**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**


**Annual
      Report pursuant to Section 13 or 15 (d) of the**


**Securities
      Exchange Act of 1934**


**For
      the Fiscal Year Ended December 31, 2006**


**Commission
      File Number 0-26168**





**CAREADVANTAGE,
      INC.**


**(Name
      of Business)**





**Delaware**
            
            **52-1849794****(State
                or other jurisdiction of**
            
            **(I.R.S.
                Employer****incorporation
                or organization)**
            
            **Identification
                No.)**




**485-C
                Route 1 South, Iselin, New Jersey**
            
            **08830****(Address
                of principal executive office)**
            
            **(Zip
                Code)**





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


**Securities
      registered pursuant to Section 12 (b) of the Exchange Act of 1934:
      NONE**




**Securities
      registered pursuant to Section 12 (g) of the Act:**





**Common
      Stock $.001 par value**


**(Title
      of Class)**





**Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o**





**Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15 (d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports) and (2) has been subject
      to such filing requirements for the past 90 days: Yes þ** **No
      o**





**Check
      if there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. o**





**Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act):**


**Yes
      o No** **þ**





**The
      Registrant’s revenues for its most recent fiscal year were $
      4,402,000.**





**The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant as of February 07, 2007 (assuming solely for purposes of this
      calculation that all directors and executive officers of the Registrant are
      affiliates) was $856,620.**




**The
      number of shares of common stock outstanding as of February 7, 2007 was
      56,775,554.**





**Transitional
      Small Business Disclosure Format Yes o** **No  þ**





**PORTIONS
      OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY
      REFERENCE**


**INTO
      THIS ANNUAL REPORT ON FORM 10-KSB: NONE**











**PART
      I**





**Item
      1.**  **Description
      of Business**





**Introduction
      and Background**





CareAdvantage,
      Inc. (“CAI,” “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
      management and consulting services designed to enable integrated health care
      delivery systems and other care management organizations and self-insured
      employers and unions 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 provided to integrated health care delivery
      systems and other care management organizations.





CAI
      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 publicly
      traded company on that date.





Initially,
      CAI 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 CAI (the last such advance being
      made
      in July 1995). Pursuant to a revised separation agreement between CAI and PMDX
      dated April 20, 1995, PMDX agreed to capitalize all such advances in connection
      with CAI’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.




1




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 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.





Data
      transparency has several key characteristics, which include easy accessibility,
      standardized performance metrics, n ationally
      recognized/MD-approved set of rules governing claim coding/grouping procedures,
      a utomated
      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, underwritten by the Robert Wood Johnson
      Foundation has as its goal, “to provide all Americans with publicly
      reported  health
      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




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  The
      Gartner Report - The Gartner Group - 1999 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 and the
      rate at which the interventions of particular provider and programs have an
      impact on the rate of progression.




CareAdvantage
      clients include health plans, employer, hospital systems, providers and other
      purchaser groups. For the past ten 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 for 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


·
            Optimize
                allocation of resource





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.




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




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.





**Operations**




The
      Company utilizes a multi-disciplinary team approach in providing its management,
      data analysis and consulting 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 RightPath ® Navigator (RPNavigator), the next generation software solution and an element
      of
      the Company’s RightPath ® Care
      Management product suite. 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
      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


·
            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 income for
      CareAdvantage, including:





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


·
            Undertaking
                of 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.





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, employers and other heath care purchasers pursuant to one or
      a
      combination of the compensation arrangements described above.




3




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.





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
      jurisdiction **** and
      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.




4




*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.





**Employees**





At
      December 31, 2006 the Company employed a total of 17 full-time employees. Of
      this total, 13 employees are engaged in servicing its clients. The 4 remaining
      employees include administrative support, finance, information systems and
      human
      resources personnel. None of the Company’s employees are party to any collective
      bargaining agreements.





**Item
      2.** ****  **Description
      of Property**





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. As a result of the Company’s ceasing to provide services to
      Horizon BCBSNJ, the Company no longer needed 20,500 square feet of this space.





On
      January 10, 2005, the Company entered into a Lease Amendment 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 Lease Amendment.





Under
      the
      Lease Amendment, 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.





At
      December 31, 2006, this additional rent that would be due if the Company failed
      to meet the conditions of the amendment would be $ 713,000. Additional minimum
      lease payments for each of the next four years ended December 31 and thereafter
      that would be due if the Company failed to meet the conditions of the amendment
      are as follows:




**Year**
                  **Ending**
                
                **Office**
                  **Space**2007
                
                
                274,0002008
                
                
                174,0002009
                
                
                95,0002010
                
                
                1,000Thereafter
                
                
                0$
                544,000




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





5




**Item
      3.** ****  **Legal
      Proceedings**





*CareAdvantage,
      Inc. v. Blue Cross & Blue Shield of Rhode Island and Coordinated Health
      Partners* ,
      commenced March 2002 and pending 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 is seeking declaratory relief including judgment
      (i) that the Company’s failure to attain Performance Goals under the Agreement
      was as a result of the defendants’ conduct, (ii) that defendants lacked cause to
      terminate the Agreement based on the Company’s failure to meet the Performance
      Goals, and (iii) that the Company is entitled to compensation under the
      Agreement, including compensation for having been deemed to have met the
      Performance Goals. In addition, the suit seeks equitable relief and damages
      with
      respect to defendants’ hiring a physician formerly employed by the Company.





*Alan
      Fontes v. CareAdvantage, Inc.* ,
      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 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 scheduled to be tried
      in
      May 2007.




**Item
      4.** ****  **Submission
      of Matters to a Vote of Security Holders**





None.





6





**PART
      II**





**Item
      5.**  **Market
      for Registrant’s Common Equity and Related Stockholder
      Matters**





(a)
            *Market
                Information*:
                Since the Company's effective registration date of June 12, 1995,
                the
                Company's Common Stock has traded in the over-the-counter market
                and is
                currently quoted on the Electronic Bulletin Board under the symbol
                CADV.
                The following table shows the range of closing 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.





**2006**
            
            **2005****Quarter
                Ended**
            
            **High**
            
            **Low**
            
            **High**
            
            **Low**March
                31,
            
            $
            .02
            
            $
            .02
            
            $
            .02
            
            $
            .01June
                30,
            
            $
            .02
            
            $
            .02
            
            $
            .03
            
            $
            .01September
                30,
            
            $
            .02
            
            $
            .02
            
            $
            .03
            
            $
            .01December
                31,
            
            $
            .02
            
            $
            .02
            
            $
            .02
            
            $
            .01




(b)
            *Holders*:****As
                of February 7, 2007 there were approximately 2,564 holders of record
                of
                the Company’s Common Stock. No shares of the Company’s preferred stock
                have been issued.





(c)
            *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 and is dependent
                on
                several factors, including the Company’s earnings and capital
                needs.





(d)
            *Equity
                Compensation Plans:*For
                information regarding the Company’s equity compensation plans, please
                refer to the table captioned “Equity Compensation Plans” in Item 11 of
                this Form 10-KSB.





(e)
            *Issuer
                Purchases of Equity Securities:*None




**Item
      6.** ****  **Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations**





**Cautionary
      Statements**





Statements
      in this Form 10-KSB may constitute "forward-looking statements" within the
      meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"),
      including statements concerning management's plans, intentions and expectations
      with respect to future financial performance and future events, particularly
      relating to revenues from performance-based services and re-negotiations of
      existing and new contracts with customers. Many of these statements involve
      known and unknown risks, uncertainties and contingencies, many of which are
      beyond our control, which could cause actual results and outcomes to differ
      materially from those expressed in this 10-KSB. Although we believe that our
      plans, intentions and expectations reflected in these forward-looking statements
      are reasonable, we can give no assurance that our plans, intentions or
      expectations will be achieved.





The
      following discussion contains cautionary statements regarding our business
      that
      investors and others should consider. This discussion is intended to take
      advantage of the "safe harbor" provisions of the PSLRA. In making these
      cautionary statements, we are not committed to addressing or updating each
      factor in future filings or communications regarding the our business or
      results, or addressing how any of these factors may have caused results to
      differ from discussions or information contained in previous filings or
      communications. In addition, any of the matters discussed below may have
      affected or may affect our past, as well as current, forward-looking statements
      about future results.





**Risk
      Factors**





***Company
      Risk***





***We
      have had a history of losses.*** Although
      our Company was profitable for 2001 and 2002, we have experienced a history
      of
      significant operating losses on a consolidated basis. At December 31, 2006
      we
      had working capital of approximately $495,000, stockholders’ equity of
      approximately $400,000 and an accumulated deficit of approximately
      $23,455,000.





7





***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.





***Significant
      contracts with the Company have been terminated.*** Since
      2002, when the Company’s contracts were terminated with Blue Cross Blue Shield
      of Rhode Island (“BCBSRI”) and Horizon Blue Cross Blue Shield of New Jersey
      (“Horizon BCBSNJ”) (accounting respectively for 4% and 82% of net revenues for
      the year ended December 31, 2002), the Company has had to significantly reduce
      its operations to match its remaining revenues and focus on alternate sources
      of
      revenues to continue to build its business. As a response to these contract
      terminations, the Company has significantly reduced its employee base (down
      to
      17 employees from 191 in 2002) and has terminated or renegotiated a variety
      of
      information systems and communications agreements. The Company has ceased
      offering certain health care cost containment services due to the lack of the
      infrastructure necessary to support the provision of these services, and the
      Company is now focusing on selling its management and consulting services.
      There
      is no guarantee that the Company, through these measures, will be successful
      in
      mitigating the effects of the loss of these contracts and to continue to
      maintain its business operations.




On
      September 28, 2006, the Company was notified by Kaiser Foundation Health Plan
      of
      the Northwest (“Kaiser”) that Kaiser was exercising its right to terminate the
      Services and License Agreement between the Company and Kaiser (the “Agreement”).
      Accordingly, the Agreement terminated effective December 31, 2006. Pursuant
      to
      the Agreement, the Company provided Management Services to Kaiser and licensed
      to Kaiser access to the RPNavigator tool. Kaiser informed the Company that
      it
      had to terminate the Agreement due to budget issues.




Although
      the Agreement has accounted for revenues for the year, including $848,000 for
      2006, the Company does not believe that the termination will materially
      adversely impact the Company’s ongoing business and operations. The Company is
      continuing to assess the impact of the termination of the Agreement on the
      Company’s business. The Company will attempt to compensate for the terminated
      Agreement by using its resources to expand its current service to existing
      customers, market its services to and enter into contracts with new customers,
      and, if necessary, implement cost reductions measures until the revenues are
      replaced. There is no assurance, however, that any of these measures will be
      successful.




***Revenue
      from a limited number of customers comprises a significant portion of our total
      revenue.*** Two
      customers, BCBS organizations, accounted for approximately 53% and 22% of
      license fees and service revenue for the year ended December 31, 2006. As
      discussed above, Kaiser, another major customer that accounted for approximately
      19% of license fees and service revenue for the year ended December 31, 2006,
      terminated its service agreement effective December 31, 2006 due to budget
      issues. If the BCBS customers terminate or modify existing contracts or
      experience business difficulties, it could adversely affect our
      earnings.





8




***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;





·
            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 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 Minnesota Mining and Manufacturing Company
      (“3M”) to use 3M’s Clinical Risk Grouping SoftwareTM, which license expires in
      April 2007 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 terminated 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.




9




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.




The
      Company and the healthcare industry generally are impacted by the Health
      Insurance Portability and Accountability Act of 1996, or 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.




10




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
      Risk***





***The
      market price of our shares has been extremely volatile.*** The
      market price of our securities 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.





***Because
      our common stock is traded in the over-the-counter market in “pink sheets” or
      the “OTC Bulletin Board,” our stock is illiquid.*** Our
      common stock is traded in the over-the-counter market in so-called "pink sheets"
      or, if available, the "OTC Bulletin Board." 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. As a result, an
      investor may find it more difficult to dispose, of 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.





***Our
      common stock is subject to additional sales practice requirements for low priced
      securities.*** Our
      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 our shares of 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 our securities and may affect the ability
                of our
                shareholders to sell any of our securities 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 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 our securities. In addition, the liquidity for our securities may
      be
      decreased, with a corresponding decrease in the price of our
      securities.





11





**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.





Prior
      to
      January 1, 2003, the Company provided, principally to Horizon BCBSNJ, certain
      health care cost containment services, including utilization review, case
      management and disease management and independent reviews. As of December 31,
      2002, Horizon BCBSNJ ceased purchasing the Company’s services. As a result,
      beginning January 1, 2003, the Company ceased offering these services, since
      it
      no longer maintained the employees and infrastructure necessary to support
      their
      delivery. Horizon BCBSNJ accounted for 82% of net revenues for the year ended
      December 31, 2002.





The
      Company is now focusing on offering its management and consulting 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”.





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.





On
      January 10, 2005, the Company entered into a Lease Amendment commencing January
      1, 2005, that amends the original lease to provide for a reduction in base
      rent
      and a 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.





**Results
      of Operations--12 Months Ended December 31, 2006 Compared to 12 Months Ended
      December 31, 2005**





The
      following discussion compares the Company's results of operations for the 12
      months ended December 31, 2006, with those for the 12 months ended December
      31,
      2005. The Company's consolidated financial statements and notes thereto included
      elsewhere in this report contains detailed information that should be referred
      to in conjunction with the following discussion.





Total
      revenues for the years ended December 31, 2006 and 2005 were approximately
      $4,402,000 and $2,844,000, respectively. The increase in revenues of
      approximately $1,558,000 was primarily attributable to increased revenue of
      approximately $1,250,000 in current customer business due to increased services,
      approximately $106,000 in new business and approximately $242,000 in related
      consulting business, offset by decreased revenue of approximately $40,000 due
      to
      termination of consulting arrangements in 2005.




*Cost
      of services:*





Cost
      of
      services for the years ended December 31, 2006 and 2005 were approximately
      $1,745,000 and $1,433,000, respectively. The
      increase in the cost of services of approximately $312,000 was primarily due
      to
      increases in personnel costs of approximately $217,000, travel costs of
      approximately $1,000 and professional costs of approximately $94,000, which
      includes an increase in licensing fees of approximately $102,000. 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 increased licensing fees related
      to
      increased revenue. As a result of this, for the twelve months ended December
      31,
      2006 compared to the twelve months ended December31, 2005, the Company has
      experienced revenue growth and its margins have improved favorably, resulting
      in
      a 60% gross profit margin and 50% gross profit margin, respectively. Other
      direct costs, such as personnel costs, may increase only if a large volume
      of
      increased business occurs where additional staffing would be
      required.




12





***Operating
      Cost and Expenses***





*Selling,
      general and administrative:*





Selling,
      general and administrative costs for the years ended December 31, 2006 and
      2005
      were $2,676,000 compared to $2,862,000, respectively. The decrease in selling,
      general and administrative costs of approximately $186,000 is due to decreases
      in personnel costs of approximately $185,000, decreased professional costs
      of
      approximately $38,000, decreased facility costs of approximately $10,000 and
      decreased information and communication costs of approximately $1,000, offset
      by
      increases in travel costs of approximately $20,000 and increases in other
      general and administrative costs of approximately $28,000.


.


*Depreciation
      and amortization:*





Depreciation
      and amortization for the years ended December 31, 2006 aggregated $125,000
      compared to $187,000 for the year ended December 31, 2005. The decrease in
      depreciation and amortization costs of approximately $62,000 is largely due
      to
      fully amortized assets.





*Interest
      (expense)/income:*





Interest
      (expense)/income for the years ended December 31, 2006 and 2005 was ($4,000)
      and
      $8,000, respectively. The increase in interest expense of approximately $12,000
      is largely due to interest expense of approximately $5,000 relating to capital
      leases and a decrease in interest income due to a decrease in interest rates.





***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.





***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, 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.
 
 *Accounting
        for stock-based compensation*
 
 Effective
        January 1, 2006, the Company adopted 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 service period which
        is
        generally the same as the option-vesting period. The Company adopted this
        standard using the modified prospective method, in which compensation expense
        is
        recognized beginning with the effective date of adoption of FAS123R for all
        share-based payments (i) granted after the effective date of the adoption
        and
        (ii) granted prior to the effective date of the adoption and that remain
        unvested or modified on the date of the adoption.
 
 Prior
        to
        January 1, 2006, the Company accounted for stock-based employee compensation
        under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
        Issued to Employees”, and related interpretations. Under the provisions of
        APB25, no compensation expense was recognized when stock options were granted
        with exercise prices equal to or greater than market value on the date of
        the
        grant.
 
 13
 For
        the
        year ended December 31, 2006, the Company included approximately $55,000
        of
        share-based compensation in its operating expenses in the Company’s statement of
        operations. For the year ended December 31, 2005, the Company included
        approximately $48,000 of share-based compensation in the statement of
        operations.
  Prior
        to
        the adoption of FAS 123R, the Company presented cash flows resulting from
        the
        tax benefits of deductions resulting from the exercise of stock options as
        operating cash flows in the statement of cash flows. FAS 123R requires cash
        flows resulting from the 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 year ended December 31, 2006.
 
 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 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. Under FAS123 and APB 25, the Company
        elected
        to account for forfeitures when awards were actually forfeited, at which
        time
        all previous pro forma expense was reversed to reduce pro forma expense for
        that
        period.
 
 *Recent
        Accounting Pronouncements*
 
 In
        July
        2006, the Financial Accounting Standards Board issued Interpretation No.
        48,
“Accounting for Uncertainty in Income Taxes - An interpretation of FASB
        Statement No. 109,” or FIN 48, which clarifies the accounting and disclosure
        requirements for uncertainty in tax positions, as defined. We are currently
        evaluating the provisions of FIN 48, which is effective for fiscal years
        beginning after December 15, 2006.
  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
        will be effective for fiscal years beginning after November 15, 2007. The
        Company is assessing the impact the adoption of SFAS No. 157 will have on
        the
        Company’s 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 Company is currently
        assessing the impact of SFAS No. 159 on its financial position and results
        of
        operations.
  In
        September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
        Accounting Bulletin (“SAB”) No. 108, “Considering the Effects on Prior Year
        Misstatements when Quantifying Misstatements in Current Year Financial
        Statements”. SAB No. 108 requires registrants to quantify errors using both the
        income statement method and the rollover method and requires adjustment if
        either method indicates a material error. If a correction to the current
        year
        relating to prior year errors is material to the current year, then the prior
        year financial information needs to be corrected. A correction to prior year
        results that are not material to those years would not require a “restatement
        process” where prior financials would be amended. The Company’s adoption of SAB
        108 did not have a material impact on its financial statements.
 14


***Liquidity,
      Financial Condition and Capital Resources***





*General
      Overview:*





At
      December 31, 2006 the Company had cash of $371,000 and working capital of
      approximately $495,000. At December 31, 2005 the Company’s cash balance was
      $114,000 and working capital was approximately $323,000.





*Financial
      Condition:*





Net
      cash
      provided by/(used in) operating activities amounted to approximately $280,000
      and ($1,505,000) for the years ended December 31, 2006 and 2005, respectively.
      This decrease in cash used by operating activities is largely due to changes
      in
      operating assets and liabilities relating primarily to the collection of
      accounts receivable and non cash charges, offset by Company’s twelve-month loss
      of approximately $151,000.





Net
      cash
      used in investing activities amounted to approximately $5,000 and $39,000 for
      the years ended December 31, 2006 and 2005, respectively. This decrease in
      cash
      used of approximately $34,000 is due to a decrease in cash used for capital
      expenditures. During 2006, the Company entered into capital leases to acquire
      fixed assets.




Net
      cash
      (used in)/provided by financing activities amounted to approximately ($18,000)
      and $170,000 for the years ended December 31, 2006 and 2005, respectively.
      This
      decrease in cash provided of approximately $188,000 is largely due to $100,000
      transfer from restricted cash in 2005, payments on a capital lease for equipment
      of approximately $31,000 and a decrease of approximately $57,000 in proceeds
      from exercise of stock options.





The
      Company has changed its business model over the past 4 years whereby it now
      generates most of its revenue from the licensing of RPNavigator and providing
      consulting services in connection with that licensing. Revenue has grown from
      $2,844,000 in 2005 to $4,402,000 in 2006. The Company plans to increase cash
      flows from operations through increases in revenue generated from the licensing
      and related consulting services. Based on a forecast prepared by management
      of
      revenue anticipated by the Company during 2007 and cash on hand at December
      31,
      2006, management expects the Company to be able to meet its obligations as
      they
      become due during 2007. However, there can be no assurances that management’s
      plans and the projected increase in revenue will be attained.


15


**Item
      7.**  **Financial
      Statements and Supplementary Data**





The
      Financial Statements and supplementary data required by this item appear under
      the caption “Index to Consolidated Financial Statements” and are included
      elsewhere herein.





**Item
      8.** ****  **Changes
      in and Disagreements with Accountants On Accounting and Financial Disclosure**





None.





**Item
      8A. 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 Chief 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, 2006, we carried out an evaluation under the
      supervisions and with the participation of our management, including our Chief
      Executive Officer and Chief 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 and acting Chief Financial Officer has concluded
      that our disclosure controls and procedures are effective at the reasonable
      assurance level.





During
      the quarter ended December 31, 2006, there have been no changes in our internal
      controls over financial reporting that that have materially affected, or are
      reasonably likely to materially affect these controls.





**Item
      8B. Other Information**





On
      February 27, 2007, the Board of Directors of the Company amended the Bylaws
      to
      amend Section 4 of Article II to define, in the case of a committee of the
      Board
      of Directors consisting of only two members, a quorum to consist of one
      member.




16




**PART
      III**





**Item
      9.**  **Directors,
      Executive Officers, Promoters and Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act**





The
      Company’s directors, executive officers and control persons as of December 31,
      2006 are as follows:





Name
            
            Age
            
            Positions
                with the CompanyDavid
                G. Noone(1,
                2)
            
            53
            
            Chairman
                of the Board of DirectorsDennis
                J. Mouras
            
            50
            
            Chief
                Executive Officer, President and DirectorDavid
                J. McDonnell(1,2)
            
            64
            
            Director




(1)
                  Member
                      of Compensation Committee.
 (2)
                  Member
                      of Audit Committee.


There
      is
      no family relationship between any director or executive officer 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, 2006:





David
      G.
      Noone 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 engaged in identifying and pursuing strategic business combinations
      from February 15, 2001 to September 2001. 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. 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 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
      Company does not have a financial expert on its audit committee because 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
      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, 2006, its 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 17 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 will revisit this issue
      in the future 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 information concerning the compensation paid by
      the
      Company for the calendar year ended December 31, 2006 to the individual
      performing the function of Chief Executive Officer and each of the next four
      most highly compensated executive officers with compensation in excess of
      $100,000, during such periods .





**Summary
      Compensation Table**





**Name
                and principal**
              **position**
            
            **Year**
            
            **Salary**
              (**$)**
            
            **Bonus**
              **($)**
            
            **Stock
                Awards**
              **($)****(2)**
            
            **Non-equity**
              **Incentive
                plan**
              **Compensation**
              **($)**
            
            **Change
                in**
              **pension**
              **value
                and**
              **non-qualified**
              **deferred**
              **compensation**
              **earnings**
              **($)**
            
            **All
                other**
              **Compensation**
              **($)****(3)**
            
            **Total**
              **($)****Dennis
                J. Mouras**
              *Chief
                Executive Officer & President**(1)*
            
            
            2006
            
            
            285,000
            
            
            0
            
            
            30,000
            
            
            0
            
            
            0
            
            
            67,380
            
            
            382,380







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


(2)
            Amounts
                calculated using the provisions of Statement of Financial Accounting
                Standards (“SFAS”) No. 123R, “Share-based Payments,”, based on a grant of
                2,000,000 shares of common stock on May 16, 2006. See Note B[10]
                of the
                financial statements contained in this 10-KSB for the year ended
                December
                31, 2006 regarding assumptions underlying valuation of equity
                awards.


(3)
            Represents
                Company matching contributions to a 401(k) profit sharing/savings
                plan in
                the amount of $6,600 and $60,780 in taxable fringe benefits which
                represents a commuting allowance, grossed up for federal and state
                income
                tax liability.





***Mouras
      Employment Agreement***





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.




18




**Compensation
      Plans**




**Outstanding
      Equity Awards at Fiscal Year End Table**




**Option
        Awards**




**Name**
                
                **Number
                    of securities underlying unexercised options**
                  **(#)
                    exercisable**
                
                **Number
                    of securities underlying unexercised options**
                  **(#)
                    unexercisable**
                
                **Option
                    Exercise Price ($)**
                
                **Option****expiration
                    date****Dennis
                    J. Mouras**
                
                
                2,263,889
                
                
                666,667
                    (1
                )
                $
                .008
                
                
                08/17/2014*Chief
                    Executive Officer & President*
                
                
                55,555
                
                
                0
                    (2
                )
                $
                .010
                
                
                10/30/2012





(1)
            Options
                vest as follows: One third of the option becomes exercisable on August
                17,
                2005; 2/3 of the option becomes exercisable in 24 equal monthly amounts
                beginning September 17, 2005 and on the 17thday
                on the following 23 months.


(2)
            Options
                vest as follows: One third of the option becomes exercisable on October
                30, 2003; 2/3 of the option becomes exercisable in 24 equal monthly
                amounts beginning November 30, 2003 and on the 30thday
                on the following 23 months.





***Stock
      Option Plan:***




The
      Board
      of Directors initially adopted the Stock Option Plan (“Plan”) on June 6, 1996,
      and the stockholders approved the plan on August 23, 1996. Effective January
      8,
      1999 and January 26, 1999, the Board of Directors approved amendments to the
      Plan to update the Plan and to increase the number of shares and certain other
      benefits available under the Plan. The stockholders approved the amendments
      to
      the Plan on July 7, 1999. Additionally, effective November 30, 2000, the Board
      of Directors and a majority of the stockholders acting by written consent,
      approved amendments to the Plan to increase the number of shares available
      under
      the Plan. On
      June
      6, 2006, pursuant to its terms, the Plan terminated.





The
      Plan
      was administered by a Committee of the Board of Directors consisting of at
      least
      two members who were "outside directors" as defined in Section 162(m) of the
      Internal Revenue Code who were 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.





Under
      the
      Plan, as amended, the Company reserved an aggregate of 22,648,000
      shares of Common Stock for issuance pursuant to options granted under the Plan.
      Beginning on January 1, 2002, and on each subsequent January 1, the number
      of
      shares reserved for issuance under the Plan was increased by three percent
      (3%),
      provided, however, that no shares authorized pursuant to such annual increase
      were to be issued with respect to incentive stock options. Pursuant
      to the terms of the Plan, the Committee selected the persons to be granted
      options and determined: (i) whether to grant a non-qualified stock option and/or
      an incentive stock option; (ii) the number of shares of the Company's Common
      Stock that could be purchased upon the exercise of such option; (iii) the time
      or times when the option was to become exercisable; (iv) the exercise price,
      which could be less than 100% of the fair market value of the Common Stock
      on
      the date of grant for incentive stock options (110% of such fair market value
      for incentive options granted to a person who owns or who is considered to
      own
      stock possessing more than 10% of the total combined voting power of all classes
      of stock of the Company); (v) the duration of the option, which could not exceed
      ten (10) years; and (vi) the terms and provisions of option agreements, which
      could differ among recipients, and which, unless the Committee otherwise
      determined, were to be substantially in the forms attached as exhibits to the
      Plan. Incentive stock options could only be granted to employees (including
      officers) of the Company and/or any of its subsidiaries. Non-qualified stock
      options could be granted to any employees (including employees who have been
      granted incentive stock options) and other persons who the Committee selected.
      The Committee could issue non-qualified stock options with an exercise price
      less than 100% of fair market value of the Common Stock.




19




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.





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
      Board
      of Directors had the authority to terminate the Plan as well as to make changes
      in and additions to such Plan. However, unless approved by the stockholders
      of
      the Company, the Board of Directors could not change the aggregate number of
      shares subject to the Plan, materially modify the requirements of eligibility
      to
      such Plan or materially increase the benefits accruing to participants under
      such Plan.





No
      grant
      under the Plan was made to Mr. Mouras in 2006; however, on May 16, 2006, he
      was
      granted as a bonus outside of the Plan 2,000,000 shares of Common Stock of
      the
      Company.





***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 2006 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 ($)******
            
            **Total**
              **($)**David
                J. McDonnell
            
            $
            6,000
            
            
            -
            
            $
            0
            
            $
            6,000David
                G. Noone
            
            $
            4,800
            
            
            -
            
            $
            0
            
            $
            4,800





**(1)**
            The
                amount of options outstanding as of December 31, 2006 for both Directors,
                McDonnell and Noone, were 1,250,000 options
                each.




***Generally***





No
      member
      of the Board of Directors of the Company presently receives annual remuneration
      for acting in that capacity, except directors who are not officers. Directors
      are paid $1,200 for each meeting of the Board of Directors they attend. Such
      directors are also eligible for the grants of options under the Directors Stock
      Option Plan. Directors are also reimbursed their reasonable out-of-pocket
      expenses for each attended meeting of the Board or any committee thereof.
      O n
      May 27,
      2005, the Company amended all outstanding stock options with an exercise price
      greater than $.01 per share previously granted to the non-employee directors
      pursuant to the Company’s Directors’ Stock Option Plan, and reduced the exercise
      price of such options to $.01, effective as of May 25, 2005. The amendments
      resulted in the re-pricing of options to purchase 300,000
      shares previously granted to David J. McDonnell at an exercise price of $.08
      per
      share, with a new exercise price of $.01 per
      share.




20




***Directors
      Stock Option Plan***





The
      Company adopted the Director Stock Option Plan (the “Director Plan”) on June 6,
      1996, and amended it on July 24, 1996 and the stockholders approved the amended
      plan on August 23, 1996. Effective January 26, 1999, the Board of Directors
      approved amendments to the Director Plan to update the plan and to increase
      the
      number of shares and certain other benefits available under the Director Plan.
      The stockholders approved the amendments to the Director Plan on July 7,
      1999.





Pursuant
      to the terms of the Director Plan, the Board of Directors may grant
      non-qualified stock options to non-employee directors and will 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 is reserved for
      issuance. On
      January 19, 2001, the Company increased its authorized shares of common stock
      from 103,600,000 to 200,000,000 shares. As a result, the number of shares
      reserved for issuance under the Director Plan is 4,000,000 shares, and on
      account of the grants made in 1999 and 2005, no further shares were available
      for issuance under the Directors Plan. The 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
      Directors Stock Option 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
      11.** **** **Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters**





The
      following table sets forth as of February 7, 2007 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) each of the executive officers named in the Summary Compensation
      Table, 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.




21




**Beneficial
      Ownership of Common Stock by**


**Certain
      Stockholders and Management**




**Name
                  of Beneficial Owner**
              
              **Number
                  of Shares**
                **Beneficially
                  Owned****(1)**
              
              **Percent
                  of Ownership****(2)**Principal
                  Holders:Credit
                  Suisse Asset Management, LLC (3) (4)
              
              
              7,536,204
              
              
              13.27
              %Directors:David
                  J. McDonnell (5)
              
              
              1,430,556
              
              
              2.46
              %David
                  G. Noone (6)
              
              
              3,430,556
              
              
              5.70
              %Management:Dennis
                  J. Mouras (7) (8)
              
              
              9,083,433
              
              
              13.79
              %All
                  directors and executive officers as a group (3 persons)
                  (8)
              
              
              13,944,545
              
              
              20.15
              %





*
      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 outstanding shares
      and shares subject to options exercisable within 60 days.





(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”).





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





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





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





(8)
      530,556 shares of Mr. McDonnells’s of Common Stock, 530,556 shares of Mr.
      Noone’s of Common Stock, 2,569,544 shares of Mr. Mouras’s of Common Stock, and
      3,630,656 shares of the Common Stock of 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 7, 2007 or that will become
      exercisable within 60 days of such date.





22




***Equity
      Compensation Plans***





The
      following table sets forth the securities authorized for issuance under the
      Company’s equity compensation plans as of December 31, 2006:




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
            
            
            19,852,149
            
            $
            0.012
            
            
            -Equity
                compensation plans not approved by
              security
                holders
            
            
            -
            
            $
            -
            
            
            -Total
            
            
            19,852,149
            
            $
            0.012
            
            
            -




**Item
      12.** **** **Certain
      Relationships and Related Transactions and Director
      Independence**





**Related
      Transactions**





None.





**Director
      Independence**





Our
      board
      of directors has determined that the following directors are “independent
      directors”, as defined in Rule 4200(a)(15) of the Nasdaq Stock Market: David G.
      Noone and David J. McDonnell.




**Item
      13.** **** **Exhibits**




Exhibit
                No.
              
              Description
                  of Exhibit2.1
              
              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).
  23
  3.2(a)
              
              Amendment
                  to Registrant’s Bylaws*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
              
              Registrant’s
                  1996 Stock Option Plan incorporated by reference to the Company's
                  Information Statement dated September 1996.10.3
              
              Registrant’s
                  1996 Director Stock Option Plan incorporated by reference to the
                  Company's
                  Information Statement dated September 1996.10.4
              
              Confidentiality,
                  Invention, and Non-Compete Agreement between the Company and David
                  Noone,
                  dated as of January 8, 1999, incorporated by reference to Exhibit
                  10.33
                  filed with the Company’s Form 10KSB for the year ended September 30,
                  1998.10.5
              
              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,
                  1999.10.6
              
              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,
                  2005.10.7
              
              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 1934.10.8
              
              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, 2005.10.9
              
              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 1934.10.10
              
              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 1934.10.11
              
              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
                  1934.10.12
              
              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 1934.10.13
              
              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.
  24
  16.1
              
              Letter
                  regarding change in accountants, incorporated by reference to Exhibit
                  16.1
                  filed on the Company’s Form 8-K dated June 6, 1996.16.2
              
              Letter
                  regarding change in accountants, incorporated by reference to Exhibit
                  16
                  filed on the Company’s Form 8-K dated July 31, 2001.16.3
              
              Letter
                  regarding change in accountants, incorporated by reference to Exhibit
                  16.1
                  filed on the Company’s Form 8-K dated June 6, 2002.21
              
              Subsidiaries
                  of the Registrant*23.1
              
              Consent
                  of Independent Registered Public Accounting Firm*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





25




I **tem
      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 Eisner, LLP in 2005 and 2006:





**Services
                Performed**
            
            **2006**
            
            **2005**Audit
                Fees (1)
            
            
            90,500
            
            
            62,000Audit-Related
                Fees (2)
            
            
            -
            
            
            6,200Tax
                Fees (3)
            
            
            14,000
            
            
            14,256All
                Other Fees (4)
            
            
            -
            
            
            4,300Total
                Fees
            
            
            104,500
            
            
            86,756





(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-Q and 10-K 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 2005 and
      2006.





(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.





****** **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 2005 and 2006
      were
      pre-approved by the audit committee. No fees in 2005 or 2006 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.


26




**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:April
                2, 2007
            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:April
                2, 2007
            By:
            /s/ Dennis J. MourasDennis
                J. Mouras, Chief Executive Officer, Director andacting Principal
                Financial Officer and Accounting
                Officer




Date:April
                2, 2007
            By:
            /s/ David J. McDonnellDavid
                J. McDonnell, Director




Date:April
                2, 2007
            By:
            /s/ David G. NooneDavid
                G. Noone, Director










CAREADVANTAGE,
      INC.


AND
      SUBSIDIARIES




CONSOLIDATED
      FINANCIAL


STATEMENTS





DECEMBER
      31, 2006 AND 2005










INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheet as of December 31, 2006
            
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2006 and
                2005
            
            F-4Consolidated
                Statements of Stockholders' Equity for the years ended December 31,
                2006
                and 2005
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2006 and
                2005
            
            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 sheet of CareAdvantage, Inc.
      and
      subsidiaries (the “Company”) as of December 31, 2006, and the related
      consolidated statements of operations, stockholders' equity and cash flows
      for
      the years ended December 31, 2006 and 2005. These consolidated financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. 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 enumerated above present fairly, in all
      material respects, the consolidated financial position of CareAdvantage, Inc.
      and subsidiaries as of December 31, 2006, and the consolidated results of
      their operations and their consolidated cash flows for the years ended December
      31, 2006 and 2005, in conformity with U.S. generally accepted accounting
      principles.


As
        discussed in Note B[10] to the consolidated financial statements, the Company
        changed its method of accounting for stock-based compensation effective January
        1, 2006.




Eisner,
      LLP


New
      York,
      New York


March
      29,
      2007





F-2




**Consolidated
      Balance Sheet**





**December
                31,****2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            **$**
            **371,000**Accounts
                receivable
            
            
            **529,000**Other
                current assets
            
            
            **92,000**Total
                current assets
            
            
            **992,000**Property
                and equipment, at cost, less accumulated depreciation
            
            
            **232,000**Intangible
                assets, net of accumulated amortization
            
            
            **1,000**Security
                deposits
            
            
            **167,000**Total
                Assets
            
            **$**
            **1,392,000****LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            
            **146,000**Accrued
                compensation and related benefits
            
            
            **110,000**Accrued
                expenses and other current liabilities
            
            
            **127,000**Deferred
                revenue
            
            
            **74,000**Capital
                lease obligation –
                current
            
            
            **40,000**Total
                current liabilities
            
            
            **497,000**Long
                Term Liabilities:Capital
                Lease Obligation – Long Term
            
            
            **143,000**Deferred
                rent
            
            
            **352,000**Total
                long term liabilities
            
            
            **495,000**Total
                Liabilities**992,000**Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock - par value $.10 per share; authorized 10,000,000shares;
                none issuedCommon
                stock - par value $.001 per share, authorized 200,000,000shares;
                issued 110,170,374 shares and outstanding
                56,775,554
            
            
            **110,000**Additional
                paid in capital
            
            
            **24,
                007,000**Accumulated
                deficit
            
            
            **(23,
                455,000**
            **)**Treasury
                Stockat
                cost, 53,394,820 shares
            
            
            **(262,000**
            **)**Total
                stockholders’ equity
            
            
            **400,000**Total
                Liabilities and Stockholders' Equity
            
            **$**
            **1,392,000**




*See
      notes to consolidated financial statements*




F-3




**Consolidated
      Statements of Operations**





**Year
                Ended****December
                31,****2006**
            
            **2005**License
                fees and service revenue
            
            **$**
            **4,402,000**
            
            $
            2,844,000Cost
                of services
            
            
            **1,745,000**
            
            
            1,433,000Gross
                profit
            
            
            **2,657,000**
            
            
            1,411,000Operating
                expenses:Selling,
                general and administrative
            
            
            **2,676,000**
            
            
            2,862,000Depreciation
                and amortization
            
            
            **125,000**
            
            
            187,000Total
                operating expenses
            
            
            **2,801000**
            
            
            3,049,000Operating
                (loss)
            
            
            **(144,000**
            **)**
            
            (1,638,000
            )Interest
                (expense)/income, net
            
            
            **(4****,000**
            **)**
            
            8,000(Loss)
                before provision for income taxes
            
            
            **(148,000**
            **)**
            
            (1,630,000
            )Provision
                for income taxes
            
            
            **3,000**
            
            
            5,000**Net
                (loss)**
            
            **$**
            **(151,000**
            **)**
            $
            (1,635,000
            )**Net
                (loss) per share of common stock -**Basic
                and diluted
            
            
            **($
                .00**
            **)**
            
            ($
                .03
            )**Weighted
                average number of common shares outstanding -**Basic
                and diluted
            
            
            **55,754,000**
            
            
            48,802,000




*See
      notes to consolidated financial statements*




F-4




**Consolidated
      Statements of Stockholders' Equity**







**Common
                  Stock**
              
              
              
              
              
              
              
              **Treasury
                  Stock****Number**
                **of**
                **Shares**
              
              **Par**
                **Value**
                **Amount**
              
              **Additional**
                **Paid
                  In**
                **Capital**
              
              **Accumulated**
                **Deficit**
              
              **Deferred**
                **Compensation**
              
              **Number**
                **of**
                **Shares**
              
              **Par**
                **Value**
                **Amount**
              
              **Stockholder’s**
                **Equity****Balance
                  as of January 1, 2005**
              
              
              99,794,152
              
              $
              100,000
              
              $
              23,801,000
              
              $
              (21,669,000
              )
              
              
              
              
              (53,394,820
              )
              
              (262,000
              )
              $
              1,970,000Exercise
                  of stock options
              
              
              7,017,889
              
              
              7,000
              
              
              63,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              70,000Deferred
                  compensation cost
              
              
              
              
              
              
              
              
              50,000
              
              
              
              
              
              (50,000
              )
              
              
              
              
              
              
              
              -Employee
                  stock option
              
              
              
              
              
              
              
              
              38,000
              
              
              
              
              
              10,000
              
              
              
              
              
              
              
              
              48,000Net
                  loss for the year ended December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              (1,635,000
              )
              
              
              
              
              
              
              
              
              
              
              (1,635,000
              )**Balance
                  as of December 31, 2005**
              
              
              106,812,041
              
              $
              107,000
              
              $
              23,952,000
              
              $
              (23,304,000
              )
              
              (40,000
              )
              
              (53,394,820
              )
              
              (262,000
              )
              $
              453,000Exercise
                  of stock options
              
              
              1,358,333
              
              
              1,000
              
              
              12,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,000Grant
                  of stock bonus award
              
              
              2,000,000
              
              
              2,000
              
              
              28,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              30,000Deferred
                  compensation cost
              
              
              
              
              
              
              
              
              (40,000
              )
              
              
              
              
              40,000
              
              
              
              
              
              
              
              
              -Employee
                  stock option
              
              
              
              
              
              
              
              
              55,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              55,000Net
                  loss for the year ended December 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              (151,000
              )
              
              
              
              
              
              
              
              
              
              
              (151,000
              )**Balance
                  as of December 31, 2006**
              
              
              **110,170,374**
              
              **$**
              **110,000**
              
              **$**
              **24,007,000**
              
              **$**
              **(23,455,000**
              **)**
              **$**
              **0**
              
              
              **(53,394,820**
              **)**
              **$**
              **(262,000**
              **)**
              **$**
              **400,000**




*See
      notes to consolidated financial statements*




F-5




**Consolidated
      Statements of Cash Flows**





**Year
                Ended****December****31****2006**
            
            **2005****Cash
                flows from operating activities:**Net
                loss
            
            **$**
            **(151,000**
            **)**
            $
            (1,635,000
            )Adjustments
                to reconcile net loss to net cash provided by/(used
                in) operating activities:Depreciation
                and amortization
            
            
            **125,000**
            
            
            187,000Stock
                based compensation
            
            
            **85,000**
            
            
            48,000Deferred
                revenue
            
            
            **74,000**
            
            
            -Changes
                in:Accounts
                receivable
            
            
            **(72,000**
            **)**
            
            (310,000
            )Other
                assets
            
            
            **16,000**
            
            
            (38,000
            )Accounts
                payable
            
            
            **7,000**
            
            
            77,000Accrued
                expenses and other current liabilities
            
            
            **20,000**
            
            
            (10,000
            )Deferred
                rent
            
            
            **176,000**
            
            
            176,000Net
                cash provided by/(used in) operating activities
            
            
            **280,000**
            
            
            (1,505,000
            )**Cash
                flows from investing activity:**Capital
                expenditures
            
            
            **(5,000**
            **)**
            
            (39,000
            )Net
                cash used in investing activity
            
            
            **(5,000**
            **)**
            
            (39,000
            )**Cash
                flows from financing activity:**Repayment
                of capital leases
            
            
            **(31,000**
            **)**
            
            -Transfer
                from restricted cash
            
            
            **-**
            
            
            100,000Proceeds
                from exercise of stock options
            
            
            **13,000**
            
            
            70,000Net
                cash (used in)/provided by financing activity
            
            
            **(18,000**
            **)**
            
            170,000**Net
                increase/(decrease) in cash and cash equivalents**
            
            
            **257,000**
            
            
            (1,374,000
            )Cash
                and cash equivalents - beginning of year
            
            
            **114,000**
            
            
            1,488,000**Cash
                and cash equivalents - end of year**
            
            **$**
            **371,000**
            
            $
            114,000**Supplemental
                disclosures of cash flow information:**Income
                taxes paid
            
            **$**
            **3,000**
            
            $
            5,000Interest
                paid
            
            **$**
            **5,000**
            
            **$**
            **-****Non-cash
                transactions:**Equipment
              acquired through capital leases
            
            **$**
            **214,000**
            
            **$**
            **-**




*See
      notes to consolidated financial statements*




F-6




**NOTE
      A - BUSINESS AND BASIS OF PRESENTATION**





**[1]**
            **Business:**





CareAdvantage,
      Inc. (“CAI” 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 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
      operates in one business segment.





As
      part
      of offering its management and consulting services, the Company has developed
      RightPath® Navigator (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
      services, the Company licenses RPNavigator to its customers and provides
      consulting services in connection with that licensing.





**[2]**
            **Basis
                of presentation:**





For
      the
      years ended December 31, 2006 and 2005, the Company has incurred net losses
      of
      ($151,000) and ($1,635,000), respectively and has an accumulated deficit of
      ($23,455,000) as of December 31, 2006. Additionally, the Company has $371,000
      of
      cash and cash equivalents at December 31, 2006 and has been provided cash from
      operations of $463,000 during the year then ended. 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, 2006
      and a forecast prepared by management based on executed contracts, management
      expects the Company to be able to meet its obligations as they become due during
      2007. However, there can be no assurances that management’s plans,
      including  projected revenue, will be attained.





On
      September 28, 2006, the Company was notified by Kaiser Foundation Health Plan
      of
      the Northwest (“Kaiser”) that Kaiser was exercising its right to terminate the
      Services and License Agreement between the Company and Kaiser (the “Agreement”).
      Accordingly, the Agreement terminated effective December 31, 2006. Pursuant
      to
      the Agreement, the Company provided Management Services to Kaiser and licensed
      to Kaiser access to the RPNavigator tool.




Although
      the Agreement has accounted for revenues for the year, including $848,000 for
      2006, the Company does not believe that the termination will materially
      adversely impact the Company’s ongoing business and operations. The Company is
      continuing to assess the impact of the termination of the Agreement on the
      Company’s business. The Company will attempt to compensate for the terminated
      Agreement by using its resources to expand its current service to existing
      customers, market its services to and enter into contracts with new customers,
      and, if necessary, implement cost reductions measures until the revenues are
      replaced. There is no assurance, however, that any of these measures will be
      successful.




**NOTE
      B - **SUMMARY
      OF SIGNIFICANT
      ACCOUNTING
      POLICIES****





**[1]**
            **Principles
                of consolidation:**





The
      consolidated financial statements include the accounts of CAI, 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.





F-7





**NOTE
      B - **SUMMARY
      OF SIGNIFICANT
      ACCOUNTING
      POLICIES
      (CONTINUED)****




**[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. The cost and accumulated depreciation of
      assets recorded under capital leases was approximately $214,000 and $11,000,
      respectively. Depreciation expense amounted to $123,000 and $128,000 for the
      years ended December 31, 2006 and 2005, respectively.





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 and $59,000 for the years ended December 31,
      2006 and 2005, respectively.





**[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,****2006**
            
            **2005**Options
            
            
            **19,852,000**
            
            
            12,832,000Total
                Potential Dilutive shares
            
            
            **19,852,000**
            
            
            12,832,000




**[5]**
            **Concentration
                of credit risk:**





Financial
      instruments that potentially subject the Company to credit risk consist of
      cash
      and accounts receivable. The Company maintains its cash balances in high quality
      financial institutions. At December 31, 2006, the Company had deposited
      approximately $371,000 in one commercial bank.





**[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.





F-8


**NOTE
        B - **SUMMARY
        OF SIGNIFICANT
        ACCOUNTING
        POLICIES
        (CONTINUED)****




**[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]**
            **Major
                customers:**





Two
      customers, BCBS organizations, accounted for approximately 53% and 22%,
      respectively, of license fees and service revenue for the year ended December
      31, 2006. Another major customer, Kaiser Foundation Health Plan of the
      Northwest, which accounted for approximately 19% of license fees and service
      revenue for the year ended December 31, 2006, terminated its service agreement
      effective December 31, 2006. Two customers, BCBS organizations, accounted for
      approximately 39% and 32%, respectively, of license fees and service revenue
      for
      the year ended December 31, 2005. Another major customer, Kaiser Foundation
      Health Plan of the Northwest, accounted for approximately 22% of license fees
      and service revenue for the year ended December 31, 2005. If the BCBS customers
      terminate or modify existing contracts or experience business difficulties,
      it
      would adversely affect our results of operations.




**[10]**
            **Stock-based
                compensation:**





Effective
      January 1, 2006, the Company adopted 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 service period which
      is generally the same as the option-vesting period. The Company adopted this
      standard using the modified prospective method, in which compensation expense
      is
      recognized beginning with the effective date of adoption of FAS123R for all
      share-based payments (i) granted after the effective date of the adoption and
      (ii) granted prior to the effective date of the adoption and that remain
      unvested or modified on the date of the adoption.





Prior
      to
      January 1, 2006, the Company accounted for stock-based employee compensation
      under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
      Issued to Employees”, and related interpretations. Under the provisions of
      APB25, no compensation expense was recognized when stock options were granted
      with exercise prices equal to or greater than market value on the date of the
      grant.





The
      following table illustrates the effect on net (loss) per share if the fair
      value
      based method had been applied to the prior periods in comparison to the current
      periods, where it was applied.




**Year
                  Ended December 31,****2005**Reported
                  net loss
              
              
              (1,635,000
              )Stock-based
                  employee compensation
              
              
              48,000included
                  in reported net lossStock-based
                  employee compensation determinedunder
                  the fair value based method
              
              
              (73,000
              )Pro
                  forma net loss
              
              
              (1,660,000
              )Basic
                  and diluted loss per share:As
                  reported
              
              
              (.03
              )Pro
                  forma
              
              
              (.03
              )




For
      the
      year ended December 31, 2006, the Company included approximately $55,000 of
      share-based compensation in its operating expenses in the Company's statement
      of
      operations. For the year ended December 31, 2005, the Company included
      approximately $48,000 of share-based compensation in the statement of
      operations.




F-9


**NOTE
        B - **SUMMARY
        OF SIGNIFICANT
        ACCOUNTING
        POLICIES
        (CONTINUED)****




Prior
      to
      the adoption of FAS 123R, the Company presented cash flows resulting from the
      tax benefits of deductions resulting  from the exercise of stock options as
      operating cash flows in the statement of cash flows. FAS 123R requires cash
      flows resulting from the 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 year ended December 31,
      2006.





The
      following table summarizes the activity of the Company’s stock options for the
      years ended December 31, 2006 and December 31, 2005:




**Weighted**
            
            **Weighted
                Average****Average**
            
            **Remaining**
            
            **Aggregate****Exercise**
            
            **Contractual**
            
            **Intrinsic****Shares**
            
            **Price**
            
            **Term**
            
            **Value**Number
                of shares under option:Outstanding
                at December 31, 2006
            
            
            12,832,000
            
            $
            0.009Granted
            
            
            8,578,000
            
            $
            0.015Exercised
            
            
            (1,358,000
            )
            $
            0.010Canceled
                or expired
            
            
            (200,000
            )
            $
            0.012Outstanding
                as of December 31, 2006
            
            
            19,852,000
            
            $
            0.012
            
            
            8.37
            
            $
            162,000Exercisable
                at December 31, 2006
            
            
            7,394,000
            
            $
            0.010
            
            
            7.35
            
            $
            77,000Expected
                to vest after December 31, 2006
            
            
            12,458,000
            
            $
            0.013
            
            
            8.97
            
            $
            85,000





**Weighted**
            
            **Weighted
                Average****Average**
            
            **Remaining**
            
            **Aggregate****Exercise**
            
            **Contractual**
            
            **Intrinsic****Shares**
            
            **Price**
            
            **Term**
            
            **Value**Number
                of shares under option:
            
            
            16,122,000
            
            $
            0.130Outstanding
                at December 31, 2005
            
            
            5,200,000
            
            $
            0.010Granted
            
            
            (7,018,000
            )
            $
            0.010Exercised
            
            
            (1,472,000
            )
            $
            0.810Canceled
                or expired
            
            
            12,832,000
            
            $
            0.009
            
            
            8.69
            
            $
            70,000Outstanding
                as of December 31, 2005Exercisable
                at December 31, 2005
            
            
            3,677,000
            
            $
            0.009
            
            
            7.78
            
            $
            17,000Expected
                to vest after December 31, 2005
            
            
            9,155,000
            
            $
            0.010
            
            
            9.05
            
            $
            53,000





F-10




The
      following summarizes the activity of the Company’s non-vested stock options for
      the year ended December 31, 2006:





**Weighted****Average****Exercise****Shares**
            
            **Price**Non-vested
                at January 1, 2006
            
            
            9,155,000
            
            $
            0.010Granted
            
            
            8,578,000
            
            $
            0.015Canceled
                or expired
            
            
            (116,000
            )
            $
            0.012Vested
            
            
            (5,159,000
            )
            $
            0.009Non-vested
                at December 31, 2006
            
            
            12,458,000
            
            $
            0.013





As
      of
      December 31, 2006, there was approximately $106,000 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 of 1.97 years.





The
      weighted average fair value of options granted during the years ended December
      31, 2005 and 2006 was $0.010 and $0.012, respectively. The total intrinsic
      value
      of options exercised during the twelve months ended December 31, 2005 and 2006
      was $14,000 and $36,000, respectively.





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. The following table illustrates the assumptions
      used in the Company’s Black-Scholes calculations to determine the stock option
      expense.




**December 31,****2006**
            
            **2005**Dividend
                yield
            
            
            **0**
            
            
            **0**Volatility
            
            
            **91**
            **%**
            
            **149**
            **%**Risk
                free interest rate
            
            
            **4.99**
            **%**
            
            **3.81**
            **%**Expected
                life in years
            
            
            **5**
            
            
            **5**




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. Under FAS123 and APB 25, the Company elected to
      account for forfeitures when awards were actually forfeited, at which time
      all
      previous pro forma expense was reversed to reduce pro forma expense for that
      period.





During
      the year ended December 31, 2006, the exercise of certain stock options resulted
      in the issuance of 1,358,000 shares of common stock for proceeds of
      $13,000.




On
      May
      16, 2006, the Company’s Board of Directors granted as a bonus to a key employee
      2,000,000 shares of the Company’s common stock with a fair value of $30,000,
      which shares vested immediately. For the year ended December 31, 2006, the
      Company recorded $30,000 in stock based compensation expense in connection
      with
      this stock grant, which is based on the fair value of the stock on the grant
      date. As of December 31, 2006, there was no unrecognized compensation cost
      related to the shares. ****




F-11




NOTEB -SUMMARY
      OF SIGNIFICANT
      ACCOUNTING
      POLICIES
      (CONTINUED)




**[11]**
            **Recent
                Accounting
                Pronouncements******




In
      July
      2006, the Financial Accounting Standards Board issued Interpretation No. 48,
      “Accounting for Uncertainty in Income Taxes - An interpretation of FASB
      Statement No. 109,” or FIN 48, which clarifies the accounting and disclosure
      requirements for uncertainty in tax positions, as defined. We are currently
      evaluating the provisions of FIN 48, which is effective for fiscal years
      beginning after December 15, 2006.





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
      will be effective for fiscal years beginning after November 15, 2007. The
      Company is assessing the impact the adoption of SFAS No. 157 will have on the
      Company’s 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 Company is currently
      assessing the impact of SFAS No. 159 on its financial position and results
      of
      operations.





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin (“SAB”) No. 108, “Considering the Effects on Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements”. SAB No. 108 requires registrants to quantify errors using both the
      income statement method and the rollover method and requires adjustment if
      either method indicates a material error. If a correction to the current year
      relating to prior year errors is material to the current year, then the prior
      year financial information needs to be corrected. A correction to prior year
      results that are not material to those years would not require a “restatement
      process” where prior financials would be amended. The Company’s adoption of SAB
      108 did not have a material impact on its financial statements.




**NOTE
        C - INTANGIBLE
        ASSETS**





Intangible
      assets, net of accumulated amortization consist of the following at December
      31,
      2006:





Trademark
            
            **$**
            **3,000**Software
                development cost
            
            
            **296,000****299,000**Less
                accumulated amortization
            
            
            **(298,000**
            **)******
            **$**
            **1,000**





**[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.





F-12




**NOTE
      D - PROPERTY
      AND EQUIPMENT**





Property
      and equipment consist of the following at December 31, 2006:





Computer
                equipment
            
            **$**
            **650,000**Furniture
                and fixtures
            
            
            **1,000**Office
                machines and telephone equipment
            
            
            **59,000**Leasehold
                improvements
            
            
            **2,000****712,000**Less
                accumulated depreciation and amortization
            
            
            **(480,000**
            **)****$**
            **232,000**





The
      above
      includes capital lease equipment with a net book value of approximately $203,000
      at December 31, 2006. Depreciation expense, including amortization of assets
      under capital leases, amounted to $123,000 for the year ended December 31,
      2006.





**NOTE
      E - CAPITAL
      LEASES**





Future
      payments as of December 31, 2006 on the equipment leases are as
      follows:





**Year**
            
            **Lease****Ending**
            
            **Obligation**2007
            
            
            59,0002008
            
            
            59,0002009
            
            
            59,0002010
            
            
            59,0002011
            
            
            38,000$
            274,000




Less:
              amounts representing interest
            
            $
            91,000Present
              value of minimum lease payments
            
            $
            183,000Less:
              current portion of capial lease obligation
            
            $
            40,000Long
              term portion of capital lease obligation
            
            $
            143,000





The
      Company’s equipment that is held under a capital lease is included in fixed
      assets, net and the related amortization is included in depreciation and
      amortization expense.




**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.


F-13


**NOTE
      F - STOCKHOLDERS'
      EQUITY
      (CONTINUED)**




Under
      the
      Plan, as amended, the Company reserved an aggregate of 22,648,000 shares of
      Common Stock for issuance pursuant to options granted under the Plan. Beginning
      on January 1, 2002, and on each subsequent January 1, the number of shares
      reserved for issuance under the Plan was increased by three percent (3%),
      provided, however, that no shares authorized pursuant to such annual increase
      were to be issued with respect to incentive stock options.




Pursuant
      to the terms of the Plan, the Committee selected the persons to be granted
      options and determined: (i) whether to grant a non-qualified stock option and/or
      an incentive stock option; (ii) the number of shares of the Company's Common
      Stock that could be purchased upon the exercise of such option; (iii) the time
      or times when the option becomes exercisable; (iv) the exercise price, which
      could not be less than 100% of the fair market value of the Common Stock on
      the
      date of grant for incentive stock options (110% of such fair market value for
      incentive options granted to a person who owns or who is considered to own
      stock
      possessing more than 10% of the total combined voting power of all classes
      of
      stock of the Company); and (v) the duration of the option, which could not
      exceed ten (10) years; and (vi) the terms and provisions of option agreements,
      which could differ among recipients, and which, unless the Committee otherwise
      determined, were to be substantially in the forms attached as exhibits to the
      Plan. Incentive stock options could only be granted to employees (including
      officers) of the Company and/or any of its subsidiaries. Non-qualified stock
      options could be granted to any employees (including employees who have been
      granted incentive stock options) and other persons who the Committee selected.
      The Committee could issue non-qualified stock options with an exercise price
      less than 100% of fair market value of the Common Stock.





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.





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.




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. On January 19, 2001, the Company increased its
        authorized shares of common stock from 103,600,000 to 200,000,000 shares.
        As a
        result, the number of shares reserved for issuance under the Director Plan
        is
        4,000,000 shares, and on account of the grants made in 1999 and 2005, no
        shares
        remained available for issuance under the Directors Plan in 2006. 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
        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
      amount of shares available for issuance upon
      exercise of outstanding options as of December 31, 2006 is 17,352,149 shares
      of
      Common Stock under the Plan and 2,500,000 shares of Common Stock under the
      Director’s Plan.




In
        May
        25, 2005, the Board approved a reduction in the exercise price, from various
        previously granted stock prices in excess of $.01 to $.01, of outstanding
        options to purchase 7,460,000 shares of common stock held by the shareholders.
        The Company recorded a charge to the statement of operations at the repricing
        date and at each reporting date, based upon subsequent changes in values
        of the
        price of the Company’s stock and recorded an aggregate charge for these employee
        stock options of $38,000 for the year ended December 31, 2005. These
        charges ceased upon adoption of FAS 123R in January
        2006.


F-14
 
 **N** **OTE** **F - S** **TOCKHOLDERS'** **E** **QUITY** **(C** **ONTINUED** **)**


The
      following table summarizes information about stock options at December 31,
      2006:




**Options
                Outstanding**
            
            **Options
                Exercisable****Weighted****Average****Remaining**
            
            **Weighted**
            
            
            
            **Weighted****Contractual**
            
            **Average**
            
            
            
            **Average****Number**
            
            **Life**
            
            **Exercise**
            
            **Number**
            
            **Exercise****Exercise
                Price**
            
            **Outstanding**
            
            **In
                Years**
            
            **Price**
            
            **Exercisable**
            
            **Price**$.008
            
            
            6,378,000
            
            
            7.63
            
            
            
            
            
            4,857,000$.010
            
            
            4,996,000
            
            
            7.59
            
            
            
            
            
            2,537,000$.015
            
            
            8,478,000
            
            
            9.38
            
            
            
            
            
            -19,852,000
            
            
            
            
            $
            0.012
            
            
            7,394,000
            
            $
            0.010




**NOTE
        G - INCOME
        TAX**





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, 2006 are as follows:





Noncurrent
                portion of deferred tax assets/(liabilities):Net
                operating loss carryforwards
            
            
            **7,399,000**Deferred
                rent
            
            
            **137,000**Tax/
                book basis of fixed assets
            
            
            **391,000**Intangibles
            
            
            **405,000**Stock
                based compensation
            
            
            **52,000**Alternative
                minimum tax credit
            
            
            **55,000**Deferred
                tax assets
            
            
            **8,439,000**Valuation
                allowance
            
            
            **(8,439,000**
            **)****$**
            **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 $18,973,000 at December 31, 2006, expiring through 2026.
      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 $74,000 and $635,000 for the years ended December
      31, 2006 and 2005, respectively. The Company incurred state income tax of
      approximately $3,000 and $5,000 for the years ended December 31, 2006 and 2005,
      respectively.





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





**Year
                Ended****December 31,****2006**
            
            **2005**Income
                tax benefit at federal statutory rate
            
            **$**
            **(50,000**
            **)**
            **$**
            **(554,000**
            **)**Permanent
                differences
            
            
            **1,000**
            
            
            **2,000**Change
                in valuation allowance
            
            
            **55,000**
            
            
            **635,000**State
                taxes, net of federal benefit
            
            
            **(7,000**
            **)**
            
            **(82,000**
            **)**Other
            
            
            **4,000**
            
            
            **4,000****$**
            **3,000**
            
            **$**
            **5,000**




F-15


**NOTE
          H - COMMITMENTS,
          CONTINGENCIESAND
          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
        scheduled to be tried in May 2007.


**[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 five years ending December
        31 and
        thereafter are as follows:
 
 **Year**
              
              **Lease****Ending**
              
              **Obligation**2007
              
              
              450,0002008
              
              
              550,0002009
              
              
              650,0002010
              
              
              750,0002011
              
              
              187,000$
              2,587,000
  Rent
        expense for the years ended December 31, 2006 and 2005 was $526,000 and
        $526,000, respectively.


On
      January 10, 2005, the Company entered into a Lease Amendment 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 Lease Amendment.





Under
      the
      Lease Amendment, 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.





At
      December 31, 2006, this additional rent that would be due if the Company failed
      to meet the conditions of the amendment would be $ 713,000. Additional minimum
      lease payments for each of the next five years ended December 31 and thereafter
      that would be due if the Company failed to meet the conditions of the amendment
      are as follows:




**Year**
            
            **Office****Ending**
            
            **Space**2007
            
            
            274,0002008
            
            
            174,0002009
            
            
            95,0002010
            
            
            1,000Thereafter
            
            
            0$
            544,000







F-16





**[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 $58,000 and $52,000 for the years ended
      December 31, 2006 and 2005, respectively.




**NOTE
      I - STAND
      BYLETTER
      OFCREDIT**





During
      2001, the Company obtained an irrevocable letter of credit in the amount of
      $92,793 in favor of the landlord for the Company’s obligation under its real
      estate lease. This letter expired as of March 31, 2005 and was not renewed.




F-17




EXHIBIT
      INDEX




ExhibitNo.
              
              Description
                of Exhibit2.1
              
              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 Registrant’s Bylaws*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
              
              Registrant’s
                  1996 Stock Option Plan incorporated by reference to the Company's
                  Information Statement dated September 1996.10.3
              
              Registrant’s
                  1996 Director Stock Option Plan incorporated by reference to the
                  Company's
                  Information Statement dated September 1996.10.4
              
              Confidentiality,
                  Invention, and Non-Compete Agreement between the Company and David
                  Noone,
                  dated as of January 8, 1999, incorporated by reference to Exhibit
                  10.33
                  filed with the Company’s Form 10KSB for the year ended September 30,
                  1998.10.5
              
              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,
                  1999.10.6
              
              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,
                  2005.10.7
              
              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 1934.10.8
              
              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, 2005.10.9
              
              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.
  
  10.10
              
              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 1934.10.11
              
              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
                  1934.10.12
              
              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 1934.10.13
              
              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, 2006.16.1
              
              Letter
                  regarding change in accountants, incorporated by reference to Exhibit
                  16.1
                  filed on the Company’s Form 8-K dated June 6, 1996.16.2
              
              Letter
                  regarding change in accountants, incorporated by reference to Exhibit
                  16
                  filed on the Company’s Form 8-K dated July 31, 2001.16.3
              
              Letter
                  regarding change in accountants, incorporated by reference to Exhibit
                  16.1
                  filed on the Company’s Form 8-K dated June 6, 2002.21
              
              Subsidiaries
                  of the Registrant*23.1
              
              Consent
                  of Independent Registered Public Accounting Firm*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