You should carefully consider and evaluate all of the information in this report, including the risk factors listed below. Risks and uncertainties in addition to those we describe below, that may not be presently known to us, or that we currently believe are immaterial, may also harm our business and operations. If any of these risks occurs, our business, results of operations and financial condition could be harmed, the price of our common stock could decline, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements contained in this report.

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Risks related to our business

We may not be able to accurately predict utilization of our full-risk contracts, which could result in contracts priced at levels insufficient to ensure profitability.

Managed care operations are at risk for costs incurred to provide agreed upon levels of service. Failure to anticipate or control costs could have material, adverse effects on our business. A very large percentage of our services are provided on a full-risk capitation basis which exposes us to significant risk that contracts negotiated and entered into may ultimately be unprofitable if utilization levels require us to provide services at a cost in excess of the capitation rates we receive for the services. The population we began managing in 2007 for our large Indiana client had not been subject to managed care previously and consequently there was little historical utilization data upon which to base initial pricing. Actual utilization experience has been greater than initial estimates, resulting in higher claim costs and lower profit margins. Failure to manage our costs or achieve anticipated cost reductions in populations brought under management will have an adverse effect on our financial results.

Because providers are responsible for claims submission, the timing of which is uncertain, we must estimate the amount of claims incurred but not reported, and actual results may differ materially.

Our costs of care include estimated amounts for claims incurred but not reported (“IBNR”). The IBNR is estimated using an actuarial paid completion factor methodology and other statistical analyses that we continually review and adjust, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. Our estimates of IBNR may be inadequate in the future, which would negatively affect results of operations. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results may differ materially from the estimated amounts reported.

We are subject to fines and penalties being assessed to us by our clients.

Many of our contracts contain provisions stating that if our clients are assessed penalties or fines by a regulatory agency due to our noncompliance with a contractual requirement, we will be responsible for paying the assessed fine or penalty. Though to date, no material fines have been assessed under such provisions, any future fines would have a negative impact on our results of operations.

A failure of our information systems would significantly impair our ability to serve our customers and manage our business.

An effective and secure information system, available at all times, is vital to our health plan customers and their members. We depend on our computer systems for significant service and management functions, such as providing membership verification, monitoring utilization, processing provider claims, and providing regulatory data and other client and managerial reports. Although our computer and communications hardware is protected by physical and software safeguards, it is still vulnerable to computer viruses, fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. We do not have 100% redundancy for all of our computer and telecommunications facilities. A catastrophic event could have a significant negative effect on our business, results of operations, and financial condition.

We also depend on a third party provider of application services for our core business application. Any sustained disruption in their services to us would have a material effect on our business.

We are subject to intense competition that may prevent us from gaining new customers or pricing our contracts at levels to achieve sufficient gross margins to ensure profitability.

We are continually pursuing new business. However, many of our competitors are significantly larger and better capitalized than us, and the smaller size and financial condition of our company has proved a deterrent to some prospective customers. Additionally, we will likely have difficulty in matching the financial resources expended on marketing characteristic of our competitors. As a result, we may not be able to successfully compete in our industry. Our major competitors include Magellan Health Services, United Behavioral Health, ValueOptions, and APS Healthcare.

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We may require additional funding, and we cannot guarantee that we will find adequate sources of capital in the future.

We cannot assure you that our existing cash and cash equivalents will be sufficient to fund our business. We expect to obtain these funds from operating activities and financing activities that may include equity or debt financings, which could dilute stockholder ownership. We cannot provide assurance that additional funding will be available on acceptable terms, if at all. If we are unable to obtain sufficient additional funds on commercially acceptable terms, we may suffer an adverse impact on our business, financial condition and results of operations.

Our ability to utilize net operating loss carryforwards (“NOLs”) may be limited.

As of December 31, 2007, we had net operating loss carryforwards (“NOLs”) of approximately $ 7.7 million for federal income tax purposes that will begin to expire in 2022. These NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percent over a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of our NOLs before utilization.

We underwent such an ownership change in each of June 2005 and January 2007. Any future ownership changes can impose the application of another Section 382 limitation on our federal NOLs and can reduce the amount of NOLs we can utilize in a year if the fair market value of our stock were to decline significantly prior to an ownership change. Such an event may have an adverse impact on our anticipated future cash flow.

Our sales cycle is long, which complicates our ability to predict our growth.

The sales and implementation process for our services is lengthy and requires our potential clients to commit time and other resources. Our sales cycle is unpredictable and has generally ranged from 12 to 18 months from our initial contact to an executed contract. Accordingly, it may be difficult to replace lost business quickly.

We are dependent on a limited number of customers, and a loss or reduction in business of any one could have a material adverse effect on our working capital and results of operations.

For the year ended December 31, 2007, we provided behavioral healthcare services to the members of six health plans under contracts that on a combined basis represented over eighty percent of our operating revenue. The loss of one or more of these clients, unless replaced by new business would negatively affect our financial condition. In the past, we have experienced the loss of certain major customers, such as our large Connecticut client in 2005 and major Texas clients in 2006 and 2007. We experienced lower operating margins and profitability overall as a result. The terms of each contract are generally for one-year periods and are automatically renewable for additional one-year periods unless terminated by either party by giving the requisite written notice.

We are subject to existing clients issuing a RFP for the management of behavioral services currently being managed by us.

Our clients are aware of the highly competitive nature of our industry, and our contracts with them frequently contain provisions allowing termination of the contract by either party without cause with 90 days written notice. Consequently our clients may request from us and any of our competitors an RFP for behavioral services currently managed by us, putting us at risk of losing a client or clients. For example, during 2007 a major Texas client issued a RFP prior to the end of our contract. We submitted a proposal but were not chosen to continue services, resulting in a significant reduction in revenue. In addition, certain administrative and overhead costs continued to be incurred past the termination date.

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We are dependent on our executive officers and other key employees.

Our operations are highly dependent on the efforts of our senior executive officers, in particular, our President and Chief Executive Officer, John M. Hill, and our Chief Financial Officer, Robert J. Landis. Each executive is employed pursuant to an employment agreement or offer letter, the remaining terms of which are three years for Mr. Hill and 17 months for Mr. Landis. The loss of their leadership, knowledge and experience could negatively impact our operations.

We may be unsuccessful in profitably managing our new Indiana Medicaid contract, and may not be able to meet specific performance measures that would allow us to receive an increase in the rate.

We may be unsuccessful in managing our new Indiana Medicaid contract that started January 1, 2007, which provided over 40% of our operating revenues in 2007. Providing services under a new contract for populations at risk that have not been managed before exposes us to the risk it may be unprofitable. There is a limited historical basis for the actuarial assumptions about the utilization of benefits by members covered under this new managed care behavioral program, and premiums based on these assumptions may be insufficient to cover the benefits provided and we may be unable to obtain offsetting rate increases. Contract premiums were set based on anticipated significant savings and a high degree of utilization management, which may cause disagreements with providers, diverting management resources and having an adverse impact on our financial results. Claims expense as a percentage of revenues for this contract amounted to 99.5% for the year ended December 31, 2007.

We are negotiating with this client to obtain a rate increase to offset the higher than expected costs of utilization. We believe that an increase will be granted effective January 1, 2008, provided we comply with monthly performance measures. Although we believe that we will meet these standards, any failure to comply with one or more of the measurement criteria will reduce our anticipated cash flow and profitability from this contract.

We may be unsuccessful in obtaining performance bonds or other security that is required by our existing or future clients, and consequently may lose clients.

Our new Indiana client requires us to maintain a performance bond in the amount of $1,000,000. In addition, certain of our other customers may require restricted cash accounts or other security with respect to our obligations to pay IBNR claims and claims not yet processed and paid. Due to our small size and financial condition, we may be unable to provide the security required by our client. This could result in the loss of a client or clients which would negatively affect our financial condition.

We are dependent on our provider network to provide services to our members.

We contract with providers as a means to assure access to behavioral health services for our members. Some providers could refuse to contract with us, demand higher payments, or take other actions which could result in higher healthcare operating expenses. In addition, certain providers may have significant market position, which could cause disruption to provider access in a particular geographic area for our members and affect our contractual requirements with our customers of maintaining an adequate network.

We may be unsuccessful in renewing our NCQA accreditation and may lose customers who require such accreditation.

NCQA accreditation is required by several of our client contracts and is an important consideration to our prospective clients. CompCare is periodically evaluated by NCQA to validate the Company’s adherence to NCQA industry-accepted standards covering operational areas such as preventative care, utilization management, credentialing, member rights and responsibilities, and quality improvement. Maintaining these quality standards and the NCQA accreditation are important considerations of our customers and prospective clients who are evaluated against similar standards. If we are not successful in renewing our NCQA accreditation, this could result in the loss of a client or clients which would negatively affect our financial condition.

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Claims brought against us may exceed our insurance coverage.

We maintain a program of insurance coverage against a broad range of risks related to our business. As part of this program of insurance, we are subject to certain deductibles and self-insured retentions. Our insurance may not be sufficient to cover all judgements, settlements or costs relating to future claims, suits or complaints. Upon expiration of our insurance policies, sufficient insurance may not be available on favorable terms, if at all. If we are unable to secure adequate insurance in the future, this may have a material adverse effect on our profitability and financial condition.

Risks related to our industry

Our existing and potential managed care clients operate in a highly competitive environment and may be subject to a higher rate of merger, acquisition and regulation than in other industries.

We typically contract with small to medium sized HMOs which may be adversely affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means. Our clients may also determine to manage the behavioral healthcare benefits “in house” and, as a result, discontinue contracting with us. Additionally, our clients may be acquired by larger HMOs, in which case there can be no assurance that the acquiring company would renew our contract.

Many managed care companies, including nine of our existing clients, provide services to groups covered by Medicare, Medicaid and/or CHIP programs. Such federal and state controlled programs are susceptible to annual changes in reimbursement rates and eligibility requirements that could ultimately affect companies such as CompCare.

As of December 31, 2007, we managed approximately 900,000 lives in connection with behavioral and substance abuse services covered through Medicaid and CHIP programs in Texas, Medicare and Medicaid in Florida, Medicaid in California, Michigan and Indiana, and Medicare in Maryland and Pennsylvania. Any changes in Medicare, Medicaid and/or CHIP reimbursement could ultimately affect us through contract bidding and cost structures with the health plans first impacted by such changes. We have limited experience with Medicare members and the various Medicare regulations. If we are unable to adapt to the differing needs of our Medicare members and the Medicare regulations, we may be unsuccessful in managing this line of business.

Temporary reductions in state funding have previously had a negative impact on us, and if implemented in the future, could have a material, adverse impact on our operations. In addition, states in which we operate may pass legislation that would reduce our revenue or increase our claims expense through changes in the reimbursement rates, changes in the benefit covered, or in the number of eligible participants. We may be unable to reduce our costs to a level that would allow us to maintain current gross margins specific to our Medicare, Medicaid and CHIP programs.

The industry is subject to extensive state and federal regulations, as well as diverse licensure requirements varying by state. Changes in regulations could affect the profitability of our contracts or our ability to retain clients or to gain new customers.

We are required to hold licenses or certificates to perform utilization review and/or TPA services in Connecticut, Florida, Georgia, Indiana, Maryland, Michigan, Pennsylvania, and Texas. Additional utilization review or TPA licenses may be required in the future, and we may not qualify to obtain new licenses or renew existing licenses. In many states, entities that assume risk under contract with licensed insurance companies or health plans have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure as either an insurer or HMO in any state. If the regulatory positions of these states were to change, our business could be materially affected until such time as we are able to meet the regulatory requirements, if at all. Additionally, some states may determine to contract directly with companies such as ours for managed behavioral healthcare services in which case they may also require us to maintain financial reserves or net worth requirements that we may not be able to meet. Currently, we cannot quantify the potential effects of additional regulation of the managed care industry, but such costs will have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.

Healthcare reform can significantly reduce our revenues and profitability.

The U.S. Congress and certain state legislatures are considering legislation that, among other things, could limit funding to our clients. We cannot predict the effect of this legislation or other legislation that may be adopted by Congress or by the states. Such legislation, if implemented, could have an adverse effect on us.

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We are subject to federal statutes prohibiting false claims.

The Federal False Claims Act imposes civil penalties for knowingly making or causing to be made false claims with respect to governmental programs, such as Medicare and Medicaid, for services not rendered, or for misrepresenting actual services rendered, in order to obtain higher reimbursement. While we do not directly provide services to beneficiaries of federally funded health programs and, accordingly, do not submit claims to the federal government, we do provide services to health plans that could become involved with false claims, which could include allegations against us as well.

Failure to adequately comply with HIPAA may result in penalties and loss of revenues.

We are subject to the requirements of HIPAA. The purpose of HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and to protect the security and privacy of protected health information. We have implemented policies and practices to achieve compliance with HIPAA, and believe we are fully compliant with all HIPAA regulations. However, any lack of compliance with HIPAA regulations may result in penalties and have a material adverse effect on our ability to retain our customers or to gain new business.

The managed care industry is subject to class action lawsuits and claims for professional liability that could that could increase our expenditures and have an adverse effect on our profitability and financial condition.

In recent years the managed care industry has been subject to a greater number of lawsuits and claims of professional liability alleging negligence in performing utilization review and other managed care activities, and in the denial of payment for services. Such incidents may result in professional negligence or other claims against us causing us to incur fees and expend substantial resources in defense of such actions. Although we maintain professional liability insurance, there can be no assurance that future claims will not have material effect on our profitability and financial position.

Risks related to our common and preferred stock

Our Series A Preferred Shareholder is able to exercise substantial or decisive influence over our major corporate decisions.

In June 2005, Woodcliff purchased 14,400 shares of our Series A Convertible Preferred Shares, which have the right to designate a majority of the members of our Board of Directors, and are convertible into 4,235,328 common shares, which when combined on an “as-converted” basis with 1,739,130 common shares purchased by Woodcliff in October 2006, results in beneficial ownership of capital stock representing approximately 50.05% of our voting power as of December 31, 2007. Hythiam acquired Woodcliff’s interest in January 2007. As a result, holders of our common stock are subject to the following risks, among others:

Our Series A Preferred Shareholder has significant rights and preferences over the holders of our common stock.

The holder of our Series A Preferred Shares is entitled to receive dividends when declared by our Board of Directors. The payment of these dividends will take priority over any payment of dividends on our common stock. The holder of our Series A Shares will have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up. The aggregate amount of that senior claim is approximately $3.6 million, which represents the Series A Preferred shareholder investment in us as of December 31, 2007 and will increase thereafter if such preferred stock accrues dividends and if we issue additional shares of such preferred stock to Hythiam pursuant to the terms of the Securities Purchase Agreement for the Series A Preferred Shares. There have been no dividends declared or paid by us to our Series A Preferred shareholder.

The holder of our Series A Preferred Shares has other rights and preferences, including the following:

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These rights and preferences could adversely affect our ability to finance future operations, satisfy capital needs or engage in other business activities that may be in our interest.

The price of our common stock may be adversely affected by our small public capitalization and investors may lose money if they invest in our stock.

The size of our public market capitalization is relatively small, and the volume of our shares that are traded is low. These factors could cause significant fluctuation in the trading of our stock, which may adversely affect the price of our common stock.

We may experience fluctuations in our quarterly operating results, which would cause our stock price to decline.

Our quarterly operating results have varied in the past and may fluctuate significantly in the future due to seasonal changes in utilization levels, changes in estimates regarding IBNR claims, the timing of implementation of new contracts, and enrollment changes. These factors may affect our quarterly and annual net revenue, expenses, and profitability in the future, and consequently we may fail to meet market expectations, causing our stock price to decline.

Shares reserved for future issuance upon the conversion of outstanding shares of our Series A Convertible Preferred Stock and upon the exercise of issued options and warrants will cause dilution to our common stockholders.

As of December 31, 2007, 4,235,328 shares of our common stock were reserved for Series A Convertible Preferred Stock, 1,476,375 shares for outstanding options and warrants, and 15,051 shares for our convertible debenture. Our stockholders would experience dilution of their investment upon conversion or exercise of these securities.

Our stock is a “penny stock” which makes it more difficult for us to raise needed funds, and for our stockholders to sell their shares.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is currently approximately $0.60 per share, which is substantially less than the $5.00 per share threshold. This designation requires any broker or dealer selling these securities to disclose specified information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of stockholders to sell their shares. In addition, since our common stock is currently not traded on any stock exchange, but instead is only quoted on the Over-The-Counter Bulletin Board, stockholders may find it difficult to obtain accurate quotations for our common stock and may experience a lack of buyers to purchase our shares or a lack of market makers to support the stock price.

There may be ongoing legal challenges to our relationship with Hythiam, which could adversely affect our results of operations.

On May 25, 2007, we entered into a Termination Agreement with Hythiam terminating the proposed merger with Hythiam. Two shareholder class action lawsuits challenging the merger have been dismissed, but plaintiffs’ requests for attorney fees remain pending. There are potential legal and economic risks associated with terminating the merger agreement and continuing with our ongoing relationship with Hythiam, including challenges from public minority shareholders concerning the procedural and financial fairness of our existing agreements, and any future agreements or arrangement between us. Current or future litigation may be expensive and time consuming, and may impede or restrict our ability to operate effectively, which could negatively impact our results of operations.

Errors in estimates may have a significant negative impact on our financial condition and results of operations.

Assumptions relating to the foregoing involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many

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respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our budgets which may in turn affect our results. In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.