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 about the expected future overall performance of the healthcare market, our expected future financial resources and operating results, including increases in revenues, profitability, interest expense, and our expected growth and expansion, and our expectations regarding our ability to obtain new and maintain existing behavioral healthcare contracts and the profitability, if any, of such behavioral healthcare contracts. These statements are based on current estimates and predictions by management about the industry and markets in which we operate, the customers we serve 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, those related 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 filings with the SEC.

The following discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto of CompCare and subsidiaries appearing elsewhere in this report.

OVERVIEW

The Company provides health care services and products through its primary operating subsidiaries, Comprehensive Behavioral Care, Inc. ("CBC") and Core Corporate Consulting Group, Inc. ("Core.")

Through CBC and its subsidiaries, we provide managed behavioral healthcare, substance abuse, and psychotropic pharmacy management services. We provide these services primarily to commercial, Medicare, Medicaid and Children's Health Insurance Program ("CHIP") health plans. Additionally, CBC provides pharmacy and analytic services for its health plan customers to integrate medical claims data and pharmacy data into actionable information so patient care can be coordinated cost effectively. Our managed care operations include at-risk behavioral health contracts, at-risk pharmacy management contracts, and administrative service agreements.

SOURCES OF REVENUE

Our revenue can be segregated into the following significant categories (dollars
in thousands):



                                             Three Months Ended          Six Months Ended
                                                  June 30,                   June 30,
                                              2012          2011         2012         2011
  At-risk behavioral contracts             $    7,490     $  9,526     $ 14,966     $ 19,095
  Administrative services only contracts          853          749        1,670        1,451
  At-risk pharmacy contracts                    9,781        8,282       19,378       16,293

                                           $   18,124     $ 18,557     $ 36,014     $ 36,839

Our customer base primarily includes regional health plans that do not have their own behavioral network. We provide services primarily through a network of contracted providers that includes:

• psychiatrists;

• psychologists;

• therapists;

• other licensed healthcare professionals;

• psychiatric hospitals;

• general medical facilities with psychiatric beds;

• residential treatment centers; and

• 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), inpatient programs and crisis intervention services. We do not directly provide treatment or own any treatment facility.

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

• At-risk arrangements under which our clients pay us a fixed fee per member in exchange for our assumption of the financial risk of providing services; and

• ASO arrangements where we manage behavioral healthcare programs or perform various managed care services, such as clinical care management, provider network development, and claims processing without assuming financial risk for member behavioral healthcare costs.

We also cover psychotropic pharmacy management services, where we receive an additional per-member per-month amount. We manage psychotropic pharmacy services through the collection and analysis of pharmacy claims data which is provided by the health plan's pharmacy benefit manager ("PBM"), whose primary functions are claims adjudication and drug cost negotiation. Through data analysis and usage evaluation against clinically sound, evidence-based criteria, we are able to identify ineffective, inappropriate and costly drug utilization. Our approach is to address these issues in a collaborative manner with the primary care physicians and psychiatrists through the provision of useful information based on our analysis. Our goal is to produce positive outcomes for patients while controlling pharmacy costs.

Under at-risk 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 by our contract at the beginning of our contract term. Under certain circumstances these premiums may be subsequently adjusted up or down, or the contract terminated, generally at the commencement of each renewal period.

Our largest expense is the cost of behavioral health services and pharmacy drugs 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 at-risk arrangements. Providing services on an at-risk basis exposes us to the risk that our contracts may ultimately be unprofitable if we are unable to control or otherwise anticipate healthcare costs. Accrued claims payable and claims expense are our most critical accounting estimates. See "Critical Accounting Policies and Estimates" below.

We manage programs through which services are provided to recipients in 23 states, the District of Columbia and Puerto Rico. Our objective is to provide easily accessible, high quality behavioral healthcare and pharmacy services and to manage costs through measures such as the monitoring of hospital inpatient admissions and the review of authorizations for various types of outpatient therapy. Our goal is to combine access to quality behavioral healthcare services with effective management controls in order to ensure the most cost-effective use of healthcare resources.

Our programs and services include:

• management of prescription drugs on an at-risk basis for health plans;

• fully integrated behavioral healthcare and psychotropic pharmacy management services;

• analytic services for medical and pharmacy claims for medical integration of behavioral and medical care coordination;

• case management/utilization review services;

• administrative services management;

• preferred provider network development;

• management and physician advisor reviews; and

• overall care management services.

We also manage physician-prescribed psychotropic medications for two Medicare health plans in Puerto Rico. Members are generally given a prescription from their primary care physician or psychiatrist. We are at-risk for the psychotropic drug costs and manage that appropriate medications are being utilized by the prescribing physician.

RECENT DEVELOPMENTS

Senior Promissory Note Renegotiation

We were unable to repay our 10% senior promissory notes in the amount of approximately $1.8 million on the maturity date of April 15, 2012. However, during June, July, and August of 2012, we reached agreement with holders of approximately $1.7 million, or approximately 98%, of these notes to renew them for an additional year. The notes will mature April 15, 2013 and bear interest at 14% effective retroactively from April 15, 2012. Although we expect to negotiate the same note modifications with the remaining senior note holders in the near future, we cannot provide any assurance of the ultimate success of these negotiations.

Contract Amendment

In June 2012, we resolved a contract interpretation dispute for $2.2 million, which reduced the cost of psychotropic drugs for which we are not responsible related to our major contract in Puerto Rico. The contract dispute resolution removes a portion of the cost of drugs prescribed for non-mental health conditions charged to us by the health plan's pharmacy benefit manager from the contract's inception to April 2012. The effect of the contract dispute resolution was to reduce our pharmacy cost by $2.2 million for the three months ended June 30, 2012.

Contract Terminations

In June 2012, we received a letter from our Louisiana client informing us that our contract to provide at-risk behavioral healthcare services to approximately 52,000 of its Medicare members would be terminated effective July 31, 2012. The contract accounted for 5.4% or $2.0 million, and 4.6%, or $1.7 million, of our revenues for the six months ended June 30, 2012 and 2011, respectively. As this contract resulted in an operating loss during 2012, its elimination is likely to improve our overall operating results.

On March 26, 2012, we received a letter from a customer terminating its contract with us effective July 1, 2012. Under the contract we provided behavioral healthcare services on an at-risk and ASO basis to approximately 209,000 Medicaid and Medicare members. The contract accounted for 5.1% or $1.8 million, and 5.3%, or $1.9 million, of our revenues for the six months ended June 30, 2012 and 2011, respectively. However, since this contract produced an operating loss for 2011 and for the six months ended June 30, 2012, its elimination is likely to improve our overall operating results.

Expense Reduction Initiative

In May 2012, we announced that we had implemented cost-saving measures beginning in the first quarter of this year to reduce our general and administrative expenses and increase our operating income. The measures included salary reductions for mid-level staff and senior management, as well as the layoff of 26 employees, among others.

Rate Increase - Major Contract

On March 5, 2012, we amended our major Puerto Rico contract that provided approximately 76.5% of our operating revenue during the six months ended June 30, 2012, and under which we provide mental health, substance abuse treatment, and pharmacy management services. Pursuant to the amendment, the contract term was extended to December 31, 2012 and the contract rate for pharmacy management services was increased by approximately 11% effective retroactively to January 1, 2012.

New or Increased Business

On March 1, 2012, we began supplying behavioral health services on an at-risk basis to approximately 6,000 members of a Texas health plan that serves Medicaid and CHIP beneficiaries.

In February 2012, we added approximately 40,000 individuals to our covered membership through the increased business of a previously existing customer. As a result, we will provide behavioral health care services on an ASO basis to participants of the In-home Support Services Workers Health Care Program in Los Angeles County, California.

Effective January 1, 2012, we began providing behavioral health services to approximately 39,000 members of a Medicare Advantage population serviced by a health plan in the states of Missouri and Washington. Services are provided on an at-risk basis.

Increase in Authorized Common Shares

Effective January 13, 2012, we increased the number of authorized shares of our common stock that we may issue from 200 million to 500 million, based on an affirmative vote by written consent of a majority of our shareholders.

Pharmaceutical Drug Management Initiative

We have recently launched an effort to expand our drug management program. We will offer to manage on an at-risk basis prescription drug programs for health plans and self insured entities. We believe we can generally reduce drug costs for our clients that utilize our program.

RESULTS OF OPERATIONS

Three months ended June 30, 2012 vs. 2011

Revenues: Total managed care revenues decreased slightly for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. However, we experienced various increases and decreases in the categories of such revenues as described below.

At-risk behavioral health contracts: Operating revenues from at-risk contracts decreased by 21.4%, or approximately $2.0 million, to $7.5 million for the three months ended June 30, 2012, compared to $9.5 million for the three months ended June 30, 2011. The decrease was primarily attributable to the loss of customers in Missouri, Texas and Wisconsin during the fourth quarter of 2011 that had accounted for $3.2 million of revenue for the three months ended June 30, 2011. This decrease was offset by approximately $1.2 million in additional revenues in 2012 from new and previously existing customers.

ASO contracts: Revenue from ASO contracts increased by 13.9%, or approximately $0.1 million, to $0.9 million for the three months ended June 30, 2012, primarily consisting of additional revenue from the expansion of business of previously existing ASO customers.

Pharmacy management contracts: Pharmacy revenue increased by 18.1%, or approximately $1.5 million, to $9.8 million for the three months ended June 30, 2012, from approximately $8.3 million for the three months ended June 30, 2011, attributable primarily to a 6.5% increase in membership and a 11% contract rate increase effective January 1, 2012 from our major customer in Puerto Rico.

Costs of revenues: Total costs of revenues decreased approximately 26.8%, or approximately $5.0 million, in 2012 as compared to 2011 for reasons set forth in the following four paragraphs.

Claims costs, at-risk behavioral health contracts: Claims expense on at-risk contracts decreased by 24.2%, or approximately $1.9 million, to $6.1 million for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The decrease was primarily attributable to a lack of claims for three contracts that were terminated during the fourth quarter of 2011 described above as compared to $2.9 million of claims costs for these contracts for the comparable prior period. The claims costs decrease was offset by increases of $0.7 million and $0.3 million, respectively, from expansion of existing contracts and the addition of new at-risk business. Claims costs as a percentage of at-risk revenues decreased to 81.1% for the three months ended June 30, 2012, from 84.2% for the three months ended June 30, 2011, attributable to lower utilization.

Pharmacy drug costs: Pharmacy costs decreased by 28.8%, or approximately $2.5 million, to $6.2 million for the three months ended June 30, 2012, as compared to $8.7 million for the three months ended June 30, 2011. The decrease is primarily attributable to a $2.2 million resolution of a contract interpretation dispute relating to the

removal of non-psychotropic drugs charged to us by the health plan's pharmacy benefit manager from the contract's inception to April 2012. Pharmacy costs as a percentage of pharmacy revenue decreased from 104.7% for the three months ended June 30, 2011, to 63.2% for the three months ended June 30, 2012, due to an increase in the contract rate effective January 1, 2012, for our major Puerto Rico customer and the aforementioned $2.2 million contract dispute resolution.

Contract loss allowance: During the three months ended June 30, 2012, we reversed $0.3 million of an excess contract loss allowance that we had established at December 31, 2011 for our Louisiana contract. The allowance was no longer needed due to the early termination of the contract.

Other healthcare operating costs: Other healthcare costs, which consist of the costs of care administration, such as salaries, employee benefits and external medical case review fees, decreased 12.5%, or approximately $0.3 million, due primarily to salary reductions and cost savings from employee headcount reductions that occurred during the three months ended June 30, 2012. Total healthcare costs as a percentage of total operating revenue decreased to 10.1% for the three months ended June 30, 2012, compared to 11.3% for the three months ended June 30, 2011.

General and administrative expense: General and administrative expense decreased by 25.1%, or approximately $0.7 million, for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The decrease was primarily attributable to a $0.7 million reduction in legal expense as compared to the same period of the previous year. As a percentage of total operating revenue, general and administrative expense decreased to 12.3% for the three months ended June 30, 2012, compared to 16.0% for the three months ended June 30, 2011, attributable to the aforementioned.

Interest expense. Interest expense, excluding amortization of debt discount, increased by approximately 57.9%, or approximately $143,000, for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011 due to an increase in the weighted average amount of debt outstanding from $5.8 million to $9.3 million. The average effective interest rate, excluding amortization of debt discount, approximated 17% for both periods.

Income taxes. Our provisions for income taxes for the quarters ended June 30, 2012 and 2011 represented solely income tax expense for certain states. Our effective income tax rate for the three months ended June 30, 2012, was 0.1%. During the current quarter, our subsidiary in Puerto Rico utilized approximately $1.0 million of deferred tax assets from net operating loss carryforwards, as compared to none in the comparable period of the prior year.

Six months ended June 30, 2012 vs. 2011

Revenues: Total managed care revenues remained substantially the same for both periods; however, we experienced various increases and decreases in the various categories of such revenues as follows.

At-risk behavioral health contracts: Operating revenues from at-risk contracts decreased by 21.6%, or approximately $4.1 million, to $15.0 million for the six months ended June 30, 2012, compared to $19.1 million for the six months ended June 30, 2011. The decrease was primarily attributable to the loss of customers in Missouri, Texas and Wisconsin during the fourth quarter of 2011 that accounted for $6.3 million of revenue for the six months ended June 30, 2011. The decrease was offset by approximately $2.3 million in additional revenues from new and previously existing customers.

ASO contracts: Revenue from ASO contracts increased by 15.1%, or approximately $0.2 million, to $1.7 million for the six months ended June 30, 2012, due primarily to additional revenue from the expansion of business of previously existing ASO customers.

Pharmacy management contracts: Pharmacy revenue increased by 18.9%, or approximately $3.1 million, to $19.4 million for the six months ended June 30, 2012, from approximately $16.3 million for the six months ended June 30, 2011, attributable primarily to a 3.6% increase in membership and a 11% contract rate increase effective January 1, 2012 from our major customer in Puerto Rico.

Costs of revenues: Total costs of revenues decreased approximately 13.9%, or $5.0 million, in 2012 as compared to 2011 for reasons set forth in the following four paragraphs.

Claims costs, at-risk behavioral health contracts: Claims expense on at-risk contracts decreased by 22.5%, or approximately $3.2 million, to $11.1 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The decrease was primarily attributable to a lack of claims for three contracts that were terminated during the fourth quarter of 2011 described above as compared to $5.4 million of claims costs for these contracts for the comparable period. The claims costs decrease was offset by increases of $1.4 million and $0.6 million resulting from the expansion of existing contracts and the addition of new at-risk business, respectively. Claims costs as a percentage of at-risk revenues decreased to 74.2% for the six months ended June 30, 2012, from 75.0% for the six months ended June 30, 2011, attributable to lower utilization.

Pharmacy drug costs: Pharmacy costs decreased by 6.5%, or approximately $1.1 million, to $15.8 million for the six months ended June 30, 2012 as compared to $16.9 million for the six months ended June 30, 2011, due to a $2.2 million resolution of the aforementioned contract interpretation dispute relating to the removal of non-psychotropic drugs charged to us by the health plan's pharmacy benefit manager, offset by higher drug costs attributable to a 3.6% increase in membership. Pharmacy costs as a percentage of pharmacy revenue decreased from 103.9% for the six months ended June 30, 2011 to 81.6% for the six months ended June 30, 2012, due to an increase in the contract rate effective January 1, 2012 for one major customer in Puerto Rico and the previously mentioned $2.2 million adjustment.

Contract loss allowance: During the six months ended June 30, 2012, we reversed $0.3 million of an excess contract loss allowance that we had established at December 31, 2011 for our Louisiana contract. The allowance was no longer needed due to the early termination of the contract.

Other healthcare operating costs: Other healthcare costs, which consist of the costs of care administration, such as salaries, employee benefits and external medical case review fees, decreased $0.3 million to $3.8 million for the six month period ended June 30, 2012, as compared to $4.1 million for the six month period ended June 30, 2011. The decrease is primarily attributable to salary reductions and cost savings from employee reductions in 2012. Total healthcare costs as a percentage of total operating revenue decreased to 10.6% for the six months ended June 30, 2012 compared to 11.1% for the six months ended June 30, 2011.

General and administrative expense: General and administrative expense decreased by 33.7%, or approximately $1.4 million, to $2.7 million for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The decrease was primarily attributable to a $1.6 million reduction in legal expense due to an adjustment of an estimated legal settlement provision. As a percentage of total operating revenue, general and administrative expense decreased to 7.6% for the six months ended June 30, 2012, compared to 11.2% for the six months ended June 30, 2011, attributable to the aforementioned.

Interest expense: Interest expense, excluding amortization of debt discount, increased by approximately 54.1%, or approximately $266,000, for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011 due to an increase in the weighted average amount of debt outstanding to $9.3 million for the six months ended June 30, 2012, from $5.8 million for the comparable prior period net of a decline in the average effective interest rate, excluding amortization of debt discount, for the six months ended June 30, 2012, to approximately 16.2% from 17.0% for the same period in 2011, which was the result of adding $3.5 million in debt at 14% during the second half of 2011.

Income taxes: Our provisions for income taxes for the six months ended June 30, 2012 and 2011 represented solely income tax expenses for certain states. Our effective income tax rate for the six months ended June 30, 2012 was 0.3%. Our subsidiary in Puerto Rico utilized approximately $1.0 million of deferred tax assets from net operating loss carryforwards for the six months ended June 30, 2012.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of our consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements. 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, premium deficiencies and claims expense, goodwill, and income taxes are critical to the preparation of our consolidated financial statements.

Revenue recognition. The majority of our managed care activities are performed under at-risk arrangements pursuant to terms of agreements primarily with health plans to provide contracted behavioral healthcare and pharmacy management services to subscribing members. Revenue under these agreements is earned continuously over time regardless of services actually provided and, therefore, is recognized monthly based on the number of qualified members. The information regarding qualified members is supplied by our clients, and we review member eligibility records and other reported information to verify its accuracy and determine the amount of revenue to be recognized. The remaining balance of our revenues is earned and recognized as services are delivered on a non-risk basis.

We also manage the psychotropic drug benefit under certain behavioral health contracts for certain health plans' subscribing members and are responsible for the cost of drugs dispensed. In accordance with the contracts, the health plan's . . .