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.

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 continues to perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009. However, revenue under this contract ceased October 31, 2008. The net loss related to this contract discontinuance is estimated to

range between $4.6 million and $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. During the fiscal 2009 second quarter, the Company incurred approximately $1.4 million of such estimated costs. The Company has subleased its leased Tennessee facility to a third party effective beginning April 2009 and ending December 31, 2010. The Company recorded a liability of $0.1 million related to the remaining lease obligation. As a result of the impending contract termination, the Company also sold fixed assets and recognized a loss on disposal of $0.1 million. As of December 31, 2008, there were no TennCare enrollees in UAHC-TN.

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, 2009. As of January 30, 2009 there were approximately 719 enrollees in UAHC-TN's Medicare Advantage Special Needs Plan ("our MA-SNP").

The total number of employees of the Company at December 31, 2008 was 29 compared to 111 at December 31, 2007. The impending expiration of the TennCare contract has resulted in a substantial decrease in the total number of employees, and management expects a further substantial decrease by the contract's June 30, 2009 expiration date.

FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2007

Total revenues decreased $2.3 million (32%) to $4.8 million for the three months ended December 31, 2008, compared to $7.0 million for the three months ended December 31, 2007. The decrease was principally due to the complete transfer of UAHC-TN's TennCare enrollees to other managed care organizations on November 1, 2008 and the impending discontinuance of its managed care services as a TennCare contractor, as described in Note 5 to our Unaudited Condensed Consolidated Financial Statements in Item 1 above.

Fixed administrative fees related to TennCare's ASO program (as described under the heading "Liquidity and Capital Resources" below) were $1.2 million for the three months ended December 31, 2008, a decrease of $2.5 million (68%) from $3.7 million for the three months ended December 31, 2007. The decrease is principally due to a decrease in TennCare enrollees, as all enrollees were transferred to other managed care organizations on November 1, 2008.

Variable administrative fees resulting from MRA revenue were $0.9 million for the three months ended December 31, 2008, compared to $0.3 million for the three months ended December 31, 2007. The $0.9 million MRA revenue received in fiscal 2009 relates to fiscal

2008. The $0.3 million MRA revenue received in fiscal 2008 relates to the third quarter of fiscal 2006.

Our MA-SNP medical premiums revenues were $2.4 million for the three months ended December 31, 2008 compared to $2.7 million for the three months ended December 31, 2007. The decrease of $0.3 million is attributable to the decrease in our MA-SNP enrollees.

Our MA-SNP per member per month ("PMPM") premium rate for the three months ended December 31, 2008 was $1,124.

Total expenses decreased $0.5 million to $6.2 million for the three months ended December 31, 2008 as compared to $6.7 million for the three months ended December 31, 2007. The decrease in total expenses was primarily the result of a decrease in marketing, general and administrative expenses.

Medical expenses for our MA-SNP decreased $0.3 million (11%) to $2.3 million for the three months ended December 31, 2008 compared to $2.6 million for the three months ended December 31, 2007. The ratio of such medical expenses to medical premiums revenues for our MA-SNP, expressed as a percentage -- the medical loss ratio ("MLR") -- was 81.2% for the three months ended December 31, 2008.

Marketing, general and administrative expenses decreased $0.4 million (10%) to $3.7 million for the three months ended December 31, 2008 from $4.1 million for the three months ended December 31, 2007. The decrease was principally due to reductions in labor costs, adminstrative costs and professional services expenses resulting from the impending TennCare contract expiration.

Depreciation and amortization expense was $0.06 million for the three months ended December 31, 2008, a slight increase from $0.05 million for the three months ended December 31, 2007.

Loss before income taxes was $1.4 million for the quarter ended December 31, 2008 compared to income before income taxes of $0.4 million for the quarter ended December 31, 2007.

Net loss was $1.4 million, or ($0.16) per basic share, for the quarter ended December 31, 2008, compared to net income of $0.3 million, or $0.03 per basic share, for the quarter ended December 31, 2007. The decrease is primarily due to the decrease in overall revenue resulting from the impending expiration of the TennCare contract.

FOR THE SIX MONTHS ENDED DECEMBER 31, 2008 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2007

Total revenues decreased $2.0 million (15%) to $11.3 million for the six months ended December 31, 2008, compared to $13.2 million for the six months ended December 31, 2007. The decrease was principally due to the decrease in TennCare revenues primarily due to the transfer of UAHC-TN's TennCare enrollees to other managed care organizations on

November 1, 2008 and the impending discontinuance of its managed care services as a TennCare contractor.

Fixed administrative fees related to TennCare's ASO program (as described under the heading "Liquidity and Capital Resources" below) were $4.6 million for the six months ended December 31, 2008, a decrease of $2.8 million (38%) from $7.4 million for the six months ended December 31, 2007. The decrease is principally due to a decrease in TennCare enrollees, as the enrollees were transferred to other managed care organizations on November 1, 2008.

Variable administrative fees resulting from MRA revenue were $0.9 million for the six months ended December 31, 2008, compared to $0.3 million for the six months ended December 31, 2007. The $0.9 million MRA revenue received in fiscal 2009 relates to fiscal 2008. The $0.3 million MRA revenue received in fiscal 2008 relates to the third quarter of fiscal 2006.

Our MA-SNP medical premiums revenues were $5.3 million for the six months ended December 31, 2008 compared to $4.8 million for the six months ended December 31, 2007. The increase of $0.5 million is attributable to the increase in our MA-SNP enrollees.

Our MA-SNP per member per month ("PMPM") premium rate for the six months ended December 31, 2008 was $1,202.

Total expenses decreased $0.4 million to $12.4 million for the six months ended December 31, 2008 as compared to $12.8 million for the six months ended December 31, 2007. The decrease is primarily due to a decrease in marketing, general and administrative expenses.

Medical expenses for our MA-SNP were $4.8 million for the six months ended December 31, 2008, compared to $4.4 million for the six months ended December 31, 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 89.4% for the six months ended December 31, 2008.

Marketing, general and administrative expenses decreased $1.0 million (11%) to $7.3 million for the six months ended December 31, 2008 from $8.3 million for the six months ended December 31, 2007. The decrease was principally due to reductions in labor costs, adminstrative costs and professional services expenses resulting from the impending TennCare contract expiration.

Depreciation and amortization expense was $0.1 million for the six months ended December 31, 2008, a $0.01 million increase from $0.09 million for the six months ended December 31, 2007.

Income tax expense was $0.08 million for the six months ended December 31, 2008 compared to $0.1 million for the six months ended December 31, 2007. The Company's effective tax rate for the six months ended December 31, 2008 is (7%) and differs from the

statutory rate of 34%. This difference is primarily related to the change in the deferred tax valuation allowance and state income taxes.

Loss before income taxes was $1.1 million for the six months ended December 31, 2008 compared to income before income taxes of $0.5 million for the six months ended December 31, 2007.

Net loss was $1.2 million, or ($0.13) per basic share, for the six months ended December 31, 2008, compared to net income of $0.3 million, or $0.04 per basic share, for the six months ended December 31, 2007. The decrease is primarily due to the decrease in overall revenue resulting from the impending expiration of the TennCare contract.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2008, the Company had (i) cash and cash equivalents and short-term marketable securities of $16.6 million, compared to $19.5 million at June 30, 2008; (ii) working capital of $14.5 million, compared to working capital of $15.3 million at June 30, 2008; and (iii) a current assets-to-current liabilities ratio of 3.96-to-1, compared to 3.38-to-1 at June 30, 2008.

Cash used in operating activities of $2.8 million was primarily due to claims processing expense and increased labor related payments such as severance and accrued vacation, resulting from the impending expiration of the TennCare contract. (See Note 5 to our Unaudited Condensed Consolidated Financial Statements in Item 1 above.)

Cash used for financing activities of $0.06 millions was primarily due to a share repurchase program. On November 25, 2008, the Company's board of directors approved the share repurchase program, authorizing the Company to repurchase up to $1.0 million of the Company's outstanding common stock. As of December 31, 2008, the Company had repurchased a total of 44,694 shares at an average price of $1.57 per share under the share repurchase program.

Cash decreased $4.7 million for the six months ended December 31, 2008, compared to an increase of $1.2 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 Tennessee increased $0.8 million at December 31, 2008 compared to June 30, 2008, primarily due to timing of cash receipts from TennCare.

Property, plant and equipment decreased by $0.3 million at December 31, 2008 compared to June 30, 2008, due to recording depreciation of $0.1 million and the disposal of fixed assets associated with the sublease of the Tennessee facility.

The Company's subsidiary, UAHC-TN, had a required minimum net worth requirement using statutory accounting practices of $7.1 million at December 31, 2008. UAHC-TN had excess statutory net worth of approximately $7.0 million at December 31, 2008.

The Company's subsidiary, UAHC-TN, was for many consecutive years a managed care organization in the TennCare program, a State of Tennessee program that provided medical benefits to Medicaid and working uninsured recipients. 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. UAHC-TN's TennCare members transferred to other managed care organizations on November 1, 2008, after which UAHC-TN continues to perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009. However, revenue under this contract was only earned through October 31, 2008. Revenue under this contract represented 50% and 57% of the Company's total revenues for the six months ended December 31, 2008 and 2007, respectively. The net loss related to this contract discontinuance is estimated to range between $4.6 million and $6.6 million, which includes claim processing costs, employee severance, and other corporate general administrative expenses beginning November 2008 through June 2009. During the fiscal 2009 second quarter, the Company incurred approximately $1.4 million of such estimated costs. The Company has subleased its leased Tennessee facility to a third party effective beginning April 2009 and ending December 31, 2010. The Company recorded a liability of $0.1 million related to the remaining lease obligation. As a result of the impending contract termination, the Company also sold fixed assets and recognized a loss on disposal of $0.1 million. Management believes that the discontinuance of the TennCare contract will have a material impact on the Company's operations.

As a result of the contract expiration as discussed above, the Company's deferred tax valuation allowance was increased during fiscal 2008. In the third quarter of fiscal 2008, the Company recorded deferred tax expense of $1.5 million. Also, management assessed the previously recorded goodwill of $3.5 million and determined that such amount was impaired in accordance with SFAS No.
142. As a result, the Company recorded a goodwill impairment charge of $3.5 million also during the third quarter of fiscal 2008.