets and liabilities
until fiscal years beginning after November 15, 2008. The adoption of these
pronouncements did not have a material impact on our financial position and
results of operations.




12




In
October of 2008, the Financial Accounting Standards Board issued Staff Position
No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active,” which clarifies the application of FASB Statement No.
157 in a market that is not active.  This FSP is effective for fiscal
years beginning after October 10, 2008.  The adoption of this
pronouncement will not have a material impact on our financial position and
results of operations.




In
February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities” including
an amendment of SFAS No. 115. SFAS No. 159 provides companies with an option to
report selected financial liabilities at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The provisions under SFAS
No. 159 were effective for the Company beginning January 1, 2008. The adoption
of this pronouncement did not have a material impact on our financial position
and results of operations.





In April
2008, the Financial Accounting Standards Board issued Staff Position No. 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP No.
142-3”).  FSP No. 142-3 amends the factors to be considered when
developing renewal or extension assumptions that are used to estimate an
intangible asset’s useful life under SFAS No. 142, “Goodwill and Other
Intangible Assets.”  FSP No. 142-3 is effective for fiscal years
beginning after December 15, 2008.  The adoption of this pronouncement
will not have a material impact on our financial position and results of
operations.





In May
2008, the Financial Accounting Standards Board issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles.”  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements.  SFAS
No. 162 became effective in September 2008 following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.”  The adoption of this pronouncement did not have a
material impact on our financial position and results of
operations.





Results
of Operations—Year Ended December 31, 2008 Compared to Year Ended December 31,
2007





The
following discussion compares the Company’s results of operations for the year
ended December 31, 2008, with those for the year ended December 31,
2007.  The Company’s consolidated financial statements and notes
thereto included elsewhere in this report contain detailed information that
should be reviewed in conjunction with the following discussion.





Total
revenues for the years ended December 31, 2008 and 2007 were approximately
$3,824,000 and $4,363,000, respectively.  The decrease in revenues of
approximately $539,000 was primarily attributable to decreased revenue of
approximately $790,000, largely due to decreased membership of one customer,
offset by increased revenue of approximately $74,000 in current customer
business due to increased services primarily with one customer and approximately
$177,000 in new business including two new customers and a one-time consulting
engagement.





Cost
of services:





Cost of services for the
years ended December 31, 2008 and 2007 were approximately $1,546,000 and
$1,687,000, respectively.The decrease in the cost of services
of approximately $141,000 was primarily due to decreases in personnel costs of
approximately $137,000 relating to terminated employees, decreases in travel
costs of approximately $6,000, offset by increases in professional costs of
approximately $2,000.  The Company’s direct costs are mostly fixed
with the exception of its costs associated with licensing fees.Any variation in
direct costs is largely due to a change in licensing fees related to a change in
license fee revenue.  Other direct costs, such as personnel costs, may
increase only if a large volume of increased business occurs where additional
staffing would be required.




Operating
Cost and Expenses





Selling,
general and administrative:





Selling,
general and administrative costs for the years ended December 31, 2008 and 2007
were $3,014,000 and $2,709,000, respectively.  The increase in
selling, general and administrative costs of approximately $305,000 is largely
due to increases in personnel costs of approximately $192,000, largely related
to salary increases, increases in professional costs of approximately $194,000
largely relating to legal and consulting fees due to the trial of Alan Fontes vs. CareAdvantage,
Inc. that commenced during 2008 and increases of approximately $5,000 in
information and communication costs, offset by decreases in facility costs of
approximately $27,000, decreased travel costs of approximately $5,000 and
decreases in other general and administrative costs of approximately
$54,000.





13


.


Depreciation
and amortization:





Depreciation
and amortization for the year ended December 31, 2008 aggregated $70,000
compared to $67,000 for the year ended December 31, 2007.  The slight
increase in depreciation and amortization costs of approximately $3,000 is
largely due to capital purchases.





Interest
expense:





Interest
expense for the years ended December 31, 2008 and 2007 was $23,000 and $18,000,
respectively.  The increase in interest expense of approximately
$5,000 is largely due to interest on equipment capital leases.





Net
loss:





The Company had a net loss of $832,000
for the year ended December 31, 2008, compared to a net loss of $83,000 for the
year ended December 31, 2007.  This increase in net loss reflects new
business not being realized and an increase in professional costs of
approximately $194,000 largely related to the trial of Alan Fontes vs. CareAdvantage,
Inc. and increased personnel costs due to salary increases relating to
market adjustments.  The Company’s net loss for thetwelvemonth period endedDecember 31, 2007 includes a gain on sale of fixed
assets of approximately $38,000.





Off-Balance
Sheet Arrangements





The
Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the company’s
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital resources or capital
reserves.





Liquidity,
Financial Condition and Capital Resources





General
Overview:





At
December 31, 2008, the Company had cash and cash equivalents of $88,000 and
negative working capital of approximately $240,000.  At December 31,
2007, the Company’s cash balance was $508,000 and working capital was
approximately $558,000.





Despite
the history of losses the Company has incurred, the Company believes that its
business has the potential to become profitable for the Company.  The
Company recently entered into a Service and License Agreement with a new state
-organization customer that offers a potential opportunity to provide services
to various other new customers including states and state
organizations.  Management believes that these opportunities enhance
business prospects and may lead to a more significant market penetration and
improved revenues and profitability for the Company.





If the
Company is unable to develop its business as planned, it may be required to seek
additional capital financing.  If the Company is not successful in
obtaining additional capital, it may need to either restructure its business,
sell its assets, or cease operations entirely.  In each case, the
Company may be required to file for bankruptcy protection.  The
Company is cautiously optimistic, however, about opportunities in its business
and currently plans to pursue those opportunities.





Financial
Condition:





Net cash
(used in)/provided by operating activities amounted to approximately ($354,000)
and $136,000 for the years ended December 31, 2008 and 2007, respectively. This
increase in cash used by operating activities is largely due to changes in
operating assets and liabilities relating primarily to accounts payable and
non-cash charges, offset by Company’s loss of approximately $832,000 in
2008.





Net cash
(used in)/provided by investing activities amounted to approximately ($4,000)
and $21,000 for the years ended December 31, 2008 and 2007,
respectively.  This decrease in cash provided is largely due a gain on
sale of assets of approximately $38,000 in 2007. Capital purchases of
approximately $4,000 and $17,000 were made in 2008 and 2007,
respectively.





Net cash
used in financing activities amounted to approximately $62,000 and $20,000 for
the years ended December 31, 2008 and 2007, respectively.  This
increase in cash used is largely due to payments on capital leases for
equipment, offset by $25,000 in proceeds from exercise of common stock options
in 2007.  There were no options exercised in 2008.





The
Company generates most of its revenue from the licensing of RPNavigator and
providing consulting services in connection with that licensing. Management
believes that its cash on hand at December 31, 2008 and cash flow from
operations based on a forecast prepared by management, which takes into account
executed contracts, and cost reductions planned and effectuated as of December
31, 2008, should enable the Company to meet its obligations as they become due
during the next 12 months. Such forecast includes contracts with new customers
as well as expanding business with current customers that are expected to start
in the next three to six months. However, there can be no assurances that
management’s plans, including projected revenue, will be attained.  If
the Company is unsuccessful in increasing its business, obtaining additional
financing, or curtailing operational costs to the point that net revenues are
sufficient to offset expenses, the Company will continue to operate at a loss
and will be required to wind up its operations, sell its assets, restructure the
business, or liquidate, as a result of which there is substantial doubt about
its ability to continue as a going concern.  No adjustments have been
made to the accompanying financial statements with respect to such
uncertainty.  Notwithstanding the foregoing, the Company is cautiously
optimistic about opportunities in its business and currently plans to pursue
those opportunities.  The Company has a history of losses and for the
12 months ended December 31, 2008, it had a net loss of $832,000. Additionally,
at December 31, 2008, the Company has an accumulated deficit of $24,370,000,
stockholders deficit of $379,000 and cash and cash equivalents of
$88,000.




14




ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The Company is a smaller reporting
company and is not required to provide the information contemplated by this
item.





ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





The Financial Statements and
supplementary data required by this item can be found beginning on page F-1
immediately following the signatures to this annual report and are incorporated
herein by reference.





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.





ITEM
      9A.
              CONTROLS
      AND PROCEDURES





Evaluation of Disclosure Controls and
Procedures





Senior management maintains disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods provided in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management, including
the Chief Executive Officer, who is also currently the acting Principal
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.  In designing and evaluating the disclosure controls and
procedures, senior management has recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and therefore has been required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.





In accordance with Rule 13a-15(b) of
the Exchange Act, as of the end of the fiscal year ended December 31, 2008, we
carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer, who is also the acting
Principal Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as defined in Rule 13a-15(e) and
15d-15(e) under the Exchange Act.  Based on that evaluation, our Chief
Executive Officer has concluded that our disclosure controls and procedures are,
in fact, effective at the reasonable assurance level.





Internal
Control Over Financial Reporting





During
the quarter ended December 31, 2008, the Company retained an
independent consultant with financial accounting and audit expertise to
perform additional oversight and review of the Company’s accounting
transactions, reconciliations, etc, to provide reasonable assurance that
unauthorized material transactions relating to the Company’s assets would be
either prevented or detected on a timely basis.  Except for the
foregoing, there were no changes in our internal controls over financial
reporting during the quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect the Company’s internal
controls over financial reporting.





As required by Section 404 of the
Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing
of the Company’s internal control over financial reporting as of December 31,
2008.  Management’s report on the Company’s internal control over
financial reporting is included on the page that follows.




15




Management’s
Annual Report on Internal Control Over Financial Reporting





Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, management is responsible for establishing and
maintaining adequate internal control over financial reporting and for assessing
the effectiveness of our internal control over financial reporting, as defined
in Exchange Act Rule 13a-15(f) and 15d-15(f).  Internal control
over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer, who is also the acting Principal
Financial Officer, to provide reasonable assurance to our management and Board
of Directors and Audit Committee regarding the reliability of financial
reporting and the fair presentation of published financial statements in
accordance with U.S. generally accepted accounting principles, and includes
those policies and procedures that:





·
                pertain
      to maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and disposition of our
    assets;


·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles and that our financial decisions are being made only
      in accordance with authorizations of our management and our Board of
      Directors; and


·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized transactions relating to our assets that could have a
      material impact on our financial
statements.





This annual report on Form 10-K does
not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting because management’s
report was not subject to attestation pursuant to temporary rules of the SEC
that permit the Company to provide only this management’s report.





Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.  A control system, no matter how well
designed and operated can provide only reasonable, but not absolute, assurance
that the control system’s objectives will be met.  The design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their cost.





Management assessed the effectiveness
of the Company’s internal control over financial reporting as of December 31,
2008.  In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework (the “COSO Framework”).





Based on this assessment and on the
foregoing criteria, management has concluded that, as of December 31, 2008, the
Company’s internal control over financial reporting is effective.





Respectfully,/s/ Dennis J. MourasDennis
      J. Mouras,Chief
      Executive Officer andActing
      Principal Financial Officer





16





ITEM
      9B.
            OTHER
      INFORMATION





None.




PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
Company’s directors, executive officers and control persons as of December 31,
2008 are as follows:





Name
              
              Age
              
              Positions with the CompanyDavid
      G. Noone (1,
      2)
              
              55
              
              Chairman
      of the Board of DirectorsDennis
      J. Mouras
              
              52
              
              Chief
      Executive Officer, President, acting Principal Financial Officer, and
      DirectorDavid
      J. McDonnell (1,2)
              
              66
              
              Director







(1)           
   Member of Compensation Committee.


(2)         
     Member of Audit Committee.





There are
no family relationships between any directors or executive officers of the
Company.





All
directors of the Company are elected by the stockholders of the Company or, in
the case of a vacancy, are elected by the directors then in office to hold
office until the next annual meeting of stockholders of the Company and until
their successors are elected and qualify or until their earlier resignation or
removal.





The
following sets forth certain information with respect to each director and
executive officer of the Company as of December 31, 2008:





David G. Noone, currently retired, has
been a director of the Company since January 1999 and Chairman of the Board
since July 30, 2002, CEO from January 1999 until February 15, 2001, and an
employee of the Company engaged in identifying and pursuing strategic business
combinations from February 15, 2001 to September 2001.  Most recently,
Mr. Noone had been employed as Executive Director of Village at East Farms,
Waterbury, Connecticut, from May 2007 until January 2009.  Prior to
his service with the Company, Mr. Noone served from September 1995 to February
1997 as the President and Chief Executive Officer of Value Health International,
a subsidiary of Value Health, Inc., where he was responsible for the migration
of Managed Health Care strategies to emerging opportunity markets in Europe,
Latin America and Asia.





Dennis J.
Mouras has served as the Chief Executive Officer and a director of the Company
since February 15, 2001.  He has served as President and Chief
Operating Officer of the Company since October 30, 2000, and as the Executive
Vice President of Marketing and Sales of the Company from April 1999 to October
30, 2000. He has also served as Acting Principal Financial Officer since January
2003.  Prior to that, Mr. Mouras served as President of Intracorp,
Inc. from January 1997 to January 1999, and as President and General Manager of
CIGNA Healthcare of Colorado from October 1994 to January 1997.





David J.
McDonnell, currently retired, has been a director of the Company since January
1997. He served from December 1993 to February 1997 as a director of Value
Health, Inc., a company engaged in the health care service business. Prior to
that, he was employed by Preferred Health Care Ltd., a behavioral managed care
company, where he served as that company’s Chief Executive Officer from 1988 to
1993, and its President from 1988 to 1992. Mr. McDonnell also served as Chairman
of Preferred Health Care Ltd.’s Board of Directors from 1991 to
1993.





Audit
Committee Financial Expert





The Board
of Directors has determined that the Company does not have an “audit committee
financial expert” as defined by Item 407 of the SEC’s Regulation
S-K.  The Board of Directors believes that the Company’s extremely
small size, limited financial resources and limited activity make such a
position unnecessary.





Compliance
with Section 16(a) of the Securities Exchange Act of 1934:





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
executive officers and directors, and persons who own more than 10% of a
registered class of the Company’s equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ, copies of which are required by regulation to be furnished to the
Company.  Based solely on review of the copies of such reports
furnished to the Company, the Company believes that during fiscal year ended
December 31, 2008, its executive officers, directors and ten percent (10%)
beneficial owners complied with all the Section 16(a) filing
requirements.




17





Code
of Ethics





During
the past several years, the Company’s resources and operations were
substantially curtailed. The Company currently has approximately 12 full-time
employees, of which only one is a principal executive and financial officer, and
has reduced its overhead expenses in order to operate within the constraints of
its limited revenues.  Because of the small staff, the involvement of
management and the Board of Directors in the business and operations of the
Company, and the internal policies of the Company, the Company has not adopted a
separate code of ethics for principal executive and financial officers. We
experience a limited number of financial transactions in our present operations,
all of which are approved and executed by our chief executive officer, who is
also currently acting as our principal financial officer.  The Board
of Directors and management have unequivocally set the tone for integrity and
credibility in all aspects of the Company’s operations.  In view of
the Company’s very small size and the limited number of personnel who are
responsible for its operations, a formal code of ethics is not
necessary.  Our Board of Directors periodically revisits this issue to
determine if adoption of a code of ethics is appropriate.  In the
meantime, our management intends to promote honest and ethical conduct, full and
fair disclosure in our reports to the SEC, and compliance with applicable
governmental laws and regulations.





ITEM
      10.
            EXECUTIVE
      COMPENSATION





Executive
Compensation





The
following table sets forth the total remuneration for services in all capacities
awarded to, earned by, or paid to our Chief Executive Officer and President (the
“named executive officer”) for each of the last two completed fiscal
years.  No other person who served as an executive officer during 2008
earned total compensation in excess of $100,000 for 2008 (or would have earned
in excess of such amount had they been an executive officer as of December 31,
2008).  The Company does not maintain any nonequity incentive
compensation plans or nonqualified deferred compensation plans.





Summary
Compensation Table





Name and principal
                                position
                              
                              Year
                              
                              Salary
                                ($)
                              
                              
                              Bonus
                                ($)
                              
                              
                              Stock
                                Awards
                                ($)(2)
                              
                              
                              Option
                                awards
                                ($)(2)
                              
                              
                              All other
                                Compensation
                                ($)(3)
                              
                              
                              Total
                                ($)Dennis
      J. Mouras
                              
                              2008
                              
                              
                              415,385
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              68,029
                              
                              
                              
                              483,414Chief
      Executive Officer & President (1)
                              
                              2007
                              
                              
                              293,626
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              67,380
                              
                              
                              
                              361,006


(1)
            Mr.
      Mouras also serves on the Board of Directors but receives no separate
      remuneration for such service.


(2)
            The
      Company calculates the value of equity awards using the provisions of
      Statement of Financial Accounting Standards No. 123R, “Share-based
      Payment”.  See Note B to the audited consolidated financial
      statements presented elsewhere in this annual report regarding assumptions
      underlying valuation of equity
awards.


(3)
            Includes
      Company matching contributions to a 401(k) profit sharing/savings plan in
      the amount of $6,600 for 2008 and 2007, $ 649 for 2008 related to imputed
      income for premiums paid for group term life insurance coverage and
      $60,780 for 2008 and 2007 for commuting allowances plus federal and state
      tax gross-ups therefor.





Mouras
Employment Agreement





On
October 25, 2000, the Company entered into an Employment Agreement with Dennis
Mouras (the “Mouras Employment Agreement”), the current Chief Executive Officer
and President and acting Principal Financial Officer.  The Mouras
Employment Agreement replaced an earlier agreement between Mr. Mouras and the
Company during the time that Mr. Mouras served as the Company’s Executive Vice
President of Marketing and Sales.The Mouras Employment
Agreement had an initial one-year term, after which it renews automatically for
successive one-year terms unless terminated by either party on at least 60 days
notice prior to an anniversary date.  The Mouras Employment Agreement
initially provided for (a) an annual salary of $285,000, (b) a grant of
incentive stock options on October 26, 2000 pursuant to the Company’s Stock
Option Plan for 2,500,000 shares, (c) six months of severance benefits if
employment is terminated without cause, and (d) other benefits, including
participation in the Company’s 401(k) plan, life insurance coverage, and medical
insurance coverage available to all eligible employees.  Under the
Mouras Employment Agreement, Mr. Mouras waived unpaid sales commissions to which
he was otherwise entitled under his prior agreement.  The Mouras
Employment Agreement also contains a non-solicitation restriction for one year
after the termination of Mr. Mouras’ employment.  On October 30, 2002,
the Company amended the Mouras Employment Agreement by agreeing to increase to
one year the severance that Mr. Mouras would be entitled to receive if his
employment is terminated without cause.  On November 11, 2005, the
Company further amended the Mouras Employment Agreement by agreeing to increase
the allowance for commuting paid Mr. Mouras to $3,000 per month from $1,500 per
month, grossed-up in each case for federal and state income tax
liability.  On November 20, 2007, the Company further amended the
Mouras Employment Agreement to increase the annual salary payable to Mr. Mouras
to $400,000 per year, effective as of the date of the amendment.  The
annual salary paid to Mr. Mouras for 2008 was actually $415,385 due to the fact
that the W-2 year for 2008 included 27 payroll periods, instead of the 26
standard payroll periods in a calendar year.




18




Stock
Option Plan





The
Company’s Restated and Amended Stock Option Plan for key employees was adopted
on June 6, 1996 and was approved by the Company’s stockholders.  This
plan terminated pursuant to its terms on June 6, 2006.  At December
31, 2008, the named executive officer did not hold any outstanding stock options
or other equity award.





Benefits
Upon Termination of Employment





Mr.
Mouras’ amended Employment Agreement, entered into on November 20, 2007,
provides for a severance payment by the Company of 12-months salary in the event
his employment is terminated by the Company without cause.  This
severance benefit would be paid out over 12 months.  As of December
31, 2008, the total amount of severance benefits that could be paid to Mr.
Mouras upon a termination of employment is $400,000.





401(k)
Plan





The
Company maintains a 401(k) plan for employees who meet the eligibility
requirements set forth in the plan.  Pursuant to the plan, the Company
provides a 50% matching contribution of the first 6% of each participant’s
contribution.  All contributions by the Company must comply with the
federal pension laws’ non-discrimination requirements and the terms of the
plan.





COMPENSATION OF
DIRECTORS





The following table provides
information about compensation paid to or earned by the Company’s Directors
during 2008 who were not named executive officers.  Mr. Mouras does
not receive director compensation.





Name
                      
                      Fees earned or
                        paid in cash
                        ($)
                      
                      
                      Option awards
                        ($)(1)
                      
                      
                      All other
                        compensation
                        ($)(2)
                      
                      
                      Total
                        ($)David
      J. McDonnell
                      
                      $
                      4,800
                      
                      
                      
                      -
                      
                      
                      $
                      1,136
                      
                      
                      $
                      5,936David
      G. Noone
                      
                      $
                      4,800
                      
                      
                      
                      -
                      
                      
                      $
                      2,738
                      
                      
                      $
                      7,538


(1)
              The
      Company calculates the value of equity awards using the provisions of
      Statement of Financial Accounting Standards No. 123R, “Share-based
      Payment”.  See Note B to the audited consolidated financial
      statements presented elsewhere in this annual report regarding assumptions
      underlying valuation of equity awards.  At December 31, 2008,
      each of Messrs. McDonnell and Noone held options outstanding to purchase
      1,250,000 shares of Common
Stock.


(2)
              Amount
      reflects reimbursement for out-of-pocket expenses associated with
      attending meetings of the Board of
Directors.





Directors’
Fees





Directors
who are not officers of the Company are paid $1,200 for each meeting of the
Board of Directors that they attend.  Directors are also reimbursed
for their reasonable out-of-pocket expenses for each attended meeting of the
Board or any committee thereof.  The Board held four meetings during
2008.





Directors
Stock Option Plan





Until its
termination on June 6, 2006, non-employee directors of the Company were eligible
to receive stock options under the Company’s Restated and Amended Directors’
Stock Option Plan (the “Director Plan”).  The Company adopted the
Director Plan on June 6, 1996, which was amended on July 24, 1996 and the
Director Plan, as amended, was approved by the stockholders on August 23,
1996.  Thereafter, the Director Plan was further amended on January
26, 1999 with the stockholders approving that amendment on July 7,
1999.





The Director Plan contemplated the
grant of non-qualified stock options and was administered by the Board of
Directors, who had authority to determine: (i) the number of shares of the
Company’s Common Stock that could be purchased upon the exercise of options;
(ii) the time or times when options became exercisable; (iii) the exercise
price; and (iv) the duration of options, which could not exceed 10
years.  The Director Plan reserved an aggregate of 2% of the Company’s
authorized number of shares of Common Stock for issuance. On January 19, 2001,
the Company increased its authorized shares of Common Stock to 200,000,000
shares, so the number of shares reserved for issuance under the Director Plan
was 4,000,000 shares.




19




All options granted under the Director
Plan are exercisable during the option grantee’s lifetime only by the option
grantee (or his or her legal representative).  In the event of
termination of an option grantee’s directorship, such person shall have three
months from such date to exercise such option to the extent the option was
exercisable as at the date of termination, but in no event subsequent to the
option’s expiration date.  In the event of termination of an option
grantee’s directorship due to death, such person’s legal representative shall
have 12 months from such date to exercise such option to the extent the option
was exercisable at the date of death, but in no event subsequent to the option’s
expiration date.





The Directors Plan contains
anti-dilution provisions which provide that in the event of any change in the
Company’s outstanding capital stock by reason of stock dividend,
recapitalization, stock split, combination, exchange of shares or merger or
consolidation, the Board shall equitably adjust the aggregate number and kind of
shares reserved for issuance, and for outstanding options, the number of shares
covered by each option and the exercise prices per share.





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





The following table sets forth as of
February 27, 2009 certain information regarding the beneficial ownership of the
Company’s Common Stock by (i) all persons known to the Company who own more than
5% of the outstanding Common Stock, (ii) each director, (iii) the named
executive officer, and (iv) all executive officers and directors as a group.
Unless otherwise indicated, the persons named in the table below have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.





Beneficial
Ownership of Common Stock by


Certain
Stockholders and Management




Number of SharesName of Beneficial Owner
                      
                      Beneficially Owned (1)
                      
                      
                      Percent of Ownership (2)Principal
      Holders:Credit
      Suisse Asset Management, LLC (3) (4)
                      
                      
                      7,536,204
                      
                      
                      
                      12.10
                      %Directors
      and Executive OfficersDavid
      J. McDonnell (5)(8)
                      
                      
                      2,150,000
                      
                      
                      
                      3.38
                      %David
      G. Noone (6)(8)
                      
                      
                      4,150,000
                      
                      
                      
                      6.53
                      %Dennis
      J. Mouras (7)
                      
                      
                      9,500,100
                      
                      
                      
                      15.25
                      %All
      directors and executive officers asa
      group (3 persons) (8)
                      
                      
                      15,800,100
                      
                      
                      
                      24.39
                      %







* Less
than 1%





(1)
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting or
investment power with respect to those securities.   Beneficial
ownership includes the right to acquire shares within 60 days (such as through
the exercise of stock options).





(2) The
percent beneficially owned by any person or group who held options exercisable
within 60 days has been calculated assuming all such options have been exercised
in full and adding the number of shares subject to such options to the total
number of shares issued and outstanding.





(3) The
principal business address of Credit Suisse Asset Management, LLC, is 466
Lexington Avenue, New York, New York 10017.





(4) Information
based on Schedule 13G filed by Credit Suisse Asset Management, LLC on December
22, 2004, with the Securities and Exchange Commission (“SEC”).





(4) The
business address of Mr. McDonnell, a director of the Company, is 301 Aqua Court,
Naples, Florida 34102.





(5) The
business address of Mr. Noone, a director of the Company, is 34 Sunset Hill
Road, Redding, Connecticut, 06896.





(6) The
business address of Mr. Mouras, Chief Executive Officer and director, is 485-C
Route 1 South, Iselin, New Jersey 08830.





(7)
1,250,000 shares of Mr. McDonnell’s Common Stock, 1,250,000 shares of Mr.
Noone’s of Common Stock, and 2,500,000 shares of the Common Stock owned by all
directors and executive officers as a group are issuable upon the exercise of
stock options to purchase shares of Common Stock that were exercisable on
February 27, 2009 or that will become exercisable within 60 days of such
date.




20




Equity
Compensation Plans





The following table sets forth the
securities authorized for issuance under the Company’s equity compensation plans
as of December 31, 2008:





Plan category
                              
                              (A)
                                  Number of securities to be
                                  issued upon exercise of
                                  outstanding options,
                                  warrants and rights
                              
                              
                              (B)
                                  Weighted-average
                                  exercise price of,
                                  outstanding options,
                                  warrants and rights
                              
                              
                              (C)
                                  Number of securities
                                  remaining available for
                                  future issuance under equity
                                  compensation plans
                                  (excluding securities
                                  reflected in column (A)Equity
      compensation plans approved by security holders
                              
                              
                              12,766,038
                              
                              
                              $
                              0.013
                              
                              
                              
                              -Equity
      compensation plans not approved by security holders
                              
                              
                              -
                              
                              
                              $
                              -
                              
                              
                              
                              -Total
                              
                              
                              12,766,038
                              
                              
                              $
                              0.013
                              
                              
                              
                              -





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Related
Transactions Since January 1, 2007





None.





Director
Independence





The Company’s Board of Directors has
determined that David G. Noone and David J. McDonnell are “independent
directors” as defined in NASDAQ Stock Market Rule 4200(a)(15).





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





Audit
and Non-Audit Fees





The following table shows the fees
billed to the Company for the audit and other services provided by the Company’s
principal accountant, Eisner LLP, in 2008 and 2007:





Services Performed
                    
                    2008
                    
                    
                    2007Audit
      Fees (1)
                    
                    
                    97,600
                    
                    
                    
                    97,600Audit-Related
      Fees (2)
                    
                    
                    -
                    
                    
                    
                    -Tax
      Fees (3)
                    
                    
                    15,200
                    
                    
                    
                    15,200All
      Other Fees (4)
                    
                    
                    -
                    
                    
                    
                    -Total
      Fees
                    
                    
                    112,800
                    
                    
                    
                    112,800





(1)              Audit
fees represent fees for professional services provided in connection with the
audit of the Company’s financial statements and review of the financial
statements included in the Company’s 10-K and 10-Q filings, and services that
are normally provided in connections with statutory and regulatory filings or
engagements.





(2)              Audit-related
fees are fees for services performed by Eisner LLP that are reasonably related
to the performance of the audit or review of the Company’s financial
statements.





(3)              Tax
fees are fees for professional services performed by Eisner LLP with respect to
tax compliance, tax preparation, tax advice and tax planning in 2007 and
2008.





(4)             
All other fees include work performed by Eisner LLP relating to 401k audit and
benefit plan filings that does not meet the above category
descriptions.




21




Pre-Approval of Audit and
Non-Audit Services




The Audit
Committee currently pre-approves all services provided by our independent
registered public accounting firm. All of the above fees for 2007 and 2008 were
pre-approved by the audit committee.  No fees in 2007 or 2008 were
paid to the independent registered public account firm pursuant to the “de
minimis” exception to the foregoing pre-approval policy.





The Audit
Committee has considered the nature and amount of fees billed by Eisner LLP and
believes that the provision of services for activities unrelated to the audit is
compatible with maintaining Eisner LLP’s independence





PART
IV





ITEM
15.       EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES





(a)(1),
(2) and (c) Financial statements and schedules:





Report
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets at December 31, 2008 and 2007
                F-3Consolidated
      Statements of Operations — Years Ended December 31, 2008 and
      2007
                F-4Consolidated
      Statements of Changes in Stockholders’ (Deficit)/Equity— Years Ended
      December 31, 2008 and 2007
                F-5Consolidated
      Statements of Cash Flows — Years Ended December 31, 2008 and
      2007
                F-6Notes
      to Consolidated Financial Statements for the years ended December 31, 2008
      and 2007
                F-7




22




(a)(3)
and (b) Exhibits required to be filed by Item 601 of Regulation
S-K:





The
exhibits filed or furnished with this annual report are shown on the Exhibit
Index that follows the signatures to this annual report, which index is
incorporated herein by reference.





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





CareAdvantage, Inc.(Registrant)




Date:   March
      31, 2009
                                By:
                                /s/ Dennis J. MourasDennis
      J. Mouras, Chief Executive
Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:


Date:   March
      31, 2009
                          /s/ Dennis J. MourasDennis J. Mouras, Chief Executive Officer, Directorand acting Principal Financial Officer and Accounting OfficerDate:   March
      31, 2009
                          /s/ David J. McDonnellDavid
      J. McDonnell, DirectorDate:   March
      31, 2009
                          /s/ David G. NooneDavid
      G. Noone,
Director
 23


CAREADVANTAGE,
INC.
 AND
SUBSIDIARIES
  CONSOLIDATED
FINANCIAL
 STATEMENTS
 
 DECEMBER
31, 2008 AND 2007
 
 INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
  Report
      of Independent Registered Public Accounting Firm
                                      F-2Consolidated
      Balance Sheets at December 31, 2008 and 2007
                                      F-3Consolidated
      Statements of Operations for the years ended December 31, 2008 and
      2007
                                      F-4Consolidated
      Statements of Changes in Stockholders’ (Deficit)/Equity for the years
      ended December 31, 2008 and 2007
                                      F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
                                      F-6Notes
      to consolidated financial statements
                                      F-7
  F-1




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


CareAdvantage,
Inc.





We have
audited the accompanying consolidated balance sheets of CareAdvantage, Inc. and
subsidiaries (the "Company") as of December 31, 2008 and 2007 and the
related consolidated statements of operations, stockholders' equity / (deficit)
and cash flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company's internal control over financial
reporting.  Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CareAdvantage, Inc.
and subsidiaries as of December 31, 2008, and 2007 and the consolidated
results of their operations and their consolidated cash flows for years then
ended, in conformity with accounting principles generally accepted in the United
States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note A to the
consolidated financial statements, the Company has had recurring losses from
operations, decreasing cash and cash equivalents, and has negative working
capital and capital deficits at December 31, 2008.  These factors
raise substantial doubt about the Company's ability to continue as a going
concern.  Management's plans in regard to these matters are also
discussed in the Note A. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





/s/
Eisner LLP





New York,
New York


March 31,
2009


F-2


CareAdvantage,
Inc. and Subsidiaries


Consolidated
Balance Sheets





December 31,2008
                  
                  
                  2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  88,000
                  
                  
                  $
                  508,000Accounts
      receivable
                  
                  
                  239,000
                  
                  
                  
                  387,000Prepaid
      expenses and other current assets
                  
                  
                  102,000
                  
                  
                  
                  148,000Total
      current assets
                  
                  
                  429,000
                  
                  
                  
                  1,043,000Property
      and equipment, at cost, net of accumulated depreciation
                  
                  
                  170,000
                  
                  
                  
                  234,000Intangible
      assets, net of accumulated amortization
                  
                  
                  4,000
                  
                  
                  
                  6,000Security
      deposits
                  
                  
                  167,000
                  
                  
                  
                  167,000Total
      Assets
                  
                  $
                  770,000
                  
                  
                  $
                  1,450,000LIABILITIES
      AND STOCKHOLDERS’ (DEFICIT)/EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  454,000
                  
                  
                  $
                  62,000Accrued
      compensation and related benefits
                  
                  
                  73,000
                  
                  
                  
                  124,000Accrued
      professional fees
                  
                  
                  50,000
                  
                  
                  
                  206,000Other
      current liabilities
                  
                  
                  1,000
                  
                  
                  
                  14,000Deferred
      revenue
                  
                  
                  33,000
                  
                  
                  
                  21,000Capital
      lease obligation – current
                  
                  
                  58,000
                  
                  
                  
                  58,000Total
      current liabilities
                  
                  
                  669,000
                  
                  
                  
                  485,000Long
      Term Liabilities:Capital
      Lease Obligation - Long Term
                  
                  
                  76,000
                  
                  
                  
                  138,000Deferred
      rent
                  
                  
                  404,000
                  
                  
                  
                  428,000Total
      long term liabilities
                  
                  
                  480,000
                  
                  
                  
                  566,000Total
      Liabilities
                  
                  
                  1,149,000
                  
                  
                  
                  1,051,000Commitments
      and contingencies (Note H)Stockholders’
      (deficit)/equity:Preferred
      stock - par value $.10 per share; authorized 10,000,000 shares; none
      issuedCommon
      stock - par value $.001 per share, authorized 200,000,000 shares;
      issued 115,534,262 and 113,256,485 shares and outstanding 62,139,442
      and 59,861,665 shares at December 31, 2008 and 2007,
      respectively
                  
                  
                  115,000
                  
                  
                  
                  113,000Additional
      paid in capital
                  
                  
                  24,138,000
                  
                  
                  
                  24,086,000Accumulated
      deficit
                  
                  
                  (24,370,000
                  )
                  
                  
                  (23,538,000
                  )Treasury
      Stock at cost, 53,394,820 shares
                  
                  
                  (262,000
                  )
                  
                  
                  (262,000
                  )Total
      stockholders’ (deficit)/equity
                  
                  
                  (379,000
                  )
                  
                  
                  399,000Total
      Liabilities and Stockholders’ (Deficit)/Equity
                  
                  $
                  770,000
                  
                  
                  $
                  1,450,000




See
notes to consolidated financial statements


F-3





CareAdvantage,
Inc. and Subsidiaries


Consolidated
Statements of Operations





Year EndedDecember 31,2008
                  
                  
                  2007License
      fees and service revenue
                  
                  $
                  3,824,000
                  
                  
                  $
                  4,363,000Cost
      of services
                  
                  
                  1,546,000
                  
                  
                  
                  1,687,000Gross
      profit
                  
                  
                  2,278,000
                  
                  
                  
                  2,676,000Operating
      expenses:Selling,
      general and administrative
                  
                  
                  3,014,000
                  
                  
                  
                  2,709,000Depreciation
      and amortization
                  
                  
                  70,000
                  
                  
                  
                  67,000Total
      operating expenses
                  
                  
                  3,084,000
                  
                  
                  
                  2,776,000Operating
      loss
                  
                  
                  (806,000
                  )
                  
                  
                  (100,000
                  )Interest
      expense
                  
                  
                  (23,000
                  )
                  
                  
                  (18,000
                  )Gain
      on sale of assets
                  
                  
                  -
                  
                  
                  
                  38,000Loss
      before provision for income taxes
                  
                  
                  (829,000
                  )
                  
                  
                  (80,000
                  )Provision
      for income taxes
                  
                  
                  3,000
                  
                  
                  
                  3,000Net
      loss
                  
                  $
                  (832,000
                  )
                  
                  $
                  (83,000
                  )Net
      loss per share of common stock -Basic
      and diluted
                  
                  $
                  ( .01
                  )
                  
                  $
                  ( .00
                  )Weighted
      average number of common shares outstanding -Basic
      and diluted
                  
                  
                  60,951,000
                  
                  
                  
                  57,857,000




See
notes to consolidated financial statements




F-4





CareAdvantage,
Inc. and Subsidiaries


Consolidated
Statements of Changes in Stockholders’ Equity/(Deficit)





Common
                            Stock
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          Treasury
                            StockNumber
                            of
                            Shares
                          
                          
                          Par
                            Value
                            Amount
                          
                          
                          Additional
                            Paid In
                            Capital
                          
                          
                          Accumulated
                            Deficit
                          
                          
                          Deferred
                            Compensation
                          
                          
                          Number
                            of
                            Shares
                          
                          
                          Par
                            Value
                            Amount
                          
                          
                          Total
                            Stockholder’s
                            (Deficit)/EquityBalance
      as of January 1,2007
                          
                          
                          110,170,374
                          
                          
                          $
                          110,000
                          
                          
                          $
                          24,007,000
                          
                          
                          $
                          (23,455,000
                          )
                          
                          $
                          0
                          
                          
                          
                          (53,394,820
                          )
                          
                          $
                          (262,000
                          )
                          
                          $
                          400,000Exercise
      of stock options
                          
                          
                          3,086,111
                          
                          
                          
                          3,000
                          
                          
                          
                          22,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          25,000Stock-based
      compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          57,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          57,000Net
      loss for the year ended December 31, 2007
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (83,000
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (83,000
                          )Balance
      as of January 1, 2008
                          
                          
                          113,256,485
                          
                          
                          $
                          113,000
                          
                          
                          $
                          24,086,000
                          
                          
                          $
                          (23,538,000
                          )
                          
                          $
                          0
                          
                          
                          
                          (53,394,820
                          )
                          
                          $
                          (262,000
                          )
                          
                          $
                          399,000Grant
      of stock-based compensation
                          
                          
                          1,000,000
                          
                          
                          
                          1,000
                          
                          
                          
                          19,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          20,000Issuance
      of stock for services
                          
                          
                          1,277,777
                          
                          
                          
                          1,000
                          
                          
                          
                          1,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,000Stock-based
      compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          32,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          32,000Net
      loss for the year ended December 31, 2008
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (832,000
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (832,000
                          )Balance
      as of December 31, 2008
                          
                          
                          115,534,262
                          
                          
                          $
                          115,000
                          
                          
                          $
                          24,138,000
                          
                          
                          $
                          (24,370,000
                          )
                          
                          $
                          0
                          
                          
                          
                          (53,394,820
                          )
                          
                          $
                          (262,000
                          )
                          
                          $
                          (379,000
                          )




See
notes to consolidated financial statements




F-5


CareAdvantage,
Inc. and Subsidiaries


Consolidated
Statements of Cash Flows





Year EndedDecember312008
                
                
                2007Cash
      flows from operating activities:Net
      loss
                
                $
                (832,000
                )
                
                $
                (83,000
                )Adjustments
      to reconcile net loss to net cash (used in)/provided by operating
      activities:Depreciation
      and amortization
                
                
                70,000
                
                
                
                67,000Stock
      based compensation
                
                
                54,000
                
                
                
                57,000Deferred
      revenue
                
                
                12,000
                
                
                
                (53,000
                )Deferred
      Rent
                
                
                (24,000
                )
                
                
                76,000Gain
      on sale of property and equipment
                
                
                -
                
                
                
                (38,000
                )Changes
      in:Accounts
      receivable
                
                
                148,000
                
                
                
                141,000Prepaid
      expenses and other assets
                
                
                46,000
                
                
                
                (56,000
                )Accounts
      payable
                
                
                392,000
                
                
                
                (83,000
                )Accrued
      expenses and other liabilities
                
                
                (220,000
                )
                
                
                108,000Net
      cash (used in)/provided by operating activities
                
                
                (354,000
                )
                
                
                136,000Cash
      flows from investing activity:Proceeds
      from sale of property and equipment
                
                
                -
                
                
                
                38,000Capital
      expenditures
                
                
                (4,000
                )
                
                
                (17,000
                )Net
      cash (used in)/provided by investing activities
                
                
                (4,000
                )
                
                
                21,000Cash
      flows from financing activity:Repayment
      of capital leases
                
                
                (62,000
                )
                
                
                (45,000
                )Proceeds
      from exercise of stock options
                
                
                -
                
                
                
                25,000Net
      cash used in financing activities
                
                
                (62,000
                )
                
                
                (20,000
                )Net
      (decrease)/increase in cash and cash equivalents
                
                
                (420,000
                )
                
                
                137,000Cash
      and cash equivalents - beginning of year
                
                
                508,000
                
                
                
                371,000Cash
      and cash equivalents - end of year
                
                $
                88,000
                
                
                $
                508,000Supplemental
      disclosures of cash flow information:Income
      taxes paid
                
                $
                3,000
                
                
                $
                3,000Interest
      paid
                
                $
                23,000
                
                
                $
                19,000Non-cash
      transactions:Equipment
      acquired through capital leases
                
                $
                -
                
                
                $
                52,000




See
notes to consolidated financial statements


F-6





CareAdvantage,
Inc. and Subsidiaries





NOTE
A - BUSINESS AND BASIS OF PRESENTATION





[1] Business:





CareAdvantage,
Inc. (the “Company”) and its direct and indirect subsidiaries, CareAdvantage
Health Systems, Inc. (“CAHS”) and Contemporary HealthCare Management, Inc.
(“CHCM”), are in the business of providing healthcare consulting services, data
warehousing and analytic services designed to enable integrated health care
delivery systems, healthcare plans, employee benefit consultants, other care
management organizations, self insured employers and unions to reduce the costs,
while improving the quality, of medical services provided to the healthcare
participants. The services include care management program enhancement services,
executive and clinical management services, training programs, risk
stratification and predictive modeling. The Company operates in one business
segment.





As part
of offering its healthcare consulting services, the Company has developed
RightPath® Navigator (RPNavigator), a proprietary tool to help its customers
better understand and forecast resource consumption, risk, and costs associated
with their respective populations. In providing its services, the Company
licenses RPNavigator to its customers and provides consulting services in
connection with that licensing.





[2] Going
Concern:





The
financial statements have been prepared and presented assuming the Company will
continue as a going concern.  For the years ended December 31, 2008
and 2007, the Company incurred net losses of $832,000 and $83,000, respectively,
and it has an accumulated deficit as of December 31, 2008 of $24,370,000.
Additionally, the Company had $88,000 of cash and cash equivalents at December
31, 2008, compared to $508,000 at December 31, 2007, and negative working
capital of approximately $240,000 and a capital deficit of
$379,000 at December 31, 2008, compared to working capital of approximately
$558,000 and stockholders' equity of $399,000 at December 31, 2007. These
factors raise substantial doubt regarding the Company’s ability to continue as a
going concern.  The Company generates most of its revenue from the
licensing of RPNavigator and providing consulting services in connection with
that licensing. Based on cash at hand at December 31, 2008 and a forecast
prepared by management, which took into account executed contracts, and cost
reductions planned and effectuated as of December 31, 2008, management expects
the Company to be able to meet its obligations as they become due during the
next twelve months. Such forecast includes contracts with new customers as well
as expanding business with current customers that are expected to start in the
next three to six months.  However, there can be no assurances that
management’s plans, including projected revenue, will be attained.





If the
Company does not attain management’s plans, the Company will further reduce the
size of its workforce and/or curtail operations, which will have a material
adverse effect on the Company’s business prospects.  The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.





NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





[1] Principles
of consolidation:





The
consolidated financial statements include the accounts of the Company, and its
wholly owned subsidiary, CAHS and CAHS’s wholly owned subsidiary, CHCM.
Intercompany accounts and transactions have been eliminated in
consolidation.





[2] Revenue
recognition:





With
respect to RPNavigator license fees, all of the Company’s customers licensing
RPNavigator are required, as part of their agreements with the Company, to
receive consulting services from the Company. All contracts provide for
licensing of RPNavigator and consulting services at a fixed monthly fee, a per
member per month fee, or a combination of both. The Company earns the revenue
from licensing and consulting services on a monthly basis and recognizes revenue
from both services on a monthly basis at either a fixed monthly fee, a per
member per month fee or a combination of both. Additionally, the Company
provides separate consulting services on a fee for service basis. Revenue for
these consulting services is recognized as the services are
provided.





[3] Depreciation
and amortization:





Depreciation
is computed by the straight-line method, over the estimated useful lives of the
assets, which range from three to seven years. Leasehold improvements are
amortized using the straight-line method over the remaining term of the related
lease or the estimated useful life, whichever is shorter. Amortization of assets
recorded under a capital lease is computed using the straight-line method and is
included in depreciation expense. (See Note D)




Intangible
assets, principally software development costs, are amortized over the expected
useful lives of five to seven years on the straight-line method (see Note C).
Amortization expense was $2,000 for both years ended December 31, 2008 and
2007.


F-7





CareAdvantage,
Inc. and Subsidiaries





NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




[4] Per
share data:





Basic and
diluted net loss per share has been computed based on the weighted average
number of outstanding shares of common stock. Potentially dilutive securities
which were excluded from the computation of basic loss per share because they
had an anti-dilutive impact are as follows:





December 31,2008
                    
                    
                    2007Total
      Potential Dilutive shares
                    
                    
                    12,766,000
                    
                    
                    
                    16,266,000




[5]Concentration
of credit risk:





Financial
instruments that potentially subject the Company to credit risk consist of cash
and cash equivalents and accounts receivable. The Company maintains its cash
balances in high quality financial institutions. At times, the amount of cash
maintained in a given financial institution may exceed the federally insured
limits.





[6]
Estimates:





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions, such as those estimates pertaining to FAS 123R, that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.





[7] Fair
value of financial instruments:





The fair
value of financial instruments approximates their carrying amount due to the
short-term nature of such instruments.





[8]
Cash and cash equivalents:





The
Company considers all highly liquid investments which have maturities of three
months or less when acquired, to be cash equivalents.





[9] Accounts
Receivable and Allowance for Doubtful Accounts:





The
Company shows accounts receivable amounts at their net realizable value, which
reflects the invoiced amounts. The Company does not currently maintain an
allowance for doubtful accounts based on management’s consideration of
historical collection experience and the characteristics of existing accounts.
The Company has not had any accounts receivable allowances or write-offs for the
accounting periods presented.





[10]
Major customers:





Two
customers, BCBS organizations, accounted for approximately 53% and 25%,
respectively, of license fees and service revenue for the year ended December
31, 2008 and approximately 66% and 4% of accounts receivable, respectively. The
same two customers, BCBS organizations, accounted for approximately 65% and 23%,
respectively, of license fees and service revenue for the year ended December
31, 2007. If the BCBS customers terminate or modify existing contracts or
experience business difficulties, it would adversely affect our results of
operations.




F-8





CareAdvantage,
Inc. and Subsidiaries





NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[11] Stock-based
compensation:





The
Company recognizes stock-based compensation in accordance with Statement of
Financial Accounting Standard No. 123R, “Share Based Payment” (FAS123R), which
requires that all share-based payments, including grants of stock options, be
recognized in the statement of operations as a compensation expense, based
on their fair values at the date of grant. Under the provisions of FAS 123R, the
estimated fair value of options granted under the Company’s Employee Stock
Option Plan and Director Stock Option Plan are recognized as compensation
expense over the option-vesting period.





For the
year ended December 31, 2008, the Company included approximately $54,000 of
share-based compensation in its operating expenses in the Company’s statement of
operations, of which approximately $20,000 was related to a stock bonus grant of
one million shares of common stock to an employee. For the year ended December
31, 2007, the Company included approximately $57,000 of share-based compensation
in the statement of operations.





FAS 123R
requires cash flows resulting from tax benefits of tax deductions in excess of
the compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. The Company did not realize any tax benefits
from stock options during the twelve months ended December 31,
2008.




The
following table summarizes the activity of the Company’s stock options for the
years ended December 31, 2008 and December 31, 2007:




Weighted
                  
                  
                  Weighted AverageAverage
                  
                  
                  Remaining
                  
                  
                  AggregateExercise
                  
                  
                  Contractual
                  
                  
                  IntrinsicShares
                  
                  
                  Price
                  
                  
                  Term
                  
                  
                  ValueNumber
      of shares under option:Outstanding
      at December 31, 2006
                  
                  
                  19,852,000
                  
                  
                  $
                  0.012Granted
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $Exercised
                  
                  
                  (3,086,000
                  )
                  
                  $
                  0.008Canceled
      or expired
                  
                  
                  (500,000
                  )
                  
                  $
                  0.013Outstanding
      as of December 31, 2007
                  
                  
                  16,266,000
                  
                  
                  $
                  0.013Granted
                  
                  
                  -
                  
                  
                  $
                  -Exercised
                  
                  
                  -
                  
                  
                  $
                  -Canceled
      or expired
                  
                  
                  (3,500,000
                  )
                  
                  $
                  0.012Outstanding
      as of December 31, 2008
                  
                  
                  12,766,000
                  
                  
                  $
                  0.013
                  
                  
                  
                  6.50
                  
                  
                  $
                  -Exercisable
      at December 31, 2008
                  
                  
                  11,849,000
                  
                  
                  $
                  0.013
                  
                  
                  
                  6.43
                  
                  
                  $
                  -Expected
      to vest after December 31, 2008
                  
                  
                  917,000
                  
                  
                  $
                  0.015
                  
                  
                  
                  7.38
                  
                  
                  $
                  -




F-9





CareAdvantage,
Inc. and Subsidiaries





NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





As of
December 31, 2008, there was approximately $8,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under existing stock option plans. This cost is expected to be
recognized over the weighted average remaining vesting period of .37
years.





There
were no exercised employee stock options during the year ended December 31,
2008.  The total intrinsic value of options exercised during the
twelve months ended December 31, 2007 was $18,000.





For the
purposes of determining estimated fair value under FAS 123R, the Company has
computed the fair values of all share-based compensation using the Black-Scholes
option pricing model and has applied the assumptions set forth in the following
table. The Company calculated expected volatility based on the Company’s
historical stock volatility. There were no options granted during the years
ended December 31, 2008 and 2007.





Under
FAS123R, forfeitures are estimated at the time of valuation and reduce expense
ratably over the vesting period. This estimate is adjusted periodically based on
the extent to which the actual forfeitures differ, or are expected to differ,
from the previous estimate.





[12] Recent
Accounting Pronouncements




In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
“Fair Value Measurements,” to define fair value, establish a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expand disclosures about fair value measurements. SFAS No. 157
is effective for fiscal years beginning after November 15, 2007. The provisions
under SFAS No. 157 were effective for the Company beginning January 1, 2008. In
February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of
FASB Statement No. 157,” which defers the effective date of SFAS No. 157 for all
nonrecurring fair-value measurements of nonfinancial assets and liabilities
until fiscal years beginning after November 15, 2008. The adoption of these
pronouncements did not have a material impact on our financial position and
results of operations.





In
October of 2008, the Financial Accounting Standards Board issued Staff Position
No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active,” which clarifies the application of FASB Statement No.
157 in a market that is not active.  This FSP is effective for fiscal
years beginning after October 10, 2008.  The adoption of this
pronouncement will not have a material impact on our financial position and
results of operations.




In
February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities” including
an amendment of SFAS No. 115. SFAS No. 159 provides companies with an option to
report selected financial liabilities at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The provisions under SFAS
No. 159 were effective for the Company beginning January 1, 2008. The adoption
of this pronouncement did not have a material impact on our financial position
and results of operations.





In April
2008, the Financial Accounting Standards Board issued Staff Position No. 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP No.
142-3”).  FSP No. 142-3 amends the factors to be considered when
developing renewal or extension assumptions that are used to estimate an
intangible asset’s useful life under SFAS No. 142, “Goodwill and Other
Intangible Assets.”  FSP No. 142-3 is effective for fiscal years
beginning after December 15, 2008.  The adoption of this pronouncement
will not have a material impact on our financial position and results of
operations.





In May
2008, the Financial Accounting Standards Board issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles.”  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements.  SFAS
No. 162 became effective in September 2008 following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.”  The adoption of this pronouncement did not have a
material impact on our financial position and results of
operations.


F-10


CareAdvantage,
Inc. and Subsidiaries





NOTE
C - INTANGIBLE ASSETS





Intangible
assets, net of accumulated amortization consist of the following at December 31,
2008 and 2007:





December 31,2008
                
                
                2007Trademark
                
                $
                3,000
                
                
                $
                3,000Software
      development cost
                
                
                304,000
                
                
                
                304,000307,000
                
                
                
                307,000Less
      accumulated amortization
                
                
                (303,000
                )
                
                
                (301,000
                )$
                4,000
                
                
                $
                6,000





Amortization
expense for intangible assets for future years ending December 31 is as
follows:





Year ending
                  
                  Amortization
                    Expense2009
                  
                  
                  2,0002010
                  
                  
                  2,000$
                  4,000





[1] Trademark:





The
trademark fees of $3,000 are associated with RPNavigator.





[2] Software
development costs:





Software
development costs are capitalized beginning when project technological
feasibility is established and concluding when the product is ready for
release.





NOTE
D - PROPERTY AND EQUIPMENT





Property
and equipment consist of the following at December 31, 2008 and
2007:





December 31,2008
                
                
                2007Computer
      equipment
                
                $
                716,000
                
                
                $
                712,000Furniture
      and fixtures
                
                
                1,000
                
                
                
                1,000Office
      machines and telephone equipment
                
                
                64,000
                
                
                
                64,000Leasehold
      improvements
                
                
                2,000
                
                
                
                2,000783,000
                
                
                
                779,000Less
      accumulated depreciation and amortization
                
                
                (613,000
                )
                
                
                (545,000
                )$
                170,000
                
                
                $
                234,000





Property
and equipment, principally computer equipment costs, are depreciated over the
expected useful lives of three to five years on the straight-line method.
Depreciation expense was $68,000 and $65,000 for years ended December 31, 2008
and 2007, respectively.  The above includes capital lease equipment
with a net book value of approximately $161,000 and $218,000 at December 31,
2008 and 2007, respectively.


F-11


CareAdvantage,
Inc. and Subsidiaries





NOTE
E - CAPITAL LEASES





Future
payments as of December 31, 2008 on the capital lease equipment are as
follows:





Year
                      
                      LeaseEnding December 31,
                      
                      Obligation2009
                      
                      
                      75,0002010
                      
                      
                      75,0002011
                      
                      
                      38,000188,000Less:
      amounts representing interest
                      
                      
                      54,000Present
      value of minimum lease payments
                      
                      
                      134,000Less:
      current portion of capital lease obligation
                      
                      
                      58,000Long
      term portion of capital lease obligation
                      
                      $
                      76,000




NOTE
F - STOCKHOLDERS’ EQUITY





[1] Preferred
stock:





The
preferred stock is issuable in such series and with such designations,
preferences, conversion rights, cumulative, participating, optional or other
rights, including voting rights, qualifications, limitations or restrictions
thereof as determined by the Board of Directors of the Company. As such, the
Board of Directors of the Company is entitled to authorize the creation and
issuance of 10,000,000 shares of preferred stock in one or more series with such
limitations and restrictions as may be determined in the Board’s sole
discretion, with no further authorization by stockholders required for the
creation and issuance thereof.





[2] Stock
option plans:





The Stock
Option Plan (the “Plan”) was administered by a Committee of the Board of
Directors consisting of at least two members who are “outside directors” as
defined in Section 162(m) of the Internal Revenue Code who are also
“disinterested persons” as defined in regulations under the Securities and
Exchange Act of 1934. Employees, officers, and other persons selected by the
Committee were eligible to receive options under the Plan. On June 6, 2006,
pursuant to its terms, the Plan terminated.





All
options granted under the Plan are exercisable during the option grantee’s
lifetime only by the option holder (or his or her legal representative) and
generally only while such option grantee is in the Company’s employ. Unless the
Committee otherwise provided, in the event an option grantee’s employment is
terminated other than by death or disability, such person would have three
months from the date of termination to exercise such option to the extent the
option was exercisable at such date, but in no event subsequent to the option’s
expiration date. Unless the Committee otherwise provided, in the event of
termination of employment due to death or disability of the option grantee, such
person (or such person’s legal representative) would have 12 months from such
date to exercise such option to the extent the option was exercisable at the
date of termination, but in no event subsequent to the option’s expiration date.
A grantee may exercise an option by payment of the exercise price via any lawful
method authorized by the Committee.




F-12


CareAdvantage,
Inc. and Subsidiaries





NOTE
F - STOCKHOLDERS’ EQUITY (CONTINUED)





Pursuant
to the terms of the Director Stock Option Plan (the “Director Plan”), the Board
of Directors could grant non-qualified stock options to non-employee directors
and determine: (i) the number of shares of the Company’s common stock that may
be purchased upon the exercise of such option; (ii) the time or times when the
option becomes exercisable; (iii) the exercise price; and (iv) the duration of
the option, which cannot exceed ten (10) years. Under the Director Plan, an
aggregate of 2% of the Company’s authorized number of shares of common stock
were reserved for issuance. The Director Plan terminated on June 6, 2006 in
accordance with its terms.





All
options granted under the Director Plan are exercisable during the option
grantee’s lifetime only by the option grantee (or his or her legal
representative). In the event of termination of an option grantee’s
directorship, such person shall have three months from such date to exercise
such option to the extent the option was exercisable as at the date of
termination, but in no event subsequent to the option’s expiration date. In the
event of termination of an option grantee’s directorship due to death, such
person’s legal representative shall have 12 months from such date to exercise
such option to the extent the option was exercisable at the date of death, but
in no event subsequent to the option’s expiration date.





The Plan
and Director Plan provides that if at any time after the date of grant of an
option, the Company shall, by stock dividend, split up, combination,
reclassification or exchange, or through merger or consolidation or otherwise,
change its shares of Common Stock into a different number or kind or class of
shares or other securities or property, then the number of shares covered by
such option and the price per share thereof shall be proportionately adjusted
for any such change by the Committee or the Board whose determination thereon
shall be conclusive.




The number
of shares available for issuance upon exercise of outstanding options as of
December 31, 2008 is 10,366,000 shares of Common Stock under the Plan and
2,400,000 shares of Common Stock under the Director Plan.





The
following table summarizes information about stock options at December 31,
2008:




Options Outstanding
                                        
                                        
                                        Options ExercisableExercise Price
                                        
                                        Number
                                          Outstanding
                                        
                                        
                                        Weighted
                                          Average
                                          Remaining
                                          Contractual
                                          Life
                                          In Years
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price
                                        
                                        
                                        Number
                                          Exercisable
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price$.008
                                        
                                        
                                        2,108,000
                                        
                                        
                                        
                                        5.63
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        2,108,000$.010
                                        
                                        
                                        3,955,000
                                        
                                        
                                        
                                        5.66
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        3,955,000$.080
                                        
                                        
                                        100,000
                                        
                                        
                                        
                                        .07
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        100,000$.015
                                        
                                        
                                        6,603,000
                                        
                                        
                                        
                                        7.38
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        5,686,00012,766,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        0.013
                                        
                                        
                                        
                                        11,849,000
                                        
                                        
                                        $
                                        0.013




NOTE
G - INCOME TAX




On
January 1, 2007, the Company adopted the Financial Accounting Standards
Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -
An interpretation of FASB Statement No. 109,” or FIN 48. FIN 48 clarifies the
accounting for uncertainties in income taxes recognized in a company’s financial
statements in accordance with Statement 109 and prescribes a recognition
threshold and measurement attributes for financial disclosure of tax positions
taken or expected to be taken on a tax return. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. We adopted the provisions of FIN 48
on January 1, 2007. The adoption of FIN 48 did not impact our financial
position, results of operations or cash flows for the twelve months ended
December 31, 2008 and 2007. We file income tax returns in the U.S. Federal
jurisdiction and various state and local jurisdictions. Generally, our federal,
state and local jurisdiction income tax returns for 2004 through 2007 remain
subject to examination by various tax authorities.


F-13





CareAdvantage,
Inc. and Subsidiaries





NOTE
G - INCOME TAX (CONTINUED)





Under the
asset and liability method used by the Company as outlined in SFAS No. 109,
“Accounting for Income Taxes”, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the consolidated financial statements’ carrying amounts of existing
assets and liabilities and their respective tax bases.





The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets at December 31, 2008 are as follows:





December
      31,Noncurrent portion of deferred tax
      assets/(liabilities):
                        
                        2008
                        
                        
                        2007Net
      operating loss carryforwards
                        
                        $
                        8,117,000
                        
                        
                        $
                        7,589,000Deferred
      rent
                        
                        
                        158,000
                        
                        
                        
                        167,000Tax/
      book basis of fixed assets
                        
                        
                        325,000
                        
                        
                        
                        363,000Intangibles
                        
                        
                        35,000
                        
                        
                        
                        220,000Stock
      based compensation
                        
                        
                        91,000
                        
                        
                        
                        70,000Alternative
      minimum tax credit
                        
                        
                        55,000
                        
                        
                        
                        55,000Deferred
      tax assets
                        
                        
                        8,781,000
                        
                        
                        
                        8,464,000Valuation
      allowance
                        
                        
                        (8,781,000
                        
                        
                        
                        (8,464,000
                        )$
                        0
                        
                        
                        $
                        0




The
Company’s deferred tax asset has been fully reserved, as its future realization
cannot be determined. The Company has net federal operating loss carryforwards
of approximately $20,813,000 at December 31, 2008, expiring through 2028.
Pursuant to Section 382 of the Internal Revenue Code, the carryforwards are
subject to limitations on annual utilization based upon an ownership change that
took place during 1996 and 2004. It is possible that the amount of the
carryforward and its annual utilization may be reduced upon examination by the
Internal Revenue Service. The valuation allowance on the Company’s deferred tax
asset increased approximately $317,000 and $25,000 for the years ended December
31, 2008 and 2007, respectively. The Company incurred state income tax of
approximately $3,000 for both years ended December 31, 2008 and
2007.





The
difference between the federal statutory rate and the Company’s effective tax
rate is as follows:





Year EndedDecember 31,2008
                
                
                2007Income
      tax benefit at federal statutory rate
                
                $
                (282,000
                )
                
                $
                (27,000
                )Permanent
      differences
                
                
                2,000
                
                
                
                5,000Change
      in valuation allowance
                
                
                317,000
                
                
                
                25,000State
      taxes, net of federal benefit
                
                
                (41,000
                )
                
                
                (3,000
                )Other
                
                
                7,000
                
                
                
                3,000$
                3,000
                
                
                $
                3,000




F-14


CareAdvantage,
Inc. and Subsidiaries





NOTE
H - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS




[1] Contingencies:





A legal
action pending in Superior Court of New Jersey was commenced in June 2004 by a
former employee of the Company seeking compensation under various legal
theories. In October 2005, the court dismissed the claim under all theories
except express contract. The Company believes that the plaintiff’s claim is
without merit and is contesting the matter vigorously. Moreover, the Company
filed a counterclaim for damages against the plaintiff claiming the former
employee induced another employee to quit employment with the Company and in
October 2005, pursuant to court order, amended its counterclaim to seek
equitable relief and damages against the plaintiff and a limited liability
company of which the plaintiff is a member, claiming the plaintiff
misappropriated and used certain Company property. This matter is presently
being tried before a chancery judge.




[2] Professional
liability:





In
providing utilization review and case management services, the Company makes
recommendations regarding benefit plan coverage based upon judgments and
established protocols as to the appropriateness of the proposed medical
treatment. Consequently, the Company could have potential liability for adverse
medical results. The Company could become subject to claims based upon the
denial of health care benefits and claims such as malpractice arising from the
acts or omissions of health care professionals. Although the Company does not
believe that it engages in the practice of medicine or that it delivers medical
services directly, no assurance can be given that the Company will not be
subject to litigation or liability which may adversely affect its financial
condition and operations in a material manner. Although the Company maintains
comprehensive general liability and professional liability insurance coverage,
including coverage for liability in connection with the performance of medical
utilization review services and typically obtains indemnification from its
customers, no assurances can be given that such coverage will be adequate in the
event the Company becomes subject to any of the above described claims. The
Company’s exposure in this regard is substantially reduced since it ceased
providing utilization review and case management services as of December 31,
2002. Nonetheless, until the applicable statutes of limitations have expired,
the Company retains exposure for past activities as well as on account of its
continued internal physician review services offered as part of its Executive
and Clinical Management Services.





[3]
Operating leases:




The
Company’s lease for office space expires in March 2011. Minimum annual lease
payments for office space for each of the next three years ending December 31
are as follows:





Year
                  
                  LeaseEnding
                  
                  Obligation2009
                  
                  $
                  650,0002010
                  
                  
                  750,0002011
                  
                  
                  187,000$
                  1,587,000




Rent
expense was $526,000 for each of the years ended December 31, 2008 and
2007.





On
January 10, 2005, the Company entered into a Second Amendment to Lease Agreement
commencing January 1, 2005 to provide for the reduction in base rent and the
waiver of escalations based on increases in real estate taxes and operating
expenses, and to provide the landlord with the option to recapture up to 50% of
the leased premises at any time. The expiration date of the Lease, March 31,
2011, remains unchanged by the Second Amendment.




F-15





CareAdvantage,
Inc. and Subsidiaries





NOTE
H - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)




Under the
Second Amendment to Lease Agreement, the Company is required to meet the
following conditions: (1) the Company cannot assign the lease except for an
assignment of the lease or a sublet provided under the original lease; (2) the
Company is not in default under any terms and conditions of the original
lease.  In the event the Company fails to meet these conditions, the
reduction in base rent, real estate taxes and operating expenses will be
nullified and entirely forfeited, and the Company will be immediately required
to pay the landlord additional rent for the difference in the base rent, and
additional rent for all escalations provided in the Lease Amendment and the
original lease. As of January 1, 2005, the additional rent attributable to the
difference in base rent was $1,257,000.





Effective
April 19, 2007 (the “Recapture Date”), the landlord “recaptured” certain
portions of the leased premises pursuant to the provisions of the Second
Amendment to Lease Agreement. This recapture does not reduce or modify, in any
respect, the Company’s obligations to pay to the landlord monthly rent or, in
the event the Company fails to meet the above conditions, additional rent.
Effective as of the Recapture Date, the premises leased by the Company under the
lease is deemed to be and refer only to 15,629 rentable square
feet.




As of
March 26, 2008, the Company and landlord entered into a Third Amendment of Lease
which provided that the reduction in base rent and the waiver of escalations
based on increases in real estate taxes and operating expenses shall be deemed
to be amortized on a straight line basis over the period commencing January 1,
2005 and ending March 31, 2011.





At
December 31, 2008, the additional rent that would be due if the Company failed
to meet the conditions of the Second Amendment to Lease Agreement would be $
452,000. The additional base rent that would be due at December 31 of the next
two years if the Company failed to meet the conditions of the Second Amendment
are as follows:




Year
                  AdditionalEnding
                  Rent2009
                  
                  
                  251,0002010
                  
                  
                  50,000





[4] Employee
benefit plans:





The
Company administers a profit-sharing/savings plan pursuant to
Section 401(k) of the Internal Revenue Code. The plan provides for a
matching contribution by the Company up to a maximum level, which in no case
exceeds 3% of the employees’ compensation. Company contributions are fully
vested immediately.





The
Company’s matching contribution was $54,000 and $56,000 for the years ended
December 31, 2008 and 2007, respectively.





[5] Employee
commitment:





As of
October 25, 2000, the Company entered into an Employment Agreement with Dennis
Mouras (the “Mouras Employment Agreement”), the current Chief Executive Officer
and President. The Mouras Employment Agreement replaces an earlier agreement
between Mr. Mouras and the Company during the time that Mr. Mouras served as the
Company’s Executive Vice President of Marketing and Sales. The Mouras Employment
Agreement continues for a one-year term, after which it renews automatically for
successive one-year terms unless terminated by either party on at least sixty
days notice prior to an anniversary date. Under the Mouras Employment Agreement,
Mr. Mouras is entitled to (a) an annual salary of $285,000, (b) a grant of
incentive stock options on October 26, 2000 pursuant to the Company’s Stock
Option Plan for 2,500,000 shares, and (c) other benefits, including
participating in the Company’s 401(k) plan, life insurance coverage, and medical
insurance coverage available to all eligible employees. Under the Mouras
Employment Agreement, Mr. Mouras waived unpaid sales commissions to which he was
otherwise entitled under his prior agreement. The Mouras Employment Agreement
also contains a non-solicitation restriction for one year after Mr. Mouras’
employment. On October 30, 2002, the Company amended the Mouras Employment
Agreement by agreeing to increase to one year (from six months) the severance that Mr.
Mouras would be entitled to receive upon his termination from the Company
without cause, and on November 11, 2005, the Company further amended the Mouras
Employment Agreement by agreeing to increase the allowance for commuting paid
Mr. Mouras to $3,000 per month from $1,500 per month grossed-up in each case for
federal and state income tax liability.   On November 20, 2007,
the Company further amended the Mouras Employment Agreement to increase the
annual salary payable to Mr. Mouras to $400,000 per year, effective as of the
date of the amendment.




F-16





EXHIBIT
INDEX




2.1
                    Deposit
      Agreement dated October 31, 1994 among Midlantic Bank, N.A., PMDX and the
      Registrant (incorporated by reference to Exhibit 2.1 filed with the
      Company's Registration Statement on Form S-1, File No.
      33-89176).2.2
                    Certificate
      of Merger of Care Advantage Health Systems (f/k/a Advantage Health
      Systems, Inc.), a Georgia corporation into CareAdvantage Health Systems,
      Inc., a Delaware corporation (incorporated by reference to Exhibit 2.2
      filed with the Company's Registration Statement on Form S-1, File No.
      33-89176).3.1
                    Registrant's
      Certificate of Incorporation (incorporated by reference to Exhibit 3.1
      filed with the Company's Registration Statement on Form S-1, File No.
      33-89176).3.1(a)
                    Amended
      and Restated Certificate of Incorporation (incorporated by reference to
      the Company's Information Statement dated September
  1996).3.2
                    Registrant's
      By-Laws (incorporated by reference to Exhibit 3.2 filed with the Company's
      Registration Statement on Form S-1, File No. 33-89176).3.2(a)
                    Amendment
      to the Registrant’s Bylaws (incorporated by reference to Exhibit 3.2(a)
      filed with the Company’s Form 10-KSB for the year ended December 31,
      2006).10.1
                    Letter
      of intent dated September 30, 1994 between the Registrant and New Jersey
      BCBS, amendments thereto of December 29, 1994, February 27, 1995 and April
      4, 1995 and Interim Services Agreement as of April 1, 1995 between the
      Registrant and New Jersey BCBS (incorporated by reference to Exhibit 10.12
      filed with the Company's Registration Statement on Form S-1, File No.
      33-89176).10.1
                    Lease
      Agreement dated April 14, 1995 between the Registrant and Metropolitan
      Life Insurance Company (incorporated by reference to Exhibit 10.13 filed
      with the Company's Registration Statement on Form S-1, File No.
      33-89176).10.2
                    Letter
      of Intent dated January 2, 1996 between CW Ventures II, L.P., the
      Registrant and its CareAdvantage Health Systems, Inc. subsidiary
      (incorporated by reference to Exhibit 10.14 filed with the Company's
      Annual Report on Form 10-KSB for the year ended October 31,
      1996).10.3
                    CW
      Exchangeable Note (incorporated by reference to Exhibit 10.16 filed with
      the Company's Annual Report on Form 10-KSB for the year ended October 31,
      1996).10.4
                    Stock
      Acquisition Agreement dated February 22, 1996 among EHC, CHCM, CAHS and
      the Registrant (incorporated by reference to Exhibit 10.17 filed with the
      Company's Annual Report on Form 10-KSB for the year ended October 31,
      1996).










10.5
                EHC
      Exchangeable Note (incorporated by reference to Exhibit 10.18 filed with
      the Company's Annual Report on Form 10-KSB for the year ended October 31,
      1996).10.6
                Stockholders’
      Agreement dated February 22, 1996 among EHC, CW Ventures and the
      Registrant (incorporated by reference to Exhibit 10.20 filed with the
      Company's Annual Report on Form 10-KSB for the year ended October 31,
      1996).10.7
                Promissory
      Note and Security Agreement, dated April 1, 1997, by CHCM in favor of
      Horizon BCBSNJ, in the original principal amount of $1,862,823
      (incorporated by reference to Exhibit 10(f)(3) filed with the Company's
      Form 10-QSB for the quarter ended April 30, 1997).10.8
                Separation
      Agreement dated April 20, 1995 between PMDX and the Registrant
      (incorporated by reference to Exhibit 10.1 filed with the Company's
      Registration Statement on Form S-1, File No. 33-89176).10.9
                Registrant’s
      1996 Stock Option Plan (incorporated by reference to the Company's
      Information Statement dated September 1996).10.10
                Registrant’s
      1996 Director Stock Option Plan (incorporated by reference to the
      Company's Information Statement dated September 1996).10.11
                Option
      Agreement between CW Ventures and Horizon BCBSNJ (incorporated by
      reference to Exhibit 5 of Schedule 13(d) of Horizon BCBSNJ respecting
      beneficial ownership of Common Stock of the Company dated June
      1997).10.12
                Settlement
      and Release Agreement entered into among Horizon BCBSNJ, the Company,
      CAHS, and CHCM, Enterprise Holding Company, Inc. ("EHC") and CW Ventures
      (incorporated by reference to Exhibit 10(a) filed with the Company’s Form
      10-QSB for the quarter ended July 31, 1998).10.13
                Employment
      Agreement, effective as of April 19, 1999, between Dennis M. Mouras, and
      the Company, (incorporated by reference to Exhibit 10.40 filed with the
      Company’s Form 10KSB for the year ended December 31,
  1999).10.14
                Settlement
      Agreement dated August 9, 2000 among the Company, Horizon Healthcare of
      New Jersey, Inc. and Allied Specialty Care Services, Inc. (incorporated by
      reference to Exhibit 10.1 filed with the Company’s Form 10QSB for the
      quarter ended September 30, 2000).10.15
                Satisfaction
      of Debt Agreement among Horizon Blue Cross Blue Shield of New Jersey,
      Horizon Healthcare of New Jersey, Inc., CareAdvantage Inc., CareAdvantage
      Health Systems, Inc. and Contemporary Healthcare Management, Inc.
      (incorporated by reference to Exhibit 10.1 filed on the Company’s Form 8-K
      dated December 5, 2000 and filed on December 13,
  2000).







10.16
                Amendment
      dated March 26, 2001 to Satisfaction of Debt Agreement dated as of
      November 1, 2000 among Horizon BCBSNJ, Horizon Healthcare of New Jersey,
      Inc., CareAdvantage, Inc., CareAdvantage Health Systems, Inc. and
      Contemporary HealthCare Management, Inc (incorporated by reference to
      Exhibit 10.1 filed with the Company’s Form 10-QSB for the quarter ended
      March 31, 2001).10.17
                Service
      Agreement dated as of January 1, 2000 between Blue Cross Blue Shield of
      Rhode Island, Coordinated Health Partners, Inc. and CareAdvantage Health
      Systems, Inc. (incorporated by reference to Exhibit 10.2 filed with the
      Company’s Form 10-QSB for the quarter ended March 31,
    2001).10.18
                Amendment
      dated as of August 9, 2001 to Satisfaction of Debt Agreement dated as of
      November 1, 2000 among Horizon BCBSNJ, Horizon Healthcare of New Jersey,
      Inc., CareAdvantage, Inc., CareAdvantage Health Systems, Inc. and
      Contemporary Healthcare Management, Inc. (incorporated by reference to
      Exhibit 10.1 filed with the Company’s Form 10-QSB for the quarter ended
      June 30, 2001).10.19
                Settlement
      Agreement between CareAdvantage, Inc. and Horizon Blue Cross Blue Shield
      of New Jersey, effective as of October 1, 2004 (incorporated by reference
      to Exhibit 10.1 filed on the Company’s Form 8-K filed on October 1,
      2004).10.20
                Second
      Amendment to Lease Agreement between CareAdvantage Health Systems, Inc.
      and Corporate Plaza Associates, L.L.C. (incorporated by reference to
      Exhibit 10.1 filed on the Company’s Form 8-K filed on January 11,
      2005).10.21
                Services
      and License Agreement between the Company and Kaiser Foundation Health
      Plan of the Northwest ("Kaiser"), effective as of January 1, 2005
      (incorporated by reference to Exhibit 10.49 filed with the Company’s Form
      10KSB for the year ended December 31, 2005. Portions of this exhibit
      (indicated by asterisks) have been omitted pursuant to a request for
      confidential treatment pursuant to Rule 24b-2 of the Securities Exchange
      Act of 1934).10.22
                Amendment
      to Employment Agreement between the Company and Dennis J. Mouras, dated as
      of November 11, 2005, and Employment Agreement between the Company and
      Dennis J. Mouras, dated as of October 25, 2000 (incorporated by reference
      to Exhibit 10.50 filed with the Company’s Form 10-QSB for the quarter
      ended September 30, 2005).10.23
                First
      Amendment to Services and License Agreement between the Company and Kaiser
      Foundation Health Plan of the Northwest (“Kaiser”), effective as of
      January 1, 2006 (incorporated by reference to Exhibit 10.51 filed with the
      Company’s Form 10KSB for the year ended December 31, 2005. Portions of
      this exhibit (indicated by asterisks) have been omitted pursuant to a
      request for confidential treatment pursuant to Rule 24b-2 of the
      Securities Exchange Act of 1934).10.24
                Second
      Amendment to Services and License Agreement between the Company and
      Kaiser, effective as of April 1, 2006 (incorporated by reference to
      Exhibit 10.52 filed with the Company’s Form 10KSB for the year ended
      December 31, 2005. Portions of this exhibit (indicated by asterisks) have
      been omitted pursuant to a request for confidential treatment pursuant to
      Rule 24b-2 of the Securities Exchange Act of 1934).10.25
                Services
      and License Agreement between the Company and Blue Cross Blue Shield of
      Texas (“BCBSTX”), effective as of August 18, 2003 (incorporated by
      reference to Exhibit 10.53 filed with the Company’s Form 10-QSB for the
      quarter ended June 30, 2006. Portions of this exhibit (indicated by
      asterisks) have been omitted pursuant to a request for confidential
      treatment pursuant to Rule 24b-2 of the Securities Exchange Act of
      1934).










10.26
                Amendment
      to Services and License Agreement between the Company and BCBSTX,
      effective as of June 1, 2006 (incorporated by reference to Exhibit 10.54
      filed with the Company’s Form 10-QSB for the quarter ended June 30, 2006.
      Portions of this exhibit (indicated by asterisks) have been omitted
      pursuant to a request for confidential treatment pursuant to Rule 24b-2 of
      the Securities Exchange Act of 1934).10.27
                Letter
      from Kaiser Foundation Health Plan of the Northwest terminating Services
      and License Agreement (incorporated by reference to Exhibit 10.1 filed on
      the Company’s Form 8-K filed on October 3, 2006).10.28
                Amendment
      to Employment Agreement between the Company and Dennis J. Mouras, dated as
      of November 20, 2007 (incorporated by reference to Exhibit 10.1 filed on
      the Company’s Form 8-K filed on November 26, 2007).10.29
                Data
      Services License Agreement between the Registrant and 3M Company dated
      April 8, 2003, as amended (incorporated by reference to Exhibit 10.57
      filed with the Company’s Form 10KSB for the year ended December 31, 2007.
      Portions of this exhibit (indicated by asterisks) have been omitted
      pursuant to a request for confidential treatment pursuant to Rule 24b-2 of
      the Securities Exchange Act of 1934).10.30
                Services
      and License Agreement between the Company and Blue Cross Blue Shield of
      Vermont made as of September 1, 2004, as amended (incorporated by
      reference to Exhibit 10.58 filed with the Company’s Form 10KSB for the
      year ended December 31, 2007. Portions of this exhibit (indicated by
      asterisks) have been omitted pursuant to a request for confidential
      treatment pursuant to Rule 24b-2 of the Securities Exchange Act of
      1934).10.31
                Third
      Amended and Restated Service Agreement between the Company and Blue Cross
      Blue Shield of Vermont made as of April 1, 2001, as amended (incorporated
      by reference to Exhibit 10.59 filed with the Company’s Form 10KSB for the
      year ended December 31, 2007. Portions of this exhibit (indicated by
      asterisks) have been omitted pursuant to a request for confidential
      treatment pursuant to Rule 24b-2 of the Securities Exchange Act of
      1934).10.32
                Third
      Amendment of Lease Agreement between CareAdvantage Health Systems, Inc.
      and SMIII Woodbridge Plaza, LLC dated March 26, 2008 (incorporated by
      reference to Exhibit 10.60 filed with the Company’s Form 10KSB for the
      year ended December 31, 2007).21
                Subsidiaries
      of the Registrant*23.1
                Consent
      of Independent Auditors*31
                Certifications
      pursuant to Rule 13a-14(a), promulgated under the Securities Exchange Act
      of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of
      2002*32
                Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
**









*filed
herewith




**
furnished herewith