UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

COMPREHENSIVE CARE CORPORATION

204 South Hoover Blvd, Suite 200, Tampa, FL 33609

(813) 288-4808

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Index

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

PART I. – FINANCIAL INFORMATION

Item 1 — Consolidated Financial Statements

Consolidated Balance Sheets
(Amounts in thousands)

See accompanying notes to consolidated financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)

See accompanying notes to consolidated financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Note 1 – Summary of Significant Accounting Policies

     The consolidated balance sheet as of February 28, 2005, and the related consolidated statements of operations and cash flows for the nine months ended February 28, 2005 and February 29, 2004 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been included. Such adjustments consisted only of normal recurring items. The results of operations for the nine months ended February 28, 2005 are not necessarily indicative of the results to be expected during the balance of the fiscal year.

     The consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The consolidated balance sheet at May 31, 2004 has been derived from the audited, consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. Notes to consolidated financial statements included in Form 10-K for the fiscal year ended May 31, 2004 are on file with the Securities and Exchange Commission and provide additional disclosures and a further description of accounting policies.

     The Company’s consolidated financial statements are presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recovery and classification of assets or the amount and classification of liabilities that may result from the outcome of the uncertainties described in Note 2 — “Basis of Presentation.”

Marketable Securities

     The Company’s marketable securities are classified as “available for sale,” and accordingly are reflected in the consolidated balance sheet at fair market value, with the unrealized loss included as an other comprehensive loss within stockholders’ deficit.

Restricted Cash

     During the quarter ended February 28, 2005, the trust agreement specific to the Company’s Directors and Officers liability insurance policy was terminated and all funds, which amounted to approximately $253,000, were released to the Company. As such, as of February 28, 2005, restricted cash consists only of the non-current amount of $72,000 representing a required deposit under the terms of the Company’s Tampa office lease.

Revenue Recognition

     The Company’s managed care activities are performed under the terms of agreements with health maintenance organizations (“HMOs”), preferred provider organizations, and other health plans or payers to provide contracted behavioral healthcare services to subscribing participants. Revenue under a substantial portion of these agreements is earned monthly based on the number of qualified participants regardless of services actually provided (generally referred to as capitation arrangements). The information regarding qualified participants is supplied by the Company’s clients and the Company relies extensively on the accuracy of the client remittance and other reported information to determine the amount of revenue to be recognized. Such agreements accounted for 88.5%, or $16.4 million, of revenue for the nine months ended February 28, 2005 and 85.9%, or $18.2 million, of revenue for the nine months ended February 29, 2004. The remaining balance of the Company’s revenues is earned on a fee-for-service basis and is recognized as services are rendered.

Accrued Claims Payable

     The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims incurred but not yet reported (“IBNR”) to the Company. The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in

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utilization and other factors. However, actual claims incurred could differ from the estimated claims payable amount reported as of February 28, 2005. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate.

Income Taxes

     The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to net operating loss carryforwards and to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect of a change in tax rates on deferred tax assets or liabilities is recognized in the consolidated statements of operations in the period that included the enactment. A valuation allowance is established for deferred tax assets unless their realization is considered more likely than not.

Stock Options

     The Company periodically grants stock options to employees and non-employee directors (“optionees”) allowing optionees to purchase the Company’s common stock pursuant to shareholder approved stock option plans. As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation-Transitional Disclosure,” the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options (“APB 25”). Under APB 25, in the event that the exercise price of the Company’s employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recognized. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under the Company’s employee stock options plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (amounts in thousands, except per share data).

     On December 16, 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which requires companies to record compensation expense for stock options issued to employees at an amount determined by the fair value of the options. SFAS No. 123R is effective for the Company for interim or annual periods beginning after June 15, 2005. As such, effective with the Company’s second fiscal quarter of fiscal 2006, SFAS No. 123R will eliminate our ability to account for stock options using the method permitted under APB 25 and instead require us to recognize compensation expense should the Company issue stock options to its employees or non-employee directors. The Company is in the process of evaluating the impact adoption of SFAS No. 123R will have on the consolidated financial statements.

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Per Share Data

     In calculating basic income (loss) per share, net income (loss) is divided by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share reflects the assumed exercise or conversion of all dilutive securities, such as options, warrants, and convertible debentures. No such exercise or conversion is assumed where the effect is antidilutive, such as when there is a net loss. The following table sets forth the computation of basic and diluted income (loss) per share in accordance with Statement No. 128, Earnings Per Share (amounts in thousands, except per share data):

Authorized shares of common stock reserved for possible issuance for convertible debentures, stock options, and warrants are as follows at February 28, 2005:

Note 2 — Basis of Presentation

     The accompanying consolidated financial statements are prepared on a going concern basis. As of February 28, 2005, the Company had a working capital deficiency of $3.1 million and a stockholders’ deficit of $3.6 million. Prior to the current quarter, during which the Company generated $527,000 from operating activities, the Company’s cash position had declined in the first and second quarters of fiscal 2005, as well as during the 2004 and 2003 fiscal years. In addition to sustaining operations, the Company’s future cash requirements will include the funding of increased marketing efforts and additional payments toward the $170,000 that remains to be paid in connection with its new information system, which has expected total costs of approximately $370,000. Once implemented, this system will enable the Company to meet HIPAA requirements, streamline the Company’s entire clinical and claims functions, and offer service improvements to the Company’s participating providers.

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     A private placement of the Company’s common stock was completed in February 2005, generating approximately $730,000 in net cash proceeds. The Company will continue to pursue sources of financing on terms that would support the Company’s capital needs and provide available funds for working capital. Management cannot state with any degree of certainty whether any required additional equity or debt financing will be available to the Company during the remaining months of fiscal 2005 and, if available, that the source of financing would be available on terms and conditions acceptable to the Company. Further, the Company has incurred operating losses in recent years, including the fiscal year ended May 31, 2004. These conditions raise substantial doubt about the Company’s ability to continue as a going concern, which is dependent upon its ability to continue to generate sufficient cash flow to meet its obligations on a timely basis, obtaining additional financing as may be required and, ultimately, sustaining an operating profit. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Note 3 – Total Comprehensive Income (Loss)

     Total comprehensive income (loss) is net income (loss) adjusted for the unrealized holding losses on available-for-sale securities, which amounted to $112,000 and $0 as of February 28, 2005 and February 29, 2004, respectively:

Note 4 — Major Customers/Contracts

(1) Beginning January 1, 2003, the Company contracted with a new HMO client to provide behavioral healthcare services to contracted Medicaid members in Florida. This business accounted for 20.8%, or $4.4 million, of the Company’s operating revenues during the nine months ended February 29, 2004. On October 30, 2003, the HMO, whose contract was scheduled to renew in January 2004, advised the Company that it had determined to “insource behavioral health” and, therefore, would not renew its contract with the Company. Accordingly, the Company’s contract with this HMO customer terminated effective December 31, 2003.

(2) The Company has one contract to provide behavioral healthcare services to Connecticut members under contract with one HMO. This agreement represented approximately 21.1%, or $3.9 million, and 12.7%, or $2.7 million, of the Company’s operating revenue for the nine months ended February 28, 2005 and February 29, 2004, respectively. Additionally, this contract provides that the Company, through its contract with this HMO, receives additional funds directly from a state reinsurance program for the purpose of paying providers. During the nine months ended February 28, 2005 and February 29, 2004, the Company filed reinsurance claims totaling approximately $2.2 million and $1.5 million, respectively. Such claims represent cost reimbursements and, as such, are not included in the reported operating revenues and are accounted for as reductions of healthcare operating expenses. As of February 28, 2005 and May 31, 2004, respectively, the Company has reported $0.3 million and $0.6 million as accounts receivable–managed care reinsurance contracts, with $3.3 million and $3.2 million reported as accrued reinsurance claims payable in the accompanying balance sheets. In the event that the Company does not collect the amounts receivable related to reinsurance amounts, the Company could remain liable for the costs of the specific services provided to members that qualify for such reimbursements. The difference between the reinsurance receivable amount and the reinsurance payable amount is related to timing differences between the authorization date, the date the money is received by the Company, and the date the money is paid to the provider. In certain cases, providers have submitted claims for authorized services having incorrect service codes or otherwise incorrect information that has caused payment to be denied by the Company. In such cases, there are contractual and statutory provisions that allow the provider to appeal a denied claim. If no appeal is received by the Company within the prescribed amount of time, the Company may be required to remit the reinsurance funds back to the appropriate party. For non-reinsurance claims incurred but not yet reported under this contract, the Company estimates its claims payable using a similar method as that used for other existing contracts. This HMO has been a customer since March 2001. The original contract term ended December 31, 2002 and, in accordance with its terms, has automatically renewed for three consecutive one-year periods, with the current term ending December 31, 2005. In October 2004, the Company submitted a bid to the State of Connecticut in response to its request for proposal for administrative services only (“ASO”) in connection with a

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contract that is expected to begin by October 1, 2005. On January 7, 2005 the Company was informed that another bidder was selected to negotiate this ASO contract. If the State of Connecticut is successful in their negotiations with the selected bidder and the State of Connecticut continues with the implementation of its ASO plans, the Company’s existing contract may be terminated sometime during the Company’s second quarter of fiscal 2006, which begins September 1, 2005.

(3) The Company has contracts with one HMO to provide behavioral healthcare services to contracted commercial, Medicaid, and Children’s Health Insurance Program (“CHIP”) members in Texas. This business accounted for approximately 21.1%, or $3.9 million, and 13.0%, or $2.8 million, of the Company’s operating revenues during the nine months ended February 28, 2005 and February 29, 2004, respectively. This HMO has been a customer of the Company since November 1998. The original contract term was for one year and the contract provides for automatic one-year renewal terms.

In general, the Company’s contracts with its customers are typically for initial one-year terms, with automatic annual extensions. Such contracts generally provide for cancellation by either party with 60 to 90 days written notice.

Note 5 – Discontinued Operations

     Results for the nine months ended February 29, 2004 include a change in estimate resulting in a net charge of approximately $387,000 related to hospital operations disposed of in prior years, which is included under discontinued operations in the accompanying consolidated financial statements. The charge primarily relates to settlement of the Company’s fiscal 1999 Medicare cost report for its Aurora, Colorado facility that was sold by the Company during fiscal 1999. The settlement requires the Company to repay a net amount of $294,000 by means of a two-year installment plan. At February 28, 2005, approximately $94,000 remains outstanding and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.

Note 6 — Commitments and Contingencies

(1) In connection with the Company’s Preferred Provider Network license in Connecticut, the Company is required to maintain a performance bond during all applicable terms of the license. As such, the Company maintains a performance bond of $2,400,000 in compliance with this requirement.

(2) Related to the Company’s discontinued hospital operations, Medicare guidelines allow the Medicare fiscal intermediary to re-open previously filed cost reports. Management believes that the Company’s fiscal 1998 and 1999 cost reports remain eligible for re-opening at some future date, in which case the intermediary may determine that additional amounts are due to or from Medicare.

(3) The Company is subject to the requirements of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). The purpose of the HIPAA provisions 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, also, to protect the security and privacy of protected health information. Entities subject to HIPAA include some healthcare providers and all healthcare plans. To meet the specific requirements of HIPAA, the Company determined it needed to make a significant investment in its current information system or in a new information system that would better meet the Company’s future needs. As a result, the Company has entered into a Software License Maintenance and Services Agreement with Qualifacts Systems, Inc. (“Qualifacts”), a vendor that has provided the Company with an immediate, temporary solution to meet HIPAA compliance rules specific to the Electronic Health Care Transactions and Code Sets Standards Model Compliance Plan with the Centers for Medicare and Medicaid Services and, additionally, to design a new, customized management information system that will enable the Company to continue to meet HIPAA requirements in the future. The Company expects to incur a total of approximately $370,000 of costs to customize the Qualifacts system and activate the licenses needed for Qualifacts and other, related third-party software.

     From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary, routine litigation incidental to their business, in which case claims may exceed insurance policy limits and the Company or any one of its subsidiaries may have exposure to a liability that is not covered by insurance. Management is not aware of any such lawsuits that could have a material adverse impact on the Company’s consolidated financial statements.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     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 the Company’s 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 Comprehensive Care Corporation (“CompCare” or the “Company”) operates, 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, cost of care, and seasonality, the Company’s ability to obtain additional financing, and other risks detailed herein and from time to time in the Company’s SEC reports. The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto of CompCare appearing elsewhere herein.

General

Introduction

     The Company has provided managed behavioral healthcare services and products since 1992. Services are marketed primarily through business development staff who are responsible for developing new sales leads and for preparing responses to formal commercial and public sector Requests for Proposals (“RFPs”). The Company typically has several RFPs in process, with submissions being made to a diverse selection of existing and prospective clients. Current services include a broad spectrum of inpatient and outpatient mental health and substance abuse therapy, counseling, and supportive interventions.

     We have experienced an overall decline in operating revenues during fiscal 2004 and for the nine months ended February 28, 2005, which is due primarily to two changes in our client base. In September 2003, revenues from Texas CHIP contracts were temporarily eliminated due to State legislative changes. Although revenues resumed after a five-month hiatus, reinstated revenue levels are approximately 60% of the former amounts primarily due to a reduction in the benefits made available to Texas CHIP members. Additionally, the State changed the eligibility requirements for Texas CHIP members, which limits membership growth for our Texas CHIP business. On December 31, 2003, we experienced the loss of one major Florida customer who determined to internally manage behavioral health services to its members. This contract accounted for 20.8%, or $4.4 million, of our revenue during the first nine months of fiscal 2004. In the past year, we have experienced membership expansion in existing contracts and, additionally from several new clients. As a result, the year-to-year variance in revenue was limited to a decline of $2.7 million from fiscal 2004 to 2005. In preparation for the loss of revenue specific to the major Florida customer, we restructured our regional and corporate operations, centralized certain clinical and administrative functions, reassigned or downsized staff, and eliminated certain expenses that could not be supported with remaining revenues. Consequently, our fiscal 2005 healthcare operating expenses and general and administrative expenses are lower than in the prior fiscal year both in amount and as a percentage of revenue.

     Effective February 28, 2005, a private placement of the Company’s common stock was completed, which generated approximately $730,000 in net cash proceeds.

Results of Operations

     For the nine months ended February 28, 2005, the Company reported net income of $406,000, or $0.09 earnings per basic share ($0.08 per diluted share). In comparison, the Company reported a loss from continuing operations of $249,000, or $0.06 loss per share (basic and diluted), and a net loss of $636,000, or $0.15 loss per share (basic and diluted), for the nine months ended February 29, 2004.

     Results for the nine months ended February 29, 2004 include a change in estimate resulting in a net charge of approximately $387,000 that has been included under discontinued operations in the unaudited, consolidated financial statements for the nine months ended February 29, 2004 (see Note 5 – “Discontinued Operations” to the unaudited, consolidated financial statements).

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     The following tables summarize the Company’s operating results from continuing operations for the three and nine months ended February 28, 2005 and February 29, 2004 (in thousands):

The Three Months Ended February 28, 2005 Compared to the Three Months Ended February 29, 2004:

     The Company reported operating income of $239,000 and net income of $212,000, or $0.04 earnings per share (basic and diluted), for the quarter ended February 28, 2005 compared to operating income of $4,000 and a net loss of $78,000, or $0.02 loss per share (basic and diluted), for the quarter ended February 29, 2004. Operating revenues decreased by 1.7%, or approximately $107,000, to $6.2 million for the quarter ended February 28, 2005 compared to $6.3 million for the quarter ended February 29, 2004. This decrease is primarily due to the loss of one major customer in Florida, which was partially offset by revenue increases attributable to the Company’s Connecticut client and its CHIP programs in Texas.

     Healthcare operating expenses decreased by approximately $386,000, or 7.0%, for the quarter ended February 28, 2005 as compared to the quarter ended February 29, 2004. This decrease is primarily attributable to reductions in revenue along with clinical program improvements resulting in reduced costs of care, and secondarily to lower personnel costs resulting from restructuring our regional and corporate operations. Healthcare operating expense as a percentage of operating revenue decreased by 4.7%, from 87.0% for the quarter ended February 29, 2004 to 82.3% for the quarter ended February 28, 2005. This decrease is primarily due to the loss of one major contract in Florida that consistently returned a high medical loss ratio.

     General and administrative expenses increased by $47,000, or 5.9%, for the quarter ended February 28, 2005 as compared to the quarter ended February 29, 2004. This increase is due to expanded marketing efforts, greater utilization of certain professional services, and a one-time expense with respect to one unemployment tax matter. These increased costs were partially offset by savings in other areas, primarily in personnel and related costs, resulting from the Company’s restructuring of regional and corporate operations. General and administrative expense as a percentage of operating revenue increased from 12.6% for the quarter ended February 29, 2004 to 13.6% for the quarter ended February 28, 2005.

The Nine Months Ended February 28, 2005 Compared to the Nine Months Ended February 29, 2004:

     The Company reported operating income of $541,000 and net income of $406,000, or $0.09 earnings per basic share, and $0.08 earnings per diluted share, for the nine months ended February 28, 2005 compared to an operating loss of $64,000 and a net loss of $636,000, or $0.15 loss per share (basic and diluted), for the nine months

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ended February 29, 2004. Operating revenues decreased by 12.9%, or approximately $2.7 million, to $18.5 million for the nine months ended February 28, 2005 compared to $21.2 million for the nine months ended February 29, 2004. This decrease is primarily attributable to the loss of one major customer in Florida that accounted for $4.4 million of revenue during the nine months ended February 29, 2004, offset by increased revenues primarily in Connecticut and Texas.

     Healthcare operating expenses decreased by approximately $2.9 million, or 15.8%, for the nine months ended February 28, 2005 as compared to the nine months ended February 29, 2004. This decrease is primarily attributable to revenue reductions along with clinical program improvements resulting in reduced costs of care, and secondarily to lower personnel costs resulting from restructuring our regional and corporate operations. Healthcare operating expense as a percentage of operating revenue decreased by 3.0%, from 87.4% for the nine months ended February 29, 2004 to 84.4% for the nine months ended February 28, 2005. This decrease is primarily due to the loss of one major contract in Florida that consistently returned a high medical loss ratio.

     General and administrative expenses decreased by $402,000, or 15.0%, for the nine months ended February 28, 2005 as compared to the nine months ended February 29, 2004. This decrease is primarily attributable to a decrease in salaries and benefits resulting from the Company’s restructuring of regional and corporate operations and less usage of outside professional services. General and administrative expense as a percentage of operating revenue decreased from 12.6% for the nine months ended February 29, 2004 to 12.3% for the nine months ended February 28, 2005.

Seasonality of Business

     Historically, we have experienced consistently low utilization by members during our first fiscal quarter, which comprises the months of June, July, and August, and increased member utilization during our fourth fiscal quarter, which comprises the months of March, April and May. 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 first fiscal quarter and a negative impact on our gross margins and operating profits during the fourth quarter.

Concentration of Risk

     We currently have contracts with six health plans to provide behavioral healthcare services under commercial, Medicaid, and CHIP plans. These combined contracts represent approximately 71.7% and 46.5% of our operating revenue for the nine months ended February 28, 2005 and February 29, 2004, respectively. 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. The loss of one or more of these clients, without replacement by new business, could negatively affect the financial condition of the Company.

Liquidity and Capital Resources

     During the nine months ended February 28, 2005, net cash provided by continuing operations amounted to $639,000, while cash used in discontinued operations totaled $112,000. During the remaining months of fiscal 2005, we expect to pay $50,000 towards the $170,000 that remains to be paid in connection with our new information system, which will enable us to continue to meet the requirements of the Health Insurance Portability and Accountability Act of 1990 (“HIPAA”). We expect the balance of $120,000 to be paid in equal monthly installments of $5,000 beginning in fiscal 2006. The timing of all remaining installments is dependent on the success of meeting specific implementation goals at set times. Our expected total costs of this system are approximately $370,000 of which $200,000 was paid prior to February 28, 2005. Once implemented, this system will enable us to continue to meet HIPAA requirements, streamline our entire clinical and claims functions, and offer service improvements to our participating providers. A private placement of the Company’s common stock was completed in February 2005, generating approximately $730,000 in net cash proceeds. As of February 28, 2005, the Company had a working capital deficiency of $3.1 million and a stockholders’ deficit of $3.6 million. We are continuing to pursue sources of financing on terms that would support our future capital needs and provide available funds for working capital. We cannot state with any degree of certainty whether any required additional equity or debt financing will be available to us during the remaining months of fiscal 2005 and, if available, that the source of financing will be available on terms and conditions acceptable to us. These conditions raise substantial doubt about the Company’s ability to continue as a going concern, which is dependent upon our ability to continue to generate sufficient cash flow to meet our obligations on a timely basis, obtaining additional financing as may be required and, ultimately, to sustain an operating profit.

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     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 sustain profitability and achieve 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 $3.5 million claims payable amount reported as of February 28, 2005.

     In October 2004, we submitted a bid to the State of Connecticut in response to its request for proposal for administrative services only (“ASO”) in connection with a contract that is expected to begin by October 1, 2005. On January 7, 2005 the Company was informed that another bidder was selected to negotiate this ASO contract. If the State of Connecticut is successful in their negotiations with the selected bidder and the State of Connecticut continues with the implementation of its ASO plans, the Company’s existing contract may be terminated sometime during the Company’s second quarter of fiscal 2006, which begins September 1, 2005. This contract represented approximately 21.1%, or $3.9 million, of our operating revenue for the nine months ended February 28, 2005(see Note 4(2) – “Major Customers/Contracts” — to the unaudited, consolidated financial statements).

Critical Accounting Estimates

     Our discussion and analysis of our financial condition and results of operations is based upon the Company’s 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 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 accrued claims payable and revenue recognition involve our most significant judgments and estimates that are material to our consolidated financial statements (see Note 1 – “Summary of Significant Accounting Policies” to the unaudited, consolidated financial statements).

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     While we currently have market risk sensitive instruments, we have no significant exposure to changing interest rates as the interest rate on our long-term debt is fixed. Since November 10, 2004, the Company has held one marketable security classified as available-for-sale, which is subject to price risk. The fair market value of such investment as of February 28, 2005 was $17,000. We do not use derivative financial instruments for investment or trading purposes and the remainder of our investments is generally limited to cash deposits.

Item 4. Controls and Procedures

     Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There have been no changes in the Company’s internal controls over financial reporting identified in connection with this evaluation that occurred during the period covered by this report and that have affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

     From time to time, the Company and its subsidiaries may be parties to and their property subject to ordinary, routine litigation incidental to their business, in which case claims may exceed insurance policy limits and the Company or any one of its subsidiaries may have exposure to a liability that is not covered by insurance. Management is not aware of any such lawsuits that could have a material adverse impact on the Company’s consolidated financial statements.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     During the quarter ended February 28, 2005, the Company issued an aggregate of 4,000 shares of its common stock in exchange for marketing services provided to the Company by one vendor who received shares of the Company’s common stock in lieu of an aggregate of $8,000 of cash compensation. Of the total 4,000 shares issued during the quarter, we issued 1,000 shares on December 1, 2004; 1,000 shares on December 23, 2004; 1,000 shares on February 3, 2005; and 1,000 shares on February 16, 2005. The foregoing sales of securities were made in reliance upon the exemptions from the registration provisions of the Securities Act of 1933, as amended, provided for by Section 4(2) thereof for transactions not involving a public offering.

Item 3. Defaults Upon Senior Securities

     Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

     On March 11, 2005, the Company held its 2004 Annual Meeting of Stockholders. The meeting was held to elect one (1) Class III Director to the Company’s Board of Directors and to obtain stockholder approval to amend the Company’s 2002 Incentive Plan.

     Stockholders of the Company’s Common Stock, $.01 par value, of record as of January 21, 2005 (the “Record Date”) were entitled to notice of the Annual Meeting and to vote at such meeting. As of the Record Date, there were 4,798,547 shares of Common Stock entitled to vote at the meeting. Stockholders holding 4,426,635 shares of Common Stock, representing a majority of the Common Stock and representing a quorum (approximately 92.2% of the total shares entitled to vote), were represented at the meeting either in person or by proxy.

RESULTS OF ELECTION OF DIRECTORS

     Stockholders were asked to elect one (1) Class III Director to the Company’s Board of Directors. Set forth below is the name of the person nominated for and elected to serve on the Company’s Board of Directors for a term of three (3) years until the year 2007 Annual Meeting of Stockholders and until his successor is duly elected and qualified as well as the results of the voting for the nominee.

     The Board of Directors of the Company is now comprised of the following four (4) directors: Ms. Mary Jane Johnson, the sole Class I Director whose term expires at the 2006 Annual Meeting of Stockholders, Mr. Howard A. Savin and Mr. Eugene L. Froelich, each a Class II Director whose term expires at the 2005 Annual Meeting of Stockholders, and Mr. Robert J. Landis, the sole Class III Director whose term expires at the 2007 Annual Meeting of Stockholders.

RESULTS OF AMENDMENT OF THE COMPREHENSIVE CARE CORPORATION 2002 INCENTIVE PLAN

     Stockholders were asked to amend the Comprehensive Care Corporation 2002 Incentive Plan (“2002 Plan”) for use in connection with the issuance of stock, options and other stock purchase rights to executive officers, key employees, and other persons who render significant services to the Company and its subsidiaries. The holders of record of the following number of shares entitled to vote, voted for or against the Company’s proposal to adopt the 2002 Plan.

NUMBER OF SHARES

15

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

     As a result of receiving stockholder approval of the amendment to the 2002 Plan, the Company will reserve and register 500,000 shares of Common Stock for future issuance in the form of stock options to be granted to employees and other persons who render significant services to the Company.

Item 5. Other Information

     Not applicable.

Item 6. Exhibits

16

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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