ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial data included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the cautionary statement regarding forward-looking statements" in the first paragraph of Item 1A of our Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

OVERVIEW

This Financial Review discusses the Company's results of operations, financial position and liquidity. This discussion should be read in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this quarterly report.

The Company provides comprehensive management and consulting services to UAHC Health Plan of Tennessee, Inc. ("UAHC-TN"), a managed care organization ("MCO") which is a wholly owned second-tier subsidiary of United American Healthcare Corporation. Since November 1993, UAHC-TN has had a contract with the State of Tennessee, Bureau of TennCare ("TennCare"), to arrange for the financing and delivery of health care services on a capitated basis to eligible Medicaid beneficiaries and non-Medicaid individuals who lack access to private or employer sponsored health insurance or to another government health plan. As of September 30, 2008, there were approximately 96,899 TennCare enrollees in UAHC-TN.

On April 22, 2008 we learned that UAHC-TN will cease providing managed care services as a TennCare contractor when its present TennCare contract expires. (See Note 5 to our Unaudited Condensed Consolidated Financial Statements in Item 1 above.) UAHC-TN's TennCare members transferred to other managed care organizations on November 1, 2008, after which UAHC-TN will perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009. Revenue under this contract represented 53% of the Company's total revenues for the three months ended September 30, 2008. Total costs related to this contract discontinuance are estimated to range between $4.6 million - $6.6 million, which includes claim processing costs, employee severance, lease termination costs and other corporate general administrative expenses beginning November 2008 through June 2009.

On October 10, 2006, UAHC-TN entered into a contract with the Centers for Medicare & Medicaid Services (CMS) to act as a Medicare Advantage qualified organization. The

contract authorizes UAHC-TN to serve members enrolled in both the Tennessee Medicaid and Medicare programs, commonly referred to as "dual-eligibles," specifically to offer a Special Needs Plan to its eligible members in Shelby County, Tennessee (including the City of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan, both beginning January 1, 2007. The contract term is through December 31, 2008, after which the contract may be renewed for successive one-year periods in accordance with its terms. As of October 31, 2008 there were approximately 806 enrollees in UAHC-TN's Medicare Advantage Special Needs Plan ("our MA-SNP").

The total number of employees of the Company at November 1, 2008 was 41 compared to 115 at November 1, 2007. As a result of the impending expiration of the TennCare contract, management expects a substantial decrease in the total number of employees.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2007

Total revenues increased $0.3 million (5%) to $6.5 million for the three months ended September 30, 2008, compared to $6.2 million for the three months ended September 30, 2007. The increase was principally due to an increase in our MA-SNP revenues and variable administrative fees offset by a decrease in TennCare revenues primarily due to a decrease in TennCare enrollees.

Fixed administrative fees related to TennCare's ASO program (as described under the heading "Liquidity and Capital Resources" below) were $3.4 million for the three months ended September 30, 2008, a decrease of $0.3 million (8%) from $3.7 million for the three months ended September 30, 2007. The decrease is principally due to a decrease in TennCare enrollees.

Our MA-SNP medical premiums revenues were $2.9 million for the three months ended September 30, 2008 compared to $2.1 million for the three months ended September 30, 2007. The increase of $0.8 million is attributable to the increase in MA-SNP enrollees.

Our MA-SNP per member per month ("PMPM") premium rate for the three months ended September 30, 2008 was $1,216.

Total expenses increased $0.1 million to $6.2 million for the three months ended September 30, 2008 as compared to $6.1 million for the three months ended September 30, 2007. The increase in medical expenses related to the MA-SNP was offset by a decrease in marketing, general and administrative expenses.

Medical expenses for our MA-SNP were $2.5 million for the three months ended September 30, 2008 compared to $1.9 million for the three months ended September 30, 2007. The increase in medical expenses is attributable to the growth in our MA-SNP activity. The ratio of such medical expenses to medical premiums revenues for our MA-SNP, expressed as a percentage -- the medical loss ratio ("MLR") -- was 88.1% for the three months ended September 30, 2008.

Marketing, general and administrative expenses decreased $0.6 million (13%) to $3.6 million for the three months ended September 30, 2008 from $4.2 million for the three months ended September 30, 2007. The decrease was principally due to reductions in labor costs, adminstrative costs and professional services expenses resulting from the TennCare contract expiration.

Depreciation and amortization expense was $0.06 million for the three months ended September 30, 2008, a $0.02 million increase from $0.04 million for the three months ended September 30, 2007.

Income tax expense was $0.08 million for the three months ended September 30, 2008 compared to $0.02 million for the three months ended September 30, 2007. The Company's effective tax rate for the three months ended September 30, 2008 is 30% and differs from the statutory rate of 34%. This difference is primarily related to the change in the valuation allowance.

Income before income taxes was $0.3 million for the first fiscal quarter ended September 30, 2008 compared to income before income taxes of $0.09 million for the quarter ended September 30, 2007.

Net income was $0.2 million, or $0.02 per basic share, for the quarter ended September 30, 2008, compared to net income of $0.07 million, or $0.01 per basic share, for the quarter ended September 30, 2007. The increase is primarily due to the increase in overall revenue resulting from our MA-SNP and the decrease in marketing, general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, the Company had (i) cash and cash equivalents and short-term marketable securities of $19.2 million, compared to $19.5 million at June 30, 2008; (ii) working capital of $15.7 million, compared to working capital of $15.3 million at June 30, 2008; and (iii) a current assets-to-current liabilities ratio of 3.85-to-1, compared to 3.85-to-1 at June 30, 2008.

Cash used in operating activities of $0.2 million was primarily due to increased labor related payments such as accrued vacation, resulting from the termination of the TennCare contract. (See Note 5 to our Unaudited Condensed Consolidated Financial Statements in Item 1 above.)

Cash decreased $0.6 million for the three months ended September 30, 2008, compared to an increase of $0.9 million for the comparable period a year earlier. The decrease was principally due to increased net purchases of marketable securities and the timing of medical claims payments.

Accounts receivable from the State of Tennesee changed slightly at September 30, 2008 compared to June 30, 2008, primarily due to timing of cash receipts from TennCare.

Property, plant and equipment decreased by $0.06 million at September 30, 2008 compared to June 30, 2008, due to recording depreciation of $0.06 million.

The Company's wholly owned subsidiary, UAHC-TN, had a required minimum net worth requirement using statutory accounting practices of $7.1 million at September 30, 2008. UAHC-TN had excess statutory net worth of approximately $7.5 million at September 30, 2008.

Beginning July 1, 2002, TennCare, a State of Tennessee program that provides medical benefits to Medicaid and working uninsured recipients, implemented an 18-month stabilization program, which entailed changes to TennCare's contracts with managed care organizations ("MCOs"), including the Company's subsidiary, UAHC -TN. During that period, MCOs were generally compensated for administrative services only (commonly called ASO), earned fixed administrative fees and were not at risk for medical costs. Through successive contractual amendments, TennCare extended the ASO reimbursement system applicable to UAHC-TN through several contractual amendments effective through June 30, 2005.

Through an amendment with an effective date of July 1, 2005, TennCare implemented a modified risk arrangement ("MRA") with all its contracted MCOs, including UAHC-TN, which thereby were at risk for losing up to 10% of administrative fee revenue and potentially could receive up to 15% incentive bonus revenue based on performance relative to benchmarks. UAHC-TN received notice from TennCare that it earned additional revenue of $1.1 million for its performance under the MRA for fiscal 2006, representing a 7% bonus revenue payout. Such additional revenue has been recorded, of which $0.3 was recorded in fiscal 2006, $0.5 million was recorded in fiscal 2007, and $0.3 million was recorded in the second quarter of fiscal 2008. UAHC-TN also earned and received additional revenue of $1.4 million for fiscal 2007, representing a 9% bonus revenue payout, and the Company has recorded such additional MRA earnings in the third quarter of fiscal 2008, when UAHC-TN was notified by TennCare of the amount. Effective July 1, 2007, the evaluation period for the MRA was changed from quarterly to annually, and the incentive bonus pool was adjusted to 20% of administrative fee revenue.

Under two escrow agreements between the Company and TennCare, on August 5, 2005 the Company funded two escrow accounts held by TennCare at the State Treasury. Both escrow agreements recited that TennCare did not at that time assert there had been any breach of UAHC-TN's TennCare contract and that the Company funded the escrow accounts as a show of goodwill and good faith in working with TennCare.

The larger escrow account, which has expired, was in the original amount of $2,300,000 and was security for repayment to TennCare of any overpayments to UAHC-TN that might be determined by an audit of all UAHC-TN process claims since 2002. In August 2007, the Company received $1,289,851 plus accumulated interest earnings back from that account. In November 2007, the remaining $1,010,149 account balance was paid to TennCare for claims discrepancies found in the audit by the Tennessee Department of Commerce and Insurance.

The other escrow account, in the original amount of $420,500, is security for any money damages that may be awarded to TennCare in the event of any future litigation between the parties in connection with certain pending investigations by state and federal authorities. The escrow account will terminate 30 days after the conclusion of such

investigations, unless the parties earlier agree otherwise. The escrow account bears interest at a rate no lower than the prevailing commercial interest rate for savings accounts at financial institutions in Nashville, Tennessee. All amounts (including interest earnings) credited to the escrow account will belong to the Company, except to the extent, if any, they are paid to TennCare to satisfy amounts determined to be owed to TennCare as provided in the escrow agreement.

On April 22, 2008, the Department of Finance and Administration of the State of Tennessee, Bureau of TennCare, disclosed its decision to award new TennCare contracts to two named organizations, not including the Company's subsidiary, UAHC-TN, as the culmination of TennCare's selection process pursuant to its Request for Proposals for managed care services to be provided in the West Grand Region of Tennessee. Consequently, UAHC-TN's TennCare members transferred to other managed care organizations on November 1, 2008, after which UAHC-TN will perform its remaining contractual obligations through its TennCare contract expiration of June 30, 2009. Revenue under this contract represented 53% of the Company's total revenues for the three months ended September 30, 2008. Total costs related to this contract discontinuance are estimated to range between $4.6 million - $6.6 million, which includes claim processing costs, employee severance, lease termination costs and other corporate general administrative expenses beginning November 2008 through June 2009. As of September 30, 2008, there were approximately 96,899 TennCare enrollees in UAHC-TN. Management believes that the discontinuance of the TennCare contract will have material impact on the Company's operations.