This report includes forward-looking statements, the realization of which may be impacted by certain important factors discussed previously under Item 1A "Risk Factors - Important Factors Related to Forward-Looking Statements and Associated Risks."

OVERVIEW

We manage the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf of employers, health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. Our managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. The customer base for our services includes both private and governmental entities. Our services are provided primarily by unrelated vendors on a subcontract or subcapitated basis.

The following table sets forth our operating income (loss) for the years ended December 31, 2007 and 2006, the seven months ended December 31, 2006 and the fiscal years ended May 31, 2006 and 2005 (amounts in thousands):

                                                      Year                         Seven Months                  Fiscal Year
                                               Ended December 31,               Ended December 31,              Ended May 31,
                                             2007            2006             2006            2005            2006         2005
                                                          (unaudited)                      (unaudited)
Operating revenues:
Capitated contracts                       $   36,295     $      18,255     $    9,829     $      14,618     $ 23,044     $ 22,062
Non-capitated sources                          1,105               749            486               649          912        2,411

Total operating revenues                      37,400            19,004         10,315            15,267       23,956       24,473

Operating expenses:
Healthcare operating expenses:
Claims expense (1)                            30,315            13,005          7,575            10,820       16,250       16,379
Other healthcare operating expenses (1)        6,475             3,856          2,138             2,594        4,312        4,919

Total healthcare operating expenses           36,790            16,861          9,713            13,414       20,562       21,298
General and administrative expenses            4,032             3,124          1,767             1,959        3,316        3,078
Recovery of doubtful accounts                     (4 )            (188 )         (136 )             (36 )        (88 )         (4 )
Depreciation and amortization                    154                98             62                51           87           96

Total operating expenses                      40,972            19,895         11,406            15,388       23,877       24,468

Operating (loss) income                   $   (3,572 )   $        (891 )   $   (1,091 )   $        (121 )   $     79     $      5

(1) Claims expense reflects the costs of revenue of capitated contracts, and other healthcare operating expenses reflects the cost of revenue of capitated and non-capitated contracts.

RESULTS OF OPERATIONS - YEAR ENDEDDECEMBER 31, 2007 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2006.

The increase in capitated contract revenue is primarily attributable to the addition of our Indiana contract, which accounted for approximately $15.0 million in revenue for the year ended December 31, 2007. Additional business from existing clients in Pennsylvania and Michigan also contributed an additional $3.1 million. The increase in non-capitated revenue is primarily attributable to the additional business from an existing customer in Texas.

Claims expense on capitated contracts increased approximately $17.3 million or 133.1% for the year ended December 31, 2007 as compared to the year ended December 31, 2006. The increase is due to the addition of the capitated revenues mentioned above. Claims expense as a percentage of capitated revenues increased from 71.2% for the year ended December 31, 2006 to 83.5% for the year ended December 31, 2007 due to a high medical loss ratio experienced with our major Indiana client. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, increased approximately $2.6 million, or 67.9%, due to staff increases in

response to the addition of revenues in Indiana, Pennsylvania and Michigan. As a percentage of total revenue, other healthcare operating expenses decreased from 20.3% for the period ended December 31, 2006 to 17.3% for the period ended December 31, 2007.

General and administrative expenses increased by $908,000, or 29.1%, for the year ended December 31, 2007 as compared to the year ended December 31, 2006. This increase is primarily attributable to the $416,000 severance benefit of two years salary paid to our former CEO upon her resignation pursuant to her employment agreement following the January 12, 2007 change in ownership of Woodcliff, the expensing of $167,000 of prepaid director fees following the resignation of certain directors, and legal and professional fees of $301,000 incurred related to the proposed merger with Hythiam. General and administrative expense as a percentage of operating revenue decreased from 16.4% for the period ended December 31, 2006 to 10.8% for the period ended December 31, 2007.

RESULTS OF OPERATIONS - SEVEN MONTHSENDED DECEMBER 31, 2006 AS COMPARED TO THE SEVEN MONTHS ENDED DECEMBER 31, 2005.

The decrease in capitated contract revenue is primarily attributable to the termination of our Connecticut contract, the loss of which accounted for $3.4 million less revenue for the seven months ended December 31, 2006 versus 2005 and the termination of a Texas contract, the loss of which accounted for $3.2 million less revenue for the same periods. This was partially offset by additional business from existing clients in Pennsylvania, Texas, Michigan and Maryland. The decrease in non-capitated revenue is primarily attributable to the loss of a management services only customer in Michigan offset by additional business in Texas and Florida and a new client in Connecticut.

Claims expense on capitated contracts decreased approximately $3.2 million or 30.0% for the seven months ended December 31, 2006 as compared to the seven months ended December 31, 2005. The reduction is due to the loss of capitated revenue as mentioned above. Claims expense as a percentage of capitated revenues increased from 74.0% for the period ended December 31, 2005 to 77.1% for the period ended December 31, 2006. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, decreased approximately $456,000, or 17.6%, due to staff reductions in response to the loss of revenues in Michigan, Connecticut and Texas. As a percentage of total revenue, other healthcare operating expenses increased from 17.0% for the period ended December 31, 2005 to 20.7% for the period ended December 31, 2006.

General and administrative expenses decreased by $192,000, or 9.8%, for the seven months ended December 31, 2006 as compared to the seven months ended December 31, 2005. This decrease is primarily attributable to indirect costs of the June 2005 sale of Series A Preferred Stock, increased costs for marketing consultants engaged to obtain additional commercial business, and legal expenses associated with our 2005 Annual Meeting and changes to the corporate charter in the period ended December 31, 2005. General and administrative expense as a percentage of operating revenue increased from 12.8% for the period ended December 31, 2005 to 17.1% for the period ended December 31, 2006.

RESULTS OF OPERATIONS -FISCAL YEAR ENDED MAY 31, 2006 AS COMPARED TOTHE FISCAL YEAR ENDED MAY 31, 2005.

Capitated contract revenues increased 4.5% or approximately $1.0 million to $23.0 million for the year ended May 31, 2006 compared to $22.0 million for the year ended May 31, 2005. This increase in revenue is primarily attributable to additional business from existing clients in Indiana and new customers in Pennsylvania and Maryland, but was partially offset by the termination of our Connecticut contract, the loss of which accounted for $1.9 million less revenue in fiscal 2006 than in fiscal 2005. Non-capitated revenue declined 62.2%, or $1.5 million, to $0.9 million for the fiscal year ended May 31, 2006, compared to $2.4 million for the fiscal year ended May 31, 2005. The decrease is primarily attributable to the loss of two management services only customers in Michigan and an ASO client in Texas.

Claims expense on capitated contracts decreased approximately $129,000 or 0.8% for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005. The reduction is due to decreased utilization of covered services. Claims expense as a percentage of capitated revenues decreased from 74.2% for the fiscal year ended May 31, 2005 to 70.5% for the fiscal year ended May 31, 2006. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, decreased approximately $607,000, or 12.3% for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005, due to staff reductions in response to the loss of revenues in Michigan, Connecticut and Texas. As a percentage of total revenue, other healthcare operating expenses decreased from 20.1% for fiscal 2005 to 18.0% for fiscal 2006.

General and administrative expenses increased by $238,000, or 7.7%, for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005. This increase is primarily attributable to indirect costs of the June 2005 sale of Series A Preferred Stock, increased costs for marketing consultants engaged to obtain additional commercial business, and legal expenses associated with our 2005 Annual Meeting and changes to the corporate charter. General and administrative expense as a percentage of operating revenue increased from 12.6% for the fiscal year ended May 31, 2005 to 13.8% for the fiscal year ended May 31, 2006.

SEASONALITY OF BUSINESS

Historically, we have experienced increased member utilization during the months of March, April and May, and consistently low utilization by members during the months of June, July, and August. Such variations in member utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the June through August period and a negative impact on our gross margins and operating profits during the months of March through May.

LIQUIDITY ANDCAPITAL RESOURCES

During the year ended December 31, 2007, our cash and cash equivalents increased by $770,000. Net cash provided by continuing operations amounted to $826,000. Cash used in investing activities is comprised primarily of $58,000 in additions to property and equipment offset by $58,000 in proceeds from sales of available-for-sale securities, sales of equipment and payments received on notes receivable. Cash provided by financing activities consists of $19,000 in net proceeds from the issuance of common stock less $55,000 of repayment of liabilities. At December 31, 2007, cash and cash equivalents amounted to $6.3 million. We believe we have sufficient working capital to sustain current operations and meet our current obligations during the next twelve months.

Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and may impact our ability to achieve and sustain profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results could differ from the $5.5 million accrued claims payable amount reported as of December 31, 2007.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The following is a schedule at December 31, 2007 of our long-term contractual
commitments, future minimum lease payments under non-cancelable operating lease
arrangements, and other long-term obligations:



                                                                Payments Due by Period
                                                                 Less
                                                                Than 1   1 - 3   4 - 5   After 5
                                                       Total     Year    Years   Years    Years
                                                                (Amounts in thousands)
Long-term Debt Obligations (a)                        $ 2,244       -    2,244      -         -
Capital Lease Obligations and related interest            199       68     110      21        -
Operating Lease Obligations                               376      300      44      32        -

Total                                                 $ 2,819      368   2,398      53        -

(a) Excludes 7 1/2% in interest payable semi-annually in April and October (see Note 12 - "Long-term Debt" to the audited, consolidated financial statements).

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements, most notably our estimate for claims incurred but not yet reported ("IBNR"). On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe our accounting policies specific to our revenue recognition, accrued claims payable and claims expense, premium deficiencies, goodwill, and stock compensation expense involve our most significant judgments and estimates that are material to our consolidated financial statements (see Note 2 - "Summary of Significant Accounting Policies" to the audited, consolidated financial statements).

REVENUE RECOGNITION

We provide managed behavioral healthcare and substance abuse services to recipients, primarily through subcontracts with HMOs. Revenue under the vast majority of these agreements is earned and recognized monthly based on the number of covered members as reported to us by our clients regardless of whether services actually provided are lesser or greater than anticipated when we entered into such contracts (generally referred to as capitation arrangements). The information regarding the number of covered members is supplied by our clients and we review membership eligibility records and other reported information to verify its accuracy in calculating the amount of revenue to be recognized. Consequently, the vast majority of our revenue is determined by the monthly receipt of covered member information and the associated payment from the client, thereby removing uncertainty and precluding us from needing to make assumptions to estimate monthly revenue amounts.

We may experience adjustments to our revenues to reflect changes in the number and eligibility status of members subsequent to when revenue is recognized. Subsequent adjustments to our revenue have not been material in the past.

ACCRUED CLAIMS PAYABLE AND CLAIMS EXPENSE

Healthcare operating expenses are composed of claims expense and other healthcare operating expenses. Claims expense includes amounts paid to hospitals, physician groups and other licensed behavioral healthcare professionals. Other healthcare operating expenses include items such as information systems, provider contracting, case management and quality assurance, attributable to both capitated and non-capitated contracts.

The cost of behavioral health services is recognized in the period in which an eligible member actually receives services and includes an estimate of IBNR. We contract with various healthcare providers including hospitals, physician groups and other managed care organizations either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine whether (1) the member is eligible to receive such services, (2) the service provided is medically necessary and is covered by the benefit plan's certificate of coverage, and (3) the service has been authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for payment and the associated cost of behavioral health services is recognized. If the claim is denied, the service provider is notified and has appeal rights under their contract with us.

Accrued claims payable consists primarily of reserves established for reported claims and claims IBNR which are unpaid through the respective balance sheet dates. Our policy is to record management's best estimate of IBNR. The IBNR liability is estimated monthly using an actuarial paid completion factor methodology and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability as more information becomes available. In deriving a range of estimates, management considers qualitative factors, authorization information, and an actuarial model that incorporates past claims payment experience, enrollment data and key assumptions such as trends in healthcare costs and seasonality. The accrued claims payable ranges were between $4.9 and $5.5 million at December 31, 2007, between $2.6 and $2.9 million at December 31, 2006, and between $2.6 and $2.8 million at May 31, 2006. To determine the best estimates, management reviews utilization statistics,

authorized healthcare service data, calculated completion factors and other data available at and subsequent to the balance sheet dates. The best estimates at December 31, 2007, December 31, 2006 and May 31, 2006 were $5.5 million, $2.7 million and $2.8 million respectively. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three years.

The following table provides a reconciliation of the beginning and ending balance of accrued claims payable for the year ended December 31, 2007, the seven months ended December 31, 2006 and the fiscal year ended May 31, 2006:

                                           Year Ended              Seven Months Ended         Fiscal Year Ended
                                        December 31, 2007          December 31, 2006            May 31, 2006
                                                                (Amounts in thousands)
Beginning accrued claims payable       $             2,746                      2,790                     3,730
Claims expense:
Current period                                      30,674                      7,576                    16,174
Prior period                                          (359 )                       (1 )                      76

Total claims expense                                30,315                      7,575                    16,250
Claims payments:
Current period                                      25,210                      4,830                    13,384
Prior period                                         2,387                      2,789                     3,806

Total claims payments                               27,597                      7,619                    17,190

Ending accrued claims payable          $             5,464                      2,746                     2,790

Changes in prior year claims expense were primarily due to changes in utilization patterns and changes in claim submission timeframes by providers. Management considers these changes in claims expenses to be immaterial when compared to the total claims expenses incurred in prior years.

Accrued claims payable at December 31, 2007 and 2006 and May 31, 2006 is comprised of approximately $1.1 million, $0.7 million and $1.1 million, respectively, of submitted and approved claims which had not yet been paid, and $4.4 million, $2.0 million and $1.7 million for IBNR claims, respectively.

Many aspects of our business are not predictable with consistency, and therefore, estimating IBNR claims involves a significant amount of management judgment. Actual claims incurred could differ from the estimated accrued claims payable amount presented. The following are factors that would have an impact on our future operations and financial condition:

• Changes in utilization patterns

• Changes in healthcare costs

• Changes in claims submission timeframes by providers

• Success in renegotiating contracts with healthcare providers

• Occurrence of catastrophes

• Changes in benefit plan design

• The impact of present or future state and federal regulations.

A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at December 31, 2007 could increase our claims expense by approximately $193,000 as illustrated in the table below:

                      Change in Healthcare Costs:
                                            (Decrease)
                        (Decrease)           Increase
                         Increase        in Claims Expense
                           (5)%         $          (195,000 )
                            5%          $           193,000

PREMIUM DEFICIENCIES

We accrue losses under our capitated contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We perform this loss accrual analysis on a specific contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance costs, and each contract's specific terms related to future revenue increases as compared to expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate of future cost increases.

At any time prior to the end of a contract or contract renewal, if a capitated contract is not meeting its financial goals, we generally have the ability to cancel the contract with 60 to 90 days' written notice. Prior to cancellation, we will usually submit a request for a rate increase accompanied by supporting utilization data. Although our clients have historically been generally receptive to such requests, no assurance can be given that such requests will be fulfilled in the future in our favor. If a rate increase is not granted, we have the ability, in most cases, to terminate the contract and limit our risk to a short-term period.

On a quarterly basis, we perform a review of our portfolio of contracts for the purpose of identifying loss contracts (as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide - Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. During the year ended December 31, 2007, we identified two contracts that were not meeting their financial goals. We successfully obtained a rate increase from one client effective January 1, 2008. We are negotiating and believe we will receive a rate increase from the other client effective January 1, 2008, provided we comply with monthly performance measures we believe we will meet. The rate increase would amount to approximately $2 million per annum. At December 31, 2007, we believe no contract loss reserve for future periods is necessary for these contracts.

GOODWILL

We evaluate at least annually the amount of our recorded goodwill by performing an impairment test that compares the carrying amount to an estimated fair value. In estimating the fair value, management makes its best assumptions regarding future cash flows and a discount rate to be applied to the cash flows to yield a present, fair value of equity. As a result of such tests, management believes there is no material risk of loss from impairment of goodwill. However, actual results may differ significantly from management's assumptions, resulting in potentially adverse impact to our consolidated financial statements.

STOCK COMPENSATION EXPENSE

We issue stock-based awards to our employees and members of our Board of Directors. Effective June 1, 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123R "Share-Based Payment" and elected to apply the modified-prospective method to measure compensation cost for stock options at fair value on the grant date and recognize compensation cost on a straight-line basis over the service period for those options expected to vest. We use the Black-Scholes option pricing model, which requires certain variables for input to calculate the fair value of a stock award on the grant date. These variables include the expected volatility of our stock price, award exercise behaviors, the risk free interest rate, and expected dividends. We use significant judgment in estimating expected volatility of the stock, exercise behavior and forfeiture rates.

Expected Volatility

We estimate the volatility of the share price by using historical data of our traded stock in combination with our expectation of the extent of fluctuation in future stock prices. We believe our historical volatility is more representative of future stock price volatility and as such it has been given greater weight in estimating future volatility.

Expected Term

A variety of factors are considered in determining the expected term of options granted. Options granted are grouped by their homogeneity based on the optionees' position, whether managerial or clerical, and length of service and turnover rate. Where possible, we analyze exercise and post-vesting termination behavior. For any group without sufficient information, we estimate the expected term of the options granted by averaging the vesting term and the contractual term of the options.

Expected Forfeiture Rate

We generally separate our option awards into two groups: employee and non-employee awards. The historical data of each group are analyzed independently to estimate the forfeiture rate of options at the time of grant. These estimates are revised in subsequent periods if actual forfeitures differ . . .