In addition to historical information, the following information contains forward-looking statements as defined under federal securities laws. Such statements include, but are not limited to, statements concerning our anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, growth and expansion, and the ability to obtain new behavioral healthcare contracts. These statements are based on current expectations, estimates and projections about the industry and markets in which we operate, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, changes in local, regional, and national economic and political conditions, the effect of governmental regulation, competitive market conditions, varying trends in member utilization, our ability to manage healthcare operating expenses, our ability to achieve expected results from new business, the profitability of our capitated contracts, cost of care, seasonality, our ability to obtain additional financing, and other risks detailed herein and from time to time in our SEC reports. The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto of CompCare appearing elsewhere herein.

OVERVIEW

GENERAL

We are a Delaware corporation organized in 1969. Unless the context otherwise requires, all references to us include our wholly owned operating subsidiary, Comprehensive Behavioral Care, Inc. (CBC) and subsidiary corporations.

Primarily through CBC, we provide managed care services in the behavioral health and psychiatric fields, which is our only operating segment. We coordinate and manage the delivery of a continuum of psychiatric and substance abuse services to:

• Commercial members

• Medicare members

• Medicaid members

• Children's Health Insurance Program (CHIP) members

on behalf of:

• employers

• health plans

• government organizations

• third-party claims administrators

• commercial purchasers

• other group purchasers of behavioral healthcare services

Our customer base includes both private and governmental entities. We provide services primarily by a contracted network of providers that includes:

• psychiatrists

• psychologists

• therapists

• other licensed healthcare professionals

• psychiatric hospitals

• general medical facilities with psychiatric beds

• residential treatment centers

• other treatment facilities

The services provided through our provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), and inpatient and crises intervention services. We do not directly provide treatment or own any provider of treatment services.

We typically enter into contracts on an annual basis to provide managed behavioral healthcare and substance abuse treatment to our clients' members. Our arrangements with our clients fall into two broad categories:

• capitation arrangements, where our clients pay us a fixed fee per member, and

• fee-for-service and administrative service arrangements where we may manage behavioral healthcare programs

or perform various managed care services.

Under capitation arrangements, the number of covered members as reported to us by our clients determines the amount of premiums we receive, which is independent of the cost of services rendered to members. The amount of premiums we receive for each member is fixed at the beginning of the contract term. These premiums may be subsequently adjusted, up or down, generally at the commencement of each renewal period.

Over the last several years we have experienced a trend with our clients to contract for services more on a capitated basis than on a non-capitated basis. In addition, several of our large clients have determined to establish their own behavioral health units.

Our largest expense is the cost of behavioral health services that we provide, which is based primarily on our arrangements with healthcare providers. Since we are subject to increases in healthcare operating expenses based on an increase in the number and frequency of our members seeking behavioral care services, our profitability depends on our ability to predict and effectively manage healthcare operating expenses in relation to the fixed premiums we receive under capitation arrangements. Providing services on a capitation basis exposes us to the risk that our contracts may ultimately be unprofitable if we are unable to anticipate or control healthcare costs. Estimation of healthcare operating expense is our most significant critical accounting estimate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates."

RECENT DEVELOPMENTS

In October 2008 we were awarded Full Accreditation by the National Committee on Quality Assurance (NCQA). NCQA accreditation validates that we meet managed behavioral healthcare organization (MBHO) accreditation standards that govern quality improvement, utilization management, provider credentialing, members' rights and responsibilities, and preventative care. These standards confirm that an MBHO is founded on principles of quality and is continuously improving the clinical care and services it provides. Full Accreditation is granted for a period of three years to those plans that meet the NCQA's rigorous standards.

In October 2008, we signed a letter of agreement to provide behavioral health and psychotropic pharmaceutical management services for a health plan with approximately 10,000 Medicare members in Puerto Rico. Services under the contract are expected to generate $1.0 million of annual revenue and will be provided through our newly formed, majority owned subsidiary, CompCare de Puerto Rico, Inc. Managed behavioral health services are expected to begin December 1, 2008 while pharmaceutical management services are anticipated to commence January 1, 2009.

At the end of September 2008, we became aware that our major Indiana client had decided to manage its plan membership through its own provider delivery system. Consequently our contract will not be renewed beyond its initial two-year term and will end December 31, 2008. Revenues for this client accounted for $13.3 million, or 48.6%, and $11.4 million, or 41.2%, of our operating revenues for the nine-month periods ending September 30, 2008 and 2007, respectively. To offset the loss of this contract, we have increased our sales and marketing efforts, which has increased our sales pipeline of potential new business. Our new contract in Puerto Rico is a result of these efforts and will partially replace the business lost in Indiana.

In August 2008, our HMO client in Maryland notified us that our contract for the HMO's Maryland membership would not be renewed and would end December 31, 2008. Services provided under this contract accounted for approximately $1.4 million, or 5.1%, and $1.0 million, or 3.6% our revenues for the nine-month periods ended September 30, 2008 and 2007, respectively.

On June 19, 2008 the court awarded $325,000 in fees and expenses to attorneys for plaintiffs that had filed two class action lawsuits against the Company in January 2007 seeking to prevent Hythiam from acquiring outstanding common shares it did not own pursuant to a plan of merger between CompCare and Hythiam. The merger was terminated in May 2007 rendering the lawsuits moot, but plaintiffs' attorneys' claims for fees and expenses remained, resulting in the judgment against us for $325,000. Our claim for coverage of the judgment by our directors' and officers' insurance policy was initially denied, necessitating the accrual of $325,000 of expense in our June 30, 2008 financial statements. However, after appeal of the determination, the insurance carrier agreed to cover the judgment. We have accordingly accrued in our financial statements as of September 30, 2008 a reduction in expense of $300,000 representing management's estimate of the reimbursable amount of the judgment and related legal fees, less the $100,000 policy deductible, which has previously been paid. We are currently covered under Hythiam's directors' and officers' insurance policy and have not experienced any increases in our premiums. See Part II, Item 1, "Legal Proceedings."

In March 2008, we signed an amendment to our agreement with our major Indiana client, which accounted for 48.6% of our total revenue for the nine months ended September 30, 2008. Effective January 1, 2008, we became eligible to receive a 15.9% rate increase, or approximately $200,000 per month, subject to meeting monthly performance measures. We met or exceeded all performance measures for the nine months ended September 30, 2008.

RESULTS OF OPERATIONS

For the nine months ended September 30, 2008, we reported a net loss of $4.8 million, or $0.62 loss per share (basic and diluted). In comparison, we reported a net loss of $2.7 million, or $0.35 loss per share (basic and diluted), for the nine months ended September 30, 2007.

The following tables summarize the Company's operating results from continuing operations for the three and nine months ended September 30, 2008 and 2007 (amounts in thousands):

THE THREE MONTHSENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2007:

                                                      THREE MONTHS ENDED
                                                        SEPTEMBER 30,
                                                       2008          2007
          Operating revenues:
          Capitated contracts                       $    8,161       9,470
          Non-capitated sources                            239         290

          Total operating revenues                       8,400       9,760

          Operating expenses:
          Healthcare operating expenses:
          Claims expense(1)                              6,050       7,700
          Other healthcare operating expenses (1)        1,482       1,674
          Reserve for loss contract                        (65 )        -

          Total healthcare operating expenses            7,467       9,374

          General and administrative expenses              529       1,201
          Bad debt expense                                  -            4
          Depreciation and amortization                     39          38

          Total operating expenses                       8,035      10,617

          Operating income (loss)                   $      365        (857 )

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

Operating revenues from capitated contracts decreased 13.8%, or $1.3 million, to $8.2 million for the three months ended September 30, 2008 compared to $9.5 million for the three months ended September 30, 2007. The decrease is attributable to the loss of four contracts accounting for $2.2 million of business in Pennsylvania, Texas and Indiana, partially offset by increased business from five clients in Indiana, Maryland, Texas and Michigan accounting for approximately $0.9 million of revenue. Non-capitated revenue decreased 17.6% or approximately $51,000, to $239,000 for the three months ended September 30, 2008, compared to $290,000 for the three months ended September 30, 2007.

Claims expense on capitated contracts decreased approximately $1.7 million or 21.4% for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 due to lower capitated revenues. Claims expense as a percentage of capitated revenues decreased from 81.3% for the three months ended September 30, 2007 to 74.1% for the three months ended September 30, 2008 due to seasonal fluctuations in medical loss ratios. Other healthcare operating expenses, attributable to servicing both capitated contracts and non-capitated contracts, decreased 15.4%, or approximately $257,000 due primarily to the elimination of temporary personnel services as well as a general reduction in the number of employees during the current quarter. In addition, the loss reserve related to our Indiana contract was reduced by $65,000.

General and administrative expenses decreased by 56.0%, or approximately $672,000 for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007. The change is primarily attributable to a reduction in legal fees of $266,000 and the recognition in the quarter ended September 30, 2007 of $416,000 in severance costs incurred as a result of the retirement of the Company's CEO, who was due a payment equal to two years salary upon resignation within one year following a change of ownership of the Company. General and administrative expense as a percentage of operating revenue decreased from 12.3% for the three months ended September 30, 2007 to 6.3% for the three months ended September 30, 2008.

THE NINE MONTHS ENDEDSEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2007:

                                                      NINE MONTHS ENDED
                                                        SEPTEMBER 30,
                                                       2008         2007
           Operating revenues:
           Capitated contracts                      $   26,506     26,785
           Non-capitated sources                           809        835

           Total operating revenues                     27,315     27,620

           Operating expenses:
           Healthcare operating expenses:
           Claims expense(1)                            23,950     22,165
           Other healthcare operating expenses(1)        4,728      4,820
           Reserve for loss contract                       235         -

           Total healthcare operating expenses          28,913     26,985

           General and administrative expenses           2,995      3,213
           Recovery of doubtful accounts                    -          (4 )
           Depreciation and amortization                   119        114

           Total operating expenses                     32,027     30,308

           Operating loss                           $   (4,712 )   (2,688 )

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

Operating revenues from capitated contracts decreased 1.0%, or approximately $279,000 to $26.5 million for the nine months ended September 30, 2008 compared to $26.8 million for the nine months ended September 30, 2007. The change is primarily attributable to $4.5 million of additional business from four existing customers in Pennsylvania, Maryland, Michigan, Texas and Indiana, offset by the loss of three clients in Indiana and Texas accounting for approximately $4.4 million of revenue, as well as a decrease in revenues from one customer in Texas accounting for approximately $277,000. Non-capitated revenue decreased 3.1% or approximately $26,000, to $809,000 for the nine months ended September 30, 2008, compared to $835,000 for the nine months ended September 30, 2007.

Claims expense on capitated contracts increased approximately $1.8 million or 8.1% for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 due to a higher medical loss ratios related to clients in Indiana, Pennsylvania, and Maryland. Accordingly, claims expense as a percentage of capitated revenues increased from 82.7% for the nine months ended September 30, 2007 to 90.4% for the nine months ended September 30, 2008. Other healthcare expenses, attributable to servicing both capitated contracts and non-capitated contracts, increased 3.0%, or approximately $143,000 due primarily to a loss reserve of $300,000 that was established at June 30, 2008 for our Indiana contract, which accounted for 48.6% of our revenue for the nine months ended September 30, 2008. The contract was determined to have a premium deficiency, which exists when the present value of future benefits payments and healthcare expenses are greater than the present value of expected future premiums. Of the $300,000 reserve established for our Indiana contract at June 30, 2008, $235,000 remains at September 30, 2008 as a reserve for the remainder of the contract, which terminates December 31, 2008 as a result of the client's decision to manage the membership using its own delivery system.

General and administrative expenses decreased by 6.8%, or approximately $218,000 for the nine months ended September 30, 2008 when compared to the nine months ended September 30, 2007. The decrease is primarily due to a $143,000 reduction in director's fees and a $320,000 decrease in salaries expense resulting from the recognition in August 2007 of $416,000 in severance costs due to the retirement of the Company's CEO. These decreases were offset by increased consulting fees of $262,000 for compliance and information system management services and $45,000 in additional compensation expense from stock options due to option grants subsequent to September 30, 2007. General and administrative expense as a percentage of operating revenue decreased from 11.6% for the nine months ended September 30, 2007 to 11.0% for the nine months ended September 30, 2008.

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.

CONCENTRATION OFRISK

For the nine months ended September 30, 2008, 88.3% of our operating revenue was concentrated in contracts with four health plans to provide behavioral healthcare services under commercial, Medicare, Medicaid, and CHIP plans. Our contracts with two of these health plans, constituting 69.1% of our operating revenue, will end December 31, 2008. For the nine months ended September 30, 2007, 86.7% of our operating revenue was concentrated in contracts with six health plans. The term of each contract is generally for one year and is automatically renewable for additional one-year periods unless terminated by either party by giving the requisite written notice. The loss of one or more of these clients, unless replaced by new business, would negatively affect our financial condition.

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended September 30, 2008, net cash used in operations totaled $5.5 million, attributable primarily to payment of claims on our Indiana, Pennsylvania, and Maryland contracts which have experienced high utilization of services by members. Approximately $1.5 million of the total cash usage was due to a timing difference in the monthly capitation remittance from our large Indiana client, which was received in October 2008. In addition, approximately $0.7 million in cash was used to pay accrued claims payable relating to three contracts that terminated during the quarter ended December 31, 2007, and $410,000 was used to make a contractually required severance payment to our former Chief Executive Officer. Cash used in investing activities is comprised of $41,000 in additions to property and equipment offset by $20,000 in proceeds from payments received on notes receivable. In September 2008 private placements of our common stock were completed generating $125,000 in cash proceeds and a convertible promissory note was issued in the amount of $200,000, providing additional funds for working capital purposes. Other cash flows from financing activities consist of repayment of debt of $41,000. At September 30, 2008, cash and cash equivalents were approximately $1.1 million.

At September 30, 2008, we had a working capital deficit of $5.2 million and a stockholders' deficit of $8.7 million. During June and July of 2008, we reduced our usage of consultants and temporary employees as well as eliminated permanent staffing positions. In addition we implemented a 10% salary reduction for employees at the vice president level and above and have reduced outside directors fees by 10%. We have also requested rate increases from several of our existing clients.

The significant decrease in our cash position is primarily attributable to our major Indiana contract, which ends December 31, 2008. To reduce the claim expenses of this contract, we have implemented additional utilization and case management procedures. We are also in the process of negotiating a rate increase. If the rate increase is realized we would also receive a lump sum payment to offset past contract expenses. Management believes the combination of the rate increase and lump sum payment would provide sufficient cash to cover the claims run-out after the contract ends. We can provide no assurance that we will be successful in our negotiations with this client. If we are unsuccessful, we will need to raise additional equity capital or seek additional debt financing to fund the claims run-out from this contract.

During the nine months ended September 30, 2007, our cash and cash equivalents increased by $1.5 million, primarily due to timing differences of monies received from our Indiana contract that started January 1, 2007 and claims received for payment from our providers related to this contract. Cash flows attributed to investing activities consist primarily of $55,000 in outflows for additions to property and equipment offset by $30,000 in cash provided by proceeds from sales of available-for-sale securities.

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 $6.4 million claims payable amount reported as of September 30, 2008.

LIMITED CASH AVAILABILITY

As of October 31, 2008, we had net cash on hand of approximately $1.1 million. Excluding non-current accrued liability payments, our current plans call for expending cash at a rate of approximately $300,000 to $400,000 per month. At presently anticipated rates, we will need to obtain additional funds within the next two to three months to avoid ceasing or drastically curtailing our operations.

If we are not able to obtain a rate increase or significant additional payment from our major Indiana client within that time frame, it is likely we will need to raise additional equity capital, sell all or a portion of our assets, or seek additional debt financing to fund our operations during the fourth quarter of 2008. Any equity financing may result in substantial dilution of existing stockholders, and financing may not be available on acceptable terms, or at all. In addition, we need Hythiam's consent for any single or series of related transactions exceeding $500,000, and prior to incurring any debt in excess of $200,000. Hythiam is under no obligation to provide us with any form of financing, and we do not currently anticipate receiving a cash investment from it. We may not be successful in obtaining needed funds, and if funding is obtained it may be on terms considered unfavorable to us or our existing shareholders.

SPECIAL COMMITTEE

In October 2007, our board of directors formed a special committee currently comprised solely of independent directors, which together with professional advisors, has been evaluating and pursuing available strategic alternatives for enhancing stockholder value, including a possible sale of the company.

GOING CONCERN

We have incurred significant operating losses and negative cash flows from operating activities, and have limited available cash, which raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain a rate increase from our major Indiana client, reduce expenditures and attain further operating efficiencies, and, ultimately, to generate greater revenue. There can be no assurance that we will be successful in our efforts to obtain a rate increase from our major Indiana client, generate, increase, or maintain revenue, or raise additional capital on terms acceptable to us, or at all, or that we will be able to continue as a going concern.

Failure to obtain sufficient cash to fund ongoing operations and, ultimately to achieve profitable operations and positive cash flows from operations during the remaining period in 2008 would adversely affect our ability to achieve any business objectives and to continue as a going concern. There can be no assurance as to the availability of needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to us, or that we will be able to achieve profitable operations and positive cash flows. The inability or failure to raise funds before our available cash is depleted will have a material adverse effect on our business and may result in discontinuation of operations.

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 . . .