Six Months Ended

(In thousands) June 30,
2009 2008
Operating activities
Net loss $ (1,872 ) $ (24,804 )
Adjustments to reconcile net loss to net cash used in operating activities:
(Income) loss from Discontinued Operations (10,449 ) 5,590
Depreciation and amortization 706 909
Amortization of debt discount and isuance costs included in interest expense 805 260
Other than temporary impairment on marketable securities 160 -
Provision for doubtful accounts 491 248
Deferred rent 26 (175 )
Share-based compensation expense 2,459 4,163
Loss on debt extinguishment 276 -
Fair value adjustment on warrant liability (84 ) (955 )
Impairment losses 1,113 358
Changes in current assets and liabilities, net of business acquired:
Receivables (66 ) (102 )
I/C with CompCare - (72 )
Prepaids and other current assets 66 895
Accounts payable (1,970 ) (22 )
Long term accrued liabilities 51 -
Net cash used in operating activities of continuing operations (8,288 ) (13,707 )
Net cash used in operating activities of discontinued operations (1,103 ) (5,027 )
Net cash used in operating activities (9,391 ) (18,734 )

Investing activities
Purchases of marketable securities $ - $ (46,520 )
Proceeds from sales and maturities of marketable securities - 61,384
Proceeds from sales of property and equipment 2 -
Proceeds from disposition of CompCare 1,500 -
Restricted cash - (47 )
Purchases of property and equipment (17 ) (698 )
Deposits and other assets (281 ) 139
Cost of intangibles - (132 )
Net cash provided by investing activities by continuing operations 1,204 14,126
Net cash provided by (used in) investing activities by discontinued operations 39 (21 )
Net cash provided by investing activities 1,243 14,105

Financing activities
Cost related to issuance of debt and warrants $ - $ (41 )
Proceeds from drawdown on UBS line of credit 1,663 -
Paydown on Short-Term Debt (1,429 ) -
Capital lease obligations (47 ) (71 )
Net cash provided by (used in) financing activities by continuing operations 187 (112 )
Net cash provided by (used in) financing activities by discontinued operations (73 ) 5
Net cash provided by (used in) financing activities 114 (107 )

	Nine Months Ended
(In thousands)	September 30,
	2009			2008
Operating activities
Net loss	$	(10,713	)	$	(31,081	)
Adjustments to reconcile net loss to net cash used in operating activities:
(Income) loss from Discontinued Operations	$	(10,449	)	$	5,449
Depreciation and Amortization		978			1,419
Amortization of debt discount and issuance costs included in interest expense		735			401
Other than temporary impairment on marketable securities		185			-
Gain on sale of marketable securities		(159	)		-
Provision for doubtful accounts		493			879
Deferred rent		88			(311	)
Share-based compensation expense		3,465			6,962
Loss on debt extinguishment		230			-
Change in fair value of warrant liabilities		4,684			(3,403	)
Impairment losses		1,113			-
Loss on disposition of assets		16			694
Changes in current assets and liabilities, net of business acquired:
Receivables		(52	)		(330	)
Prepaids and other current assets		169			778
Accounts payable, accrued compensation & other accrued liabilities		(1,734	)		434
Long Term Accrued Liabilities		6			-
Net cash used in operating activities of continuing operations		(10,945	)		(18,109	)
Net cash used in operating activities of discontinued operations		(1,103	)		(6,506	)
Net cash used in operating activities		(12,048	)		(24,615	)
Investing activities
Purchases of marketable securities		-			(65,197	)
Proceeds from sales and maturities of marketable securities		1,420			87,770
Proceeds from sales of property and equipment		13			17
Proceeds from disposition of CompCare		1,500			-
Restricted cash		24			(13	)
Purchases of property and equipment		(17	)		(899	)
Deposits and other assets		16			141
Cost of intangibles		-			(178	)
Net cash from by investing activities by continuing operations		2,956			21,641
Net cash from (used in) by investing activities by discontinued operations		39			(21	)
Net cash from by investing activities		2,995			21,620
Financing activities
Proceeds from the issuance of common stock and warrants		7,000			-
Costs related to the issuance of common stock and warrants		(683	)		-
Proceeds from drawdown on UBS line of credit		2,072			5,365
Paydown of Short-Term Debt		(3,014	)		-
Capital lease obligations		(74	)		(111	)
Net cash from financing activities by continuing operations		5,301			5,254
Net cash from (used in) financing activities by discontinued operations		(73	)		316
Net cash from financing activities		5,228			5,570

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HYTHIAM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(continued)

	Six Months Ended						Nine Months Ended
(In thousands)	June 30,						September 30,
	2009			2008			2009			2008

Net increase (decrease) in cash and cash equivalents for continuing operations		(6,897	)		307			(2,688	)		8,786
Net decrease in cash and cash equivalents for discontinued operations		(1,137	)		(5,043	)		(1,137	)		(6,211	)
Net decrease in cash and cash equivalents		(8,034	)		(4,736	)
Net increase (decrease) in cash and cash equivalents								(3,825	)		2,575
Cash and cash equivalents at beginning of period		10,893			11,149			10,893			11,149
Cash and cash equivalents at end of period	$	2,859		$	6,413		$	7,068		$	13,724

Supplemental disclosure of cash paid
Interest	$	144		$	292		$	197		$	346
Income taxes		30			3			77			16
Supplemental disclosure of non-cash activity
Common stock, options and warrants issued for outside services		189			471		$	168			1,665
Property and equipment acquired through capital leases and other
financing		-			6

See accompanying notes to the financial statements.

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HyHyt~~thiam,~~hiam, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1. Basis of Consolidation, Presentation and Going Concern

The accompanying unaudited interim condensed consolidated financial statements for Hythiam, Inc. (referred to herein as the Company, Hythiam, we, us or our) and our subsidiaries have been prepared in accordance with the Securities and Exchange Commission (SEC) rules for interim financial information and do not include all information and notes required for complete financial statements. In our opinion, all adjustments, consisting of normal recurring ~~accruals,~~adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto in our most recent Annual Report on Form 10-K/A, from which the December 31, 2008 balance sheet has been derived.

Our financial statements have been prepared on the basis that we will continue as a going concern. At September 30, 2009, cash and cash equivalents amounted to $7.1 million and we had working capital of approximately $1.9 million. Our working capital includes $9.2 million of auction-rate securities (ARS) that are currently illiquid. We have incurred significant operating losses and negative cash flows from operations since our inception. During the three and nine months ended September 30, 2009, our cash and cash equivalents used in operating activities amounted to $2.6 million and $12.0 million, respectively. We expect to continue to incur negative cash flows and net losses for at least the next twelve months. As of ~~June~~September 30, 2009, these conditions raised substantial doubt as to our ability to continue as a going concern. At June 30, 2009, cash, cash equivalents and current marketable securities amounted to $3.0 million and we had a working capital deficit of approximately $1.9 million. Our working capital deficit is impacted by $10.4 million of auction-rate securities (ARS) that are currently illiquid. During the three and six months ended June 30, 2009, our cash and cash equivalents used in operating activities amounted to $3.1 million and $9.4 million, respectively.

Our ability to fund our ongoing operations and continue as a going concern is dependent on raising additional capital, signing and generating revenue from new contracts for our Catasys® managed care programs and the success of management’s plans to increase revenue and continue to decrease expenses. InBeginning in the fourth quarter of 2008, and continuing in each of the quarters during 2009, management took actions that we expect will result in reducing annual operating expenses by ~~$10.2~~a total of approximately $15.9 million, compared to the third quarter of 2008, including $10.2 million from actions taken in the fourth quarter of 2008 and ~~we took~~$5.7 million from further actions taken in the first ~~and second~~three quarters of ~~2009 that resulted in additional annual savings of approximately $4.5 million.~~2009. In addition, management currently has plans for additional cost reductions ~~from the elimination of certain positions in our licensee and managed treatment center operations and related corporate staff and a reduction~~ in certain payroll, support and occupancy costs, consulting and other outside services if required. ~~Certain of these reductions have already been implemented as of the reporting date, resulting in additional estimated annual reductions in operating expenses totaling $1.2 million.~~ Also, we have renegotiated certain leasing and vendor agreements to obtain more favorable pricing and to restructure payment terms. We have also negotiated and plan to negotiate more favorable payment terms with vendors, which include negotiating settlements for outstanding liabilities. We have exited certain markets in our licensee operations that management has determined will not provide short-term profitability. We may exit additional markets in our licensee operations and further curtail or restructure our ~~company~~Company managed treatment center to reduce costs or if management determines that those markets will not provide short-term profitability. We do not expect the cost impact of such actions to be material. ~~Additionally,~~In September 2009, we signed an agreement with Ford® Motor Company (Ford) to provide the Catasys integrated substance dependence solution to Ford’s hourly employees in Michigan who are enrolled in the National PPO and who meet certain criteria, and we raised approximately $7 million in a registered direct equity placement with selected institutional investors. We are pursuing additional new Catasys contracts and additional capital. As of ~~July~~October 31, 2009, we had net cash on hand of approximately ~~$2.0~~$6.1 million. Excluding short-term debt and non-current accrued liability payments, our current plans call for expending cash at a rate of approximately $650,000 per month. At presently anticipated rates, which do not include management’s plans for additional cost reductions, we will need to obtain additional funds within ~~two~~the next eleven to ~~three~~twelve months to avoid drastically curtailing or ceasing our operations. We are currently in discussions with third parties regarding additional financing. There can be no assurance that we will be successful in our efforts to generate, increase, or maintain revenue; or raise necessary funds on acceptable terms or at all, and we may not be able to offset this by sufficient reductions in expenses and increases in revenue. If this occurs, we may be unable to meet our cash obligations as they become due and we may be required to further delay or reduce operating expenses and curtail our operations, which would have a material adverse effect on us, or we may be unable to continue as a going concern. This has raised substantial doubts from our auditors as to our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability of the carrying amount of the recorded assets or the amount of liabilities that might result from the outcome of this uncertainty.

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Pursuant to a Stock Purchase Agreement between WoodCliff (our wholly-owned subsidiary) and Core Corporate Consulting Group, Inc., dated January 14, 2009, and effective as of January 20, 2009, we have disposed of our entire interest in our controlled subsidiary, Comprehensive Care Corporation (CompCare), consisting of 14,400 shares of Class A Series Preferred Stock, and 1,739,130 shares of common stock of CompCare held by Woodcliff, for aggregate gross proceeds of $1.5 million. We did not present CompCare as “held for sale” at December 31, 2008 since all of the criteria specified by ~~SFAS 144,~~ ~~Accounting for the impairment or Disposal of Long-Lived Assets~~ ~~(SFAS 144),~~current accounting rules had not been met as of that date. The financial statements and footnotes present the operations, assets, liabilities and cash flows of CompCare as a discontinued operation. See Note 5, Discontinued Operations, for further discussion.

Based on the provisions of the management services agreement (MSA) between us and our managed professional medical corporation, we have determined that it constitutes a variable interest entity, and that we are the primary beneficiary as defined in current Financial Accounting Standards Board (FASB) ~~Interpretation No. 46R,~~ ~~Consolidation~~accounting rules relating to the consolidation of ~~Variable Interest Entities~~, ~~an Interpretation of Accounting Research Bulletin No. 51~~ ~~(FIN 46R)~~.variable interest entities. Accordingly, we are required to consolidate the revenue and expenses of our managed professional medical corporation. See Note 2Summary of Significant Accounting Policies under the header Management Service Agreements for more discussion.

All intercompany transactions and balances have been eliminated in consolidation. Certain amounts in the consolidated financial statements for the same periods in 2008 have been reclassified to conform to the presentation for the three and ~~six~~nine months ended ~~June~~September 30, 2009.

We have evaluated subsequent events through November 9, 2009, the filing date of this quarterly report.

Note 2. Summary of Significant Accounting Policies

Revenue Recognition

Our healthcare services revenues to date have been primarily derived from licensing our PROMETA Treatment Program and providing administrative services to hospitals, treatment facilities and other healthcare providers, and from revenues generated by our managed treatment centers. We record revenues earned based on the terms of our licensing and management contracts, which requires the use of judgment, including the assessment of the collectability of receivables. Licensing agreements typically provide for a fixed fee on a per-patient basis, payable to us following the providers’ commencement of the use of our program to treat patients. For revenue recognition purposes, we treat the program licensing and related administrative services as one unit of accounting. We record the fees owed to us under the terms of the agreements at the time we have performed substantially all required services for each use of our program, which for the significant majority of our license agreements to date is in the period in which the provider begins using the program for medically directed and supervised treatment of a patient and, in other cases, is at the time that medical treatment has been completed.

The revenues of our managed treatment center, which we include in our consolidated financial statements, are derived from charging fees directly to patients for medical treatments, including the PROMETA Treatment Program. Revenues from patients treated at the managed treatment center are recorded based on the number of days of treatment completed during the period as a percentage of the total number of treatment days for the PROMETA Treatment Program. Revenues relating to the continuing care portion of the PROMETA Treatment Program are deferred and recorded over the period during which the continuing care services are provided.

Cost of Healthcare Services

Cost of healthcare services represent direct costs that are incurred in connection with licensing our treatment programs and providing administrative services in accordance with the various technology license and services agreements, and are associated directly with the revenue that we recognize. Consistent with our revenue recognition policy, the costs associated with providing these services are recognized, for a significant majority of our agreements, in the period in which patient treatment commences, and in other cases, at the time treatment has been completed. Such costs include royalties paid for the use of the PROMETA Treatment Program for patients treated by all licensees, and direct labor costs, continuing care expense, medical supplies and program medications for patients treated at the managed treatment center.

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Comprehensive Income (Loss)

Our comprehensive loss is as follows:

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
(In thousands)	June 30,						June 30,						September 30,						September 30,
	2009			2008			2009			2008			2009			2008			2009			2008
Net loss	$	(4,926	)	$	(14,093	)	$	(1,872	)	$	(24,804	)	$	(8,842	)	$	(6,277	)	$	(10,714	)	$	(31,081	)
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable securities available for sale		27			(210	)		453			(776	)		14			(316	)		467			(1,092	)
Reclassification adjustment for Net Realized Gain included in loss from continuing operations														(30	)		-			(30	)		-
Comprehensive loss	$	(4,899	)	$	(14,303	)	$	(1,419	)	$	(25,580	)	$	(8,858	)	$	(6,593	)	$	(10,277	)	$	(32,173	)

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priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level Input:		Input Definition:
Level I		Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II		Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following table summarizes fair value measurements by level at ~~June~~September 30, 2009 for assets and liabilities measured at fair value on a recurring basis:

(Dollars in thousands) Level I Level II Level III Total
Certificates of deposit (1) $ 164 $ - $ - $ 164
Variable auction-rate securities - - 10,365 10,365
Certificates of deposit (2) 133 - - 133
Total assets $ 297 $ - $ 10,365 $ 10,662

Warrant liabilities $ - $ 72 $ - $ 72
Total liabilities $ - $ 72 $ - $ 72

(1) included in marktable securities on our consolidated balance sheets
(2) included in deposits and other assets on our consolidated balance sheets

(Dollars in thousands)	Level I		Level II		Level III		Total
Auction-rate securities	$	-	$	-	$	9,209	$	9,209
Certificates of deposit (1)		133		-		-		133
Total assets	$	133	$	-	$	9,209	$	9,342

Warrant liabilities	$	-	$	-	$	6,112	$	6,112
Total liabilities	$	-	$	-	$	6,112	$	6,112

(1) included in deposits and other assets on our consolidated balance sheets

~~Liabilities measured at market value on a recurring basis include warrant liabilities resulting from recent debt and equity financing. In accordance with EITF 00-19,~~ ~~Accounting for Derivative~~ Financial ~~Instruments Indexed to, and Potentially Settled~~instruments classified as Level 3 in ~~a Company’s Own Stock~~ ~~(EITF 00-19),~~ the warrant liabilities are being marked to market each quarter-end until they are completely settled. The warrants are valued using the Black-Scholes method, using assumptions consistent with our application of SFAS 123R. See ~~Warrant Liabilities~~ ~~below.~~

~~All of our assets measured at~~ fair value ~~on a recurring basis using significant Level III inputs~~hierarchy as of ~~June~~September 30, 2009 ~~were ARS.~~represent our investment in ARS, in which management has used at least one significant unobservable input in the valuation model. See discussion above in Marketable Securities for additional information on our ARS, including a description of the securities, a discussion of the uncertainties relating to their liquidity and our accounting ~~treatment under SFAS 115. The following table summarizes our fair value measurements using significant Level III inputs, and changes therein, for the six months ended June 30, 2009:~~

(Dollars in thousands) Level III
Balance as of December 31, 2008 $ 10,072
Transfers in/out of Level III -
Purchases and sales, net -
Net unrealized gains (losses) 453
Net realized gains (losses)* (160 )
Balance as of June 30, 2009 $ 10,365

* Reflects other-than-temporary loss on auction-rate securities.

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treatment. As discussed above, ~~there have been continued auction failures with our~~the market for ARS ~~portfolio.~~effectively ceased when the vast majority of auctions began to fail in February 2008. As a result, quoted prices for our ARS did not exist as of ~~June~~September 30, 2009 and, accordingly, we concluded that Level 1 inputs were not available and unobservable inputs were used. We determined that use of a valuation model was the best available technique for measuring the fair value of our ARS portfolio and we based our estimates of the fair value using valuation models and methodologies that utilize an income-based approach to estimate the price that would be received to sell our securities in an orderly transaction between market participants. The estimated price was derived as the present value of expected cash flows over an estimated period of illiquidity, using a risk adjusted discount rate that was based on the credit risk and liquidity risk of the securities.

~~In making our determination whether losses are considered to be “other-than-temporary” declines in value, we consider the following factors at each quarter-end reporting period:~~

●	~~How long and by how much the fair value of the ARS securities have been below cost~~

●	~~The financial condition of the issuers~~

●	~~Any downgrades of the securities by rating agencies~~

●	~~Default on interest or other terms~~

●	~~Whether it is more likely than not that we will be required to sell the ARS before the recover in value~~

In accordance with FSP FAS 115-2 and FAS 124-2, other-than-temporary declines in value are reflected as a non-operating expense in our Consolidated Statement of Operations because it is more likely than not that we will be required to sell the ARS before the recover in value, whereas subsequent increases in value are reflected in Stockholders’ Equity on our Consolidated Balance sheet.

Based on the valuation models and methodologies, and consideration of other factors, for the three and six months ended June 30, 2009, we recognized approximately $28,000 and $160,000, respectively, in other-than-temporary decline in value related to our investment in certain ARS. We also recognized temporary increases in value of approximately $27,000 and $453,000 related to our investment in certain other ARS for the three and six months ended June 30, 2009, respectively. While our valuation model was based on both Level II (credit quality and interest rates) and Level III inputs, we determined that the Level III inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates and estimated periods of illiquidity.

~~These securities will continue~~Liabilities measured at market value on a recurring basis include warrant liabilities resulting from recent debt and equity financing. In accordance with current accounting rules, the warrant liabilities are being marked to ~~be analyzed~~market each ~~reporting period for other-than-temporary impairment factors. We may be required to adjust~~quarter-end until they are completely settled. The warrants are valued using the ~~carrying~~Black-Scholes method, using both observable and unobservable inputs and assumptions consistent with those used in our estimate of fair value of ~~these investments through~~employee stock options. See Warrant Liabilities below.

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The following table summarizes our fair value measurements using significant Level III inputs, and changes therein, for the nine months ended September 30, 2009:

						Level III
		Level III				Warrant
(Dollars in thousands)		ARS				Liabilities
Balance as of December 31, 2008		$	10,072		Balance as of December 31, 2008	$	-
	Transfers in/out of Level III		-		Transfers in/out of Level III		156
	Net purchases (sales)		(1,275	)	Initial valuation of warrant liabilities		1,273	(b)
	Net unrealized gains (losses)		437		Change in fair value of
	Net realized gains (losses)		(25	) (a)	warrant liabilities		4,683
Balance as of September 30, 2009		$	9,209		Balance as of September 30, 2009	$	6,112

(a)	Includes other-than-temporary loss on auction-rate securities.
(b)	Represents initial valuation of warrants issued in conjunction with the Registered Direct Placement in
	September 2009 and adjustment related to the modification of the Highbridge Senior Secured Note in
	August 2009.

As reflected in the table above, net sales were $1.3 million as of September 30, 2009 and represent proceeds realized from the redemption of a certain ARS at par by the issuer, resulting in a gain of approximately $160,000. The net realized gains (losses) include $185,000 of other-than-temporary losses, partially offset by the gain referred to above.

Assets that are measured at fair value on a non-recurring basis include intellectual property, with a carrying amount of $2.7 million at September 30, 2009. In accordance with FASB’s accounting rules for intangible assets, we perform an impairment test each quarter and intangible assets were written down to their implied fair value at March 31, 2009, resulting in an impairment charge ~~if any loss is considered to be other than temporary. If our efforts to raise additional capital discussed~~of $355,000 during the three months. See discussion in ~~Note 1 are successful, we believe that we will not require access to the underlying ARS prior to June 2010.~~Intangible Assets below.

Fair Value Information about Financial Instruments Not Measured at Fair Value

FASB ~~Statement 107,~~ ~~Disclosures about Fair Value~~rules regarding fair value disclosures of ~~Financial Instruments~~financial instruments requires disclosure of fair value information about certain financial instruments for which it is practical to estimate that value. The carrying amounts reported in our balance sheet for cash, cash equivalents, marketable securities, accounts receivable, notes receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying values of our outstanding short and long-term debt were ~~$10.9~~$9.6 million and ~~$12.2~~$9.8 million and the fair values were ~~$10.5~~$9.2 million and ~~$10.7~~$9.6 million as of ~~June~~September 30, 2009 and December 31, 2008, respectively. Considerable judgment is required to develop estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Intangible Assets

As of ~~June~~September 30, 2009, the gross and net carrying amounts of intangible assets that are subject to amortization are as follows:

Gross Amortization
(In thousands) Carrying Accumulated Net Period
Amount Amortization Balance (in years)
Intellectual property $ 4,360 $ (1,584 ) $ 2,776 12-18

	Gross							Amortization
(In thousands)	Carrying		Accumulated			Net		Period
	Amount		Amortization			Balance		(in years)
Intellectual property	$	4,360	$	(1,643	)	$	2,717	12-18

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During the three and ~~six~~nine months ended ~~June~~September 30, 2009 we did not acquire any new intangible assets and at ~~June~~September 30, 2009, all of our intangible assets consisted of intellectual property, which is not subject to renewal or extension. ~~In accordance with SFAS 144,~~ ~~Accounting for the impairment or Disposal of Long-Lived Assets~~ ~~(SFAS 144), we~~We performed an impairment test on intellectual property as of March 31, 2009 and after considering

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numerous factors, including a valuation of the intellectual property by an independent third party, we determined that the carrying value of certain intangible assets was not recoverable and exceeded the fair value and we recorded an impairment charge totaling $355,000 for these assets as of March 31, 2009. These charges included $122,000 for intangible assets related to our managed treatment center in Dallas and $233,000 related to intellectual property for additional indications for the use of the PROMETA Treatment Program that isare currently non-revenue generating. In its valuation, the independent third-party valuation firm relied on the “relief from royalty” method, as this method was deemed to be most relevant to the intellectual property assets of the Company. We determined that the estimated useful lives of the remaining intellectual property properly reflected the current remaining economic useful lives of the assets. We also performed anadditional impairment ~~test~~tests on intellectual property ~~as of~~at June 30 and September 30, 2009 and determined that no additional impairment ~~charge was~~charges were necessary.

Estimated remaining amortization expense for intangible assets for the current year and each of the next five years ending December 31 is as follows:

(In thousands)
Year Amount
2009 $ 116
2010 $ 233
2011 $ 233
2012 $ 233
2013 $ 233

(In thousands)
Year	Amount
2009	$	58
2010	$	234
2011	$	234
2012	$	234
2013	$	234

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to seven years for furniture and equipment. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related lease term, which is typically five to seven years.

During the three months ended March 31, 2009, we performed an impairment test on all property and equipment, including capitalized software related to our ~~Catasys~~Behavioral Health segment. As a result of this testing, we determined that the carrying value of this asset was not recoverable and exceeded its fair value and we wrote off the $758,000 net book value of this software as of March 31, 2009. This impairment charge was recognized in operating expenses in our consolidated statements of ~~operations in accordance with SFAS 144.~~operations. We also performed an impairment ~~test~~tests on all property and equipment ~~as of~~ June 30 ~~3009~~and September 30, 2009 and determined that no additional impairment charge was necessary.

Variable Interest Entities

Generally, an entity is ~~subject to FIN 46R and is called~~defined as a Variable Interest Entity (VIE) under current accounting rules if it has (a) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (b) equity investors that cannot make significant decisions about the entity’s operations, or that do not absorb the expected losses or receive the expected returns of the entity. When determining whether an entity that is a business qualifies as a VIE, we also consider whether (i) we participated significantly in the design of the entity, (ii) we provided more than half of the total financial support to the entity, and (iii) substantially all of the activities of the VIE either involve us or are conducted on our behalf. A VIE is consolidated by its primary beneficiary, which is the party that absorbs or receives a majority of the entity’s expected losses or expected residual returns.

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As discussed under the heading Management Services Agreements below, we have a MSA with a managed medical corporation. Under this MSA, the equity owner of the affiliated medical group has only a nominal equity investment at risk, and we absorb or receive a majority of the entity’s expected losses or expected residual returns. We participate significantly in the design of this MSA. We also agree to provide working capital loans to allow for the medical group to pay for its obligations. Substantially all of the activities of this managed medical corporation either involve us or are conducted for our benefit, as evidenced by the facts that (i) the operations of the managed

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medical corporation are conducted primarily using our licensed protocols and (ii) under the MSA, we agree to provide and perform all non-medical management and administrative services for the medical group. Payment of our management fee is subordinate to payments of the obligations of the medical group, and repayment of the working capital loans is not guaranteed by the equity owner of the affiliated medical group or other third party. Creditors of the managed medical corporation do not have recourse to our general credit.

Based on the design and provisions of these MSA and the working capital loans provided to the medical group, we have determined that the managed medical corporation is a VIE, and that we are the primary beneficiary as defined in ~~FIN 46R.~~the current accounting rules. Accordingly, we are required to consolidate the revenues and expenses of the managed medical corporation.

Management Services Agreements

We have executed MSAs with medical professional corporations and related treatment centers, with terms generally ranging from five to ten years and provisions to continue on a month-to-month basis following the initial term, unless terminated for cause. In May 2009, we terminated the MSAs with a medical professional corporation and a managed treatment center located in Dallas, Texas “for cause” and because the Company had fully met its funding requirements with respect to the MSAs. As a result, we no longer consolidate these entities as VIEs. In connection with the termination of these MSAs, we determined that the carrying value of certain assets was not recoverable and we recorded an impairment charge totaling $151,000 ~~for~~during the ~~three months~~quarter ended June 30, 2009.

Under the remaining MSA, we license to the treatment center the right to use our proprietary treatment programs and related trademarks and provide all required day-to-day business management services, including, but not limited to:

●	general administrative support services;

●	information systems;

●	recordkeeping;

●	scheduling;

●	billing and collection;

●	marketing and local business development; and

●	obtaining and maintaining all federal, state and local licenses, certifications and regulatory permits

The treatment center retains the sole right and obligation to provide medical services to its patients and to make other medically related decisions, such as the choice of medical professionals to hire or medical equipment to acquire and the ordering of drugs.

In addition, we provide medical office space to the treatment center on a non-exclusive basis, and we are responsible for all costs associated with rent and utilities. The treatment center pays us a monthly fee equal to the aggregate amount of (a) our costs of providing management services (including reasonable overhead allocable to the delivery of our services and including start-up costs such as pre-operating salaries, rent, equipment, and tenant improvements incurred for the benefit of the medical group, provided that any capitalized costs will be amortized over a five year period), (b) 10%-15% of the foregoing costs, and (c) any performance bonus amount, as determined by the treatment center at its sole discretion. The treatment center’s payment of our fee is subordinate to payment of the treatment center’s obligations, including physician fees and medical group employee compensation.

We have also agreed to provide a credit facility to the treatment center to be available as a working capital loan, with interest at the Prime Rate plus 2%. Funds are advanced pursuant to the terms of the MSA described above. The notes are due on demand, or upon termination of the respective MSA. At ~~June~~September 30, 2009, there was one outstanding credit facility under which ~~$8.4~~$8.6 million was outstanding. Our maximum exposure to loss could exceed this amount, and cannot be quantified as it is contingent upon the amount of losses incurred by the respective treatment center.

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Generally, an entity is subject to FIN 46R and is called a Variable Interest Entity (VIE) if it has (a) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (b) equity investors that cannot make significant decisions about the entity’s operations, or that do not absorb the expected losses or receive the expected returns of the entity. When determining whether an entity that is a business qualifies as a VIE, we also consider whether (i) we participated significantly in the design of the entity, (ii) we provided more than half of the total financial support to the entity, and (iii) substantially all of the activities of the VIE either involve us or are conducted on our behalf. A VIE is consolidated by its primary beneficiary, which is the party that absorbs or receives a majority of the entity’s expected losses or expected residual returns.

Under the MSA, the equity owner of the affiliated treatment center has only a nominal equity investment at risk, and we absorb or receive a majority of the entity’s expected losses or expected residual returns. We participate significantly in the design of the MSA. We also agree to provide working capital loans to allow for the treatment center to pay for its obligations. Substantially all of the activities of the managed medical corporations either involve

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us or are conducted for our benefit, as evidenced by the facts that (i) the operations of the managed medical corporation are conducted primarily using our licensed protocols and (ii) under the MSA, we agree to provide and perform all non-medical management and administrative services for the respective the treatment center. Payment of our management fee is subordinate to payments of the obligations of the treatment center, and repayment of the working capital loans is not guaranteed by the equity owner of the affiliated the treatment center or other third party. Creditors of the managed medical corporations do not have recourse to our general credit. Based on these facts, we have determined that the managed medical corporations are VIEs and that we are the primary beneficiary as defined in ~~FIN 46R.~~the current accounting rules. Accordingly, we are required to consolidate the assets, liabilities, revenues and expenses of the managed treatment centers.

The amounts and classification of assets and liabilities of the VIEs included in our Consolidated Balance Sheets at ~~June~~September 30, 2009 and December 31, 2008 are as follows:

	June 30,		December 31,		September 30,		December 31,
(Dollars in thousands)	2009		2008		2009		2008
Cash and cash equivalents	$	13	$	274	$	1	$	274
Receivables, net		9		281		8		281
Prepaids and other current assets		1		3		-		3
Total assets	$	23	$	558	$	9	$	558

Accounts payable		8	$	30		18	$	30
Intercompany loans		8,447		9,238		8,848		9,238
Accrued compensation and benefits		21		54		7		54
Accrued liabilities		4		13		14		13
Total liabilities	$	8,480	$	9,335	$	8,887	$	9,335

Warrant Liabilities

We have issued warrants in connection with the registered direct ~~placement~~placements of our common stock in November 2007 and September 2009, and the amended and restated Highbridge senior secured note in July 2008. The ~~warrants~~warrant agreements include provisions that require us to record them as a liability, at fair value, aspursuant to FASB accounting rules, including provisions in some warrants that protect the holders from declines in the Company’s stock price and a ~~liability in accordance with EITF 00-19, with subsequent~~requirement to deliver registered shares upon exercise, which is considered outside the control of the Company. The warrant liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of ~~operations.~~operations, until they are completely settled or expire. The fair value of the warrants is determined each reporting period using athe Black-Scholes option pricing model, and is affected by changes in inputs to that model including our stock price, expected stock price volatility, interest rates and expected term.

For the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, we recognized ~~non-operating~~ gains/(losses) of ~~$15,000, $84,000,~~ ($~~1.3 million)~~4.8) million, ($4.7) million, $2.4 million and ~~$1.0~~$5.7 million, respectively, related to the revaluation of our warrant liabilities. ~~We will continue~~The losses in 2009 resulted mainly from a $5.4 million charge for anti-dilution adjustments to ~~re-measure~~1.9 million warrants outstanding from the November 2007 registered direct placement, triggered by the terms of the September 2009 registered direct financing. The adjustment resulted in an increase to the number of warrant ~~liabilities at fair value each quarter-end until they are completely settled or expire.~~outstanding totaling 12.4 million warrants and a decrease in the exercise price from $5.75 to $0.75 per share, due to the relative lower offering price in the September 2009 registered direct financing.

Recent Accounting Pronouncements

Recently Adopted

On September 30, 2009, we adopted changes issued by the FASB to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting Standards CodificationTM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange

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Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates (ASU). ASU’s will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on our consolidated financial statements.

On July 1, 2009, we adopted changes issued by the FASB to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued, otherwise known as “subsequent events.” Specifically, these changes set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of these changes had no impact on our consolidated financial statements as management already followed a similar approach prior to the adoption of this new guidance. We have evaluated subsequent events through November 9, 2009, the filing date of this quarterly report, and there is no material impact on to our consolidated financial statements.

On June 30, 2009, we adopted changes issued by the FASB to fair value disclosures of financial instruments. These changes require a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such disclosures include the fair value of all financial instruments, for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position; the related carrying amount of these financial instruments; and the method(s) and significant assumptions used to estimate the fair value. Other than the required disclosures (see above “Fair Value Measurements”), the adoption of these changes had no impact on our consolidated financial statements.

On June 30, 2009, we adopted changes issued by the FASB to fair value accounting. These changes provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and includes guidance for identifying circumstances that indicate a transaction is not orderly. This guidance is necessary to maintain the overall objective of fair value measurements, which is, that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The adoption of these changes had no impact on our consolidated financial statements.

On June 30, 2009, we adopted changes issued by the FASB to the recognition and presentation of other-than-temporary impairments. These changes amend existing other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The adoption of these changes had no impact on our consolidated statements.

On January 1, 2009, we adopted changes issued by the FASB to accounting for business combinations. While retaining the fundamental requirements of accounting for business combinations, including that the purchase method be used for all business combinations and for an acquirer to be identified for each business combination, these changes define the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. These changes require an acquirer in a business combination, including business combinations achieved in stages (step acquisition), to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This guidance also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. Additionally, these changes require acquisition-related costs to be expensed in the period in which the costs are incurred and the services are received instead of including such costs as part of the acquisition price. We have not engaged in any acquisitions since this new guidance was issued, so there has been no impact to our consolidated financial statements.

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~~Recent Accounting Pronouncements~~On January 1, 2009, we adopted changes issued by the FASB in December 2007 to accounting for business combinations. These changes apply to all assets acquired and liabilities assumed in a business combination that arise from certain contingencies and requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be recognized initially at fair value; (iii) subsequent measurements of assets and liabilities arising from contingencies be based on a systematic and rational method depending on their nature and contingent consideration arrangements be measured subsequently; and (iv) disclosures of the amounts and measurement basis of such assets and liabilities and the nature of the contingencies. We have not engaged in any acquisitions since this new guidance was issued, so there has been no impact to our consolidated financial statements.

~~Recently Adopted~~On January 1, 2009, we adopted changes issued by the FASB to accounting for intangible assets. These changes amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset in order to improve the consistency between the useful life of a recognized intangible asset outside of a business combination and the period of expected cash flows used to measure the fair value of an intangible asset in a business combination. The adoption of these changes did not have a material impact on our consolidated results of operations, financial position or cash flows, and the required disclosures regarding our intangible assets are included above under the heading Intangible Assets.

On January 1, 2009, we adopted changes issued by the FASB to consolidation accounting and reporting that establish accounting and reporting for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance defines a non-controlling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. These changes require, among other items, that a non-controlling interest be included in the consolidated balance sheet within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and non-controlling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and non-controlling interest all on the consolidated statement of operations; and if a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The adoption of these changes had no impact on our consolidated financial statements.

On January 1, 2009, we adopted changes issued by the FASB to fair value accounting and reporting as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the consolidated financial statements on at least an annual basis. These changes define fair value, establish a framework for measuring fair value in GAAP, and expand disclosures about fair value measurements. This guidance applies to other GAAP that require or permit fair value measurements and is to be applied prospectively with limited exceptions. The adoption of these changes, as it relates to nonfinancial assets and nonfinancial liabilities, had no impact on our consolidated financial statements. These provisions will be applied at such time a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of these changes.

In December 2008, the FASB issued ~~FSP FAS 140-4 and FASB Interpretation No. (FIN) 46R-8,~~ ~~Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. This FSP amends FASB Statement No. 140~~ ~~Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities~~ ~~to require~~changes requiring public entities to provide additional disclosures about transfers of financial assets. It also ~~amends FIN 46,~~ ~~Consolidation of Variable Interest Entities~~ ~~as revised to require~~requires public ~~enterprises~~entities to provide additional disclosures about their involvement with VIEs. ~~FSP FAS 140-4 and FIN 46(R)-8 are effective~~These changes were adopted for the Company's fiscal year ending December 31, 2008. We are required to consolidate the revenues and expenses of the managed medical corporations. The financial results of managed treatment centers are included in our consolidated financial statements under accounting standards applicable to VIEs, and the required disclosures regarding our involvement with VIEs are included above under the heading Variable Interest Entities.

~~In December 2007,~~On April 1, 2009 we adopted changes issued by the FASB ~~issued SFAS No. 141(R),~~ ~~Business Combinations~~ ~~(SFAS 141(R)). SFAS 141(R) replaces SFAS No. 141,~~ ~~Business Combinations~~ (SFAS 141), which retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS 141(R) expands on the disclosures previously required by SFAS 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. We adopted this statement as of January 1, 2009, and it did not have a material impact on our consolidated financial statements.

~~In April 2008, the FASB issued FSP FAS 142-3,~~ ~~Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,~~ ~~Goodwill and Other Intangible Assets~~. This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other generally accepted accounting principles in the United States (GAAP). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The adoption of this statement did not have a material impact on our consolidated results of operations, financial position or cash flows, and the required disclosures regarding our intangible assets are included above under the heading ~~Intangible Assets.~~

~~In December 2007, the FASB issued SFAS No. 160,~~ ~~Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51~~ (SFAS 160). SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company's balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company's income statement. SFAS 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. We adopted SFAS 160 for the fiscal year begun January 1, 2009, and it did not have a material impact on our financial position, results of operations or cash flows.

~~In May 2008, the FASB issued SFAS No. 162,~~ ~~The Hierarchy of Generally Accepted Accounting Principles~~ (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 became effective November 15, 2008. We adopted SFAS 162 for the fiscal year begun January 1, 2009, and it did not have a material impact on our financial position, results of operations or cash flows.

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determining whether a financial instrument or an embedded feature is indexed to an ~~issuer’s~~entity’s own stock and thus able to qualify for the ~~SFAS 133 paragraph 11(a)~~derivative accounting scope exception. ~~EITF 07-5 was effective for the first annual reporting period beginning after December 15, 2008, and early adoption was prohibited. EITF 07-5~~These changes did not have any impact on our consolidated financial ~~position, results of operations or cash flows.~~statements.

Recently Issued

In ~~April~~August 2009, the FASB issued ASU 2009-15, which changes the ~~following three FSPs intended~~fair value accounting for liabilities. These changes clarify existing guidance that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to ~~provide additional application guidance and enhance disclosures regarding~~measure fair value using either a valuation technique that uses a quoted price of either a similar liability or a quoted price of an identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of fair value measurements, ~~and impairments of securities:~~

●	~~FSP FAS 115-2 and FAS 124-2,~~ ~~Recognition and Presentation of Other-Than-Temporary Impairments~~;

●	~~FSP FAS 107-1 and APB 28-1,~~ ~~Interim Disclosures about Fair Value of Financial Instruments; and~~

●	~~FSP FAS 157-4,~~ ~~Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly~~

~~These FSPs were effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted the FSPs~~such as an income approach (e.g., present value technique). This guidance also states that both a quoted price in an active market for the ~~interim period ended June 30, 2009. Because we will more likely than not be required~~identical liability and a quoted price for the identical liability when traded as an asset in an active market when no adjustments to ~~sell our ARS before they recover in value, these FSPs had no impact on our financial position, results of operations or cash flows. See above under~~ the ~~headings~~ ~~Marketable Securities~~ ~~and~~ ~~Fair Value Measurements~~ ~~for additional disclosures required by these FSPs.~~

~~In May 2009, the FASB issued SFAS 165,~~ ~~Subsequent Events. SFAS 165 establishes principles and requirements for subsequent events including (i) the specification~~quoted price of the period after the balance sheet date during which management shall evaluate events or transactions for potential recognition or disclosure in the financial statements, (ii) the circumstances under which such events or transactions would be recognized or disclosed, and (iii) the disclosures that an entity shall make about such events or transactions. SFAS 165 wasasset are required are Level 1 fair value measurements. This ASU is effective ~~for annual reporting periods ending after June 15, 2009. We adopted SFAS 165 for the interim period ended June 30, 2009, and it did~~on January 1, 2010. Adoption of this ASU will not have a material impact on our consolidated financial statements.

~~Recently Issued~~

In June 2009, the FASB issued ~~SFAS 167, Amendments~~changes to ~~FASB Interpretation No. 46(R). SFAS 167~~ ~~amends certain requirements~~the accounting for variable interest entities. These changes require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of ~~FASB Interpretation 46(R),~~ ~~Consolidation~~whether an enterprise is the primary beneficiary of ~~Variable Interest Entities,~~ a variable interest entity; to ~~improve~~eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial ~~reporting by enterprises involved~~statements with ~~VIEs.~~ ~~SFAS 167 will be~~more transparent information about an enterprise’s involvement in a variable interest entity. These changes become effective for ~~annual reporting periods ending after November 15, 2009.~~us beginning on January 1, 2010. The adoption of ~~SFAS 167~~this change is not expected to have a material impact on our consolidated financial statements.

In June 2009, the FASB issued ~~SFAS 168, The FASB Accounting Standards Codification and~~changes to the ~~Hierarchy of Generally Accepted Accounting Principles. SFAS 168~~ ~~identifies the sources of~~ accounting ~~principles and the framework~~ for ~~selecting the principles used in the preparation~~transfers of financial ~~statements~~assets. These changes remove the concept of ~~nongovernmental~~a qualifying special-purpose entity and remove the exception from the application of variable interest accounting to variable interest entities that are ~~presented~~qualifying special-purpose entities; limits the circumstances in ~~conformity with GAAP.~~ ~~SFAS 168~~which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. These changes will bebecome effective for ~~interim and annual reporting periods ending after September 15, 2009. The adoption of SFAS 168 is not expected to have a material impact~~us on ~~our consolidated financial statements.~~January 1, 2010.

Note 3.�� Segment Information

We manage and report our operations through two business segments: Behavioral Health and Healthcare Services. During the three and ~~six~~nine months ended ~~June~~September 30, 2009, we revised our segments to reflect the disposal of CompCare (see Note 5, Discontinued Operations), and to properly reflect how our segments are currently managed. Our behavioral health managed care services segment, which had been comprised entirely of the operations of CompCare, is now presented in discontinued operations and is not a reportable segment. The Healthcare Services segment has been segregated into Behavioral Health, which includes our Catasys programs, and Healthcare Services. Prior years have been restated to reflect this revised presentation.

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Behavioral Health

Catasys’s integrated substance dependence solution combines innovative medical and psychosocial treatments with elements of traditional disease management and ongoing member support to help organizations treat and manage substance dependent populations to impact both the medical and behavioral health costs associated with substance dependence and the related co-morbidities.

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We are currently marketing our Catasys integrated substance dependence solutions to managed care health plans for reimbursement on a case rate or monthly fee, which involves educating third party payors on the disproportionately high cost of their substance dependent population and demonstrating the potential for improved clinical outcomes and reduced cost associated with using our Catasys programs.

Healthcare Services

Our Healthcare Services segment is focused on delivering solutions for those suffering from alcohol, cocaine, methamphetamine and other substance dependencies by researching, developing, licensing and commercializing innovative physiological, nutritional, and behavioral treatment programs. Treatment with our PROMETA Treatment Programs, which integrate behavioral, nutritional, and medical components, are available through physicians and other licensed treatment providers who have entered into licensing agreements with us for the use of our treatment programs. Also included in this segment is a licensed and managed treatment center, which offers a range of addiction treatment services, including the PROMETA Treatment Programs for dependencies on alcohol, cocaine and methamphetamines.

Our healthcare services segment also comprises results from international operations in the prior periods; however, these operating segments are not separately reported as they did not meet any of the quantitative thresholds under ~~SFAS No. 131,~~ ~~Disclosures about Segments of an Enterprise and Related Information~~.current accounting rules regarding segment disclosures.

We evaluate segment performance based on total assets, revenue and income or loss before provision for income taxes. Our assets are included within each discrete reporting segment. In the event that any services are provided to one reporting segment by the other, the transactions are valued at the market price. No such services were provided during the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008. Summary financial information for our two reportable segments is as follows:

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
(in thousands)	June 30,						June 30,						September 30,						September 30,
	2009			2008			2009			2008			2009			2008			2009			2008

Healthcare services
Revenues	$	371		$	2,031		$	1,078		$	4,037		$	268		$	1,258		$	1,346		$	5,295
Loss before provision for income taxes		(4,290	)		(8,333	)		(9,985	)		(16,080	)		(7,978	)		(4,974	)		(17,963	)		(21,517	)
Assets *		18,229			50,205			18,229			50,205			20,834			43,587			20,834			43,587

Behavioral health
Revenues	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Loss before provision for income taxes		(634	)		(1,845	)		(2,326	)		(3,117	)		(861	)		(1,438	)		(3,187	)		(4,092	)
Assets *		-			-			-						-			1,114			-			1,114

Consolidated continuing operations
Revenues	$	371		$	2,031		$	1,078		$	4,037		$	268		$	1,258		$	1,346		$	5,295
Loss before provision for income taxes		(4,924	)		(10,178	)		(12,311	)		(19,197	)		(8,839	)		(6,412	)		(21,150	)		(25,609	)
Assets *		18,229			50,205			18,229			50,205			20,834			44,701			20,834			44,701

* Assets are reported as of June 30.
* Assets are reported as of September 30.

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Note 4. Debt Outstanding

On August 11, 2009, we amended our amended and restated senior secured note with Highbridge International LLC (Highbridge), to extend the maturity date from January 15, 2010 to July 15, 2010, and Highbridge agreed to give up its optional redemption rights. We also committed to exercising our right to sell our ARS in accordance with the terms of the rights offering by UBS, who sold them to us, and use the proceeds from the sale to redeem the note. If we borrow or raise capital, we will use all or a portion of the funds raised to redeem the note at 110%. We also amended all 1.8 million warrants that had been previously issued to Highbridge to purchase shares of our

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common stock (including 1.3 million issued in conjunction with the amended and restated note in 2008 and 540,000 issued in conjunction with the November 2007 registered direct financing), to change the exercise price to $0.28 per share, and extend the expiration date to five years from the amendment date.

Pursuant to accounting rules regarding debtor’s accounting for modification or Exchange of Debt Instruments, the amended note was not considered to have substantially different terms and was accounted for in the same manner as a debt extinguishment. The incremental fair value of the amended warrants compared to the original warrants, treated as consideration granted by us for the amendment, amounted to $276,000 on the date of amendment and was accounted for as a discount to the note and is being amortized to interest expense over the remaining contractual maturity period of the amended debt.

During the ~~six~~nine months ended ~~June~~September 30, 2009, we drew down additional proceeds under the UBS line of credit facility, and used the proceeds to pay down the principal balance on our senior secured note with Highbridge International LLC. We made an additional $318,000 pay-down on the senior secured note in September 2009, using proceeds that we received from the registered direct stock financing that was completed in the same month. We recognized ~~a $276,000 loss~~losses of $54,000 and $330,000, respectively, on extinguishment of debt resulting from ~~the pay down, which is included in our loss from continuing operations~~these pay-downs for the ~~six~~three and nine months ended ~~June~~September 30, 2009.

In August 2009, we paid down $1.3 million on the UBS line of credit, using 100% of the proceeds received from the sale of certain ARS. Our UBS line of credit and our senior secured note are both collateralized by the ARS, which had a carrying value of ~~$10.4~~$9.2 million at June 30, 2009 and are classified as marketable securities in our consolidated balance sheets. The ARS are restricted to satisfy our obligations under the UBS line of credit and the senior secured note, under which $7.3 million and $3.6 million, respectively, was outstanding at JuneSeptember 30, 2009. The following table shows the total principal amount, related interest rates and maturities of debt outstanding, as of ~~June~~September 30, 2009 and December 31, 2008:

		June 30,	December 31,	September 30,		December 31,
(dollars in thousands, except where otherwise noted)	(dollars in thousands, except where otherwise noted)	2009	2008	2009		2008
Short-term Debt	Short-term Debt
Senior secured note due January, 2010; callable by the holder on July 18, 2009;
	interest payable quarterly at prime plus 2.5% (5.75% and 7.0% at June 30,
	2009 and December 31, 2008, respectively), $3.7 million principal net of $94,000
	unamortized discount at June 30, 2009 and $5 million principal net of $899,000
	unamortized discount at December 31, 2008	$ 3,556	$ 4,101
Senior secured note due July 15, 2010; interest payable quarterly at prime
plus 2.5% (5.75% and 7.0% at September 30, 2009 and December 31,
2008, respectively, $3,332,000 principal net of $210,000 unamortized
discount at September 30, 2009 and $5,000,000 principal net of				discount at September 30, 2009 and $5,000,000 principal net of
$899,000 unamortized discount at December 31, 2008				$	3,122	$	4,101

UBS line of credit, payable on demand, interest payable monthly at 91-day	UBS line of credit, payable on demand, interest payable monthly at 91-day
T-bill rate plus 120 basis points (1.282% at September 30, 2009 and				T-bill rate plus 120 basis points (1.282% at September 30, 2009 and
1.675% at December 31, 2008)					6,460		5,734
	T-bill rate plus 120 basis points (1.351% at June 30, 2009 and 1.675%
	at December 31, 2008)	7,318	5,734

	Total Short-term Debt	$ 10,874	$ 9,835
Total Short-term Debt				$	9,582	$	9,835

Healthcare Services

The following table summarizes the operating results for healthcare services for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008:

	Three Months Ended						Nine Months Ended
(In thousands, except patient treatment data)	September 30,						September 30,
	2009			2008			2009			2008
Revenues
U.S. licensees	$	123		$	527		$	459		$	2,514
Managed treatment centers (a)		145			533			753			1,621
Other revenues		-			198			134			1,160
Total healthcare services revenues	$	268		$	1,258		$	1,346		$	5,295

Operating expenses
Cost of healthcare services	$	68		$	330		$	502		$	1,335
General and administrative expenses
Salaries and benefits		899			2,464			5,285			12,736
Other expenses		2,118			5,449			6,376			12,638
Research and development		-			713			-			2,986
Impairment losses		-			-			355			447
Depreciation and amortization		273			510			896			973
Total operating expenses	$	3,358		$	9,466		$	13,414		$	31,115

Loss from operations	$	(3,090	)	$	(8,208	)	$	(12,068	)	$	(25,820	)

Interest and other income		19			113			142			738
Interest expense		(221	)		(637	)		(999	)		(1,149	)
Loss on extinguishment of debt		(54	)		-			(330	)		-
Gain on the sale of marketable securities		160			-			160			-
Other than temporary impairment on marketable securities		(25	)		-			(185	)		-
Change in fair value of warrant liabilities		(4,767	)		3,758			(4,683	)		4,714
Loss before provision for income taxes	$	(7,978	)	$	(4,974	)	$	(17,963	)	$	(21,517	)

PROMETA patients treated
U.S. licensees		24			93			96			435
Managed treatment centers (a)		22			33			78			117
Other		-			8			11			60
		46			134			185			612

Average revenue per patient treated (b)
U.S. licensees	$	4,435		$	5,352		$	4,298		$	5,643
Managed treatment centers (a)		4,206			9,033			5,957			9,586
Other		-			7,786			12,185			8,324
Overall average		4,326			6,404			5,466			6,659

(a) Includes managed and/or licensed PROMETA Centers.
(b) The average revenue per patient treated excludes administrative fees and other non-PROMETA patient revenues.

Three Months Ended Six Months Ended
(In thousands, except patient treatment data) June 30, June 30,
2009 2008 2009 2008
Revenues
U.S. licensees $ 152 $ 1,164 $ 336 $ 1,987
Managed treatment centers (a) 219 424 608 1,088
Other revenues - 443 134 962
Total healthcare services revenues $ 371 $ 2,031 $ 1,078 $ 4,037

Operating expenses
Cost of healthcare services $ 161 $ 524 $ 434 $ 1,005
General and administrative expenses
Salaries and benefits 1,608 3,878 4,384 10,272
Other expenses 2,284 3,685 4,260 7,189
Research and development - 915 - 2,273
Impairment losses - 447 355 447
Depreciation and amortization 302 - 623 463
Total operating expenses $ 4,355 $ 9,449 $ 10,056 $ 21,649

Loss from operations $ (3,984 ) $ (7,418 ) $ (8,978 ) $ (17,612 )

Interest and other income 77 196 123 625
Interest expense (370 ) (247 ) (778 ) (512 )
Loss on extinguishment of debt - - (276 ) -
Other than temporary impairment on
marketable securities (28 ) - (160 ) -
Change in fair value of warrant liability 15 (1,311 ) 84 956
Loss before provision for income taxes $ (4,290 ) $ (8,780 ) $ (9,985 ) $ (16,543 )

PROMETA patients treated
U.S. licensees 30 198 72 342
Managed treatment centers (a) 19 31 56 84
Other - 17 11 52
49 246 139 478

Average revenue per patient treated (b)

U.S. licensees $ 5,067 $ 5,753 $ 4,528 $ 5,722
Managed treatment centers (a) 7,211 9,978 6,661 9,823
Other - 11,390 12,182 8,407
Overall average 5,898 6,675 5,993 6,734

(a) Includes managed and/or licensed PROMETA Centers.
(b) The average revenue per patient treated excludes administrative fees and other non-PROMETA patient revenues.

Revenue

Revenue decreased by ~~$1.7 million and $3.0 million for~~$990,000 in the three ~~and six~~ months ended ~~June~~September 30, 2009 ~~respectively,~~ compared to the same ~~periods~~period in 2008, primarily due ~~mainly~~ to our decision to streamline our operations and focus on managed care opportunities in our Behavioral Health segment. We exited unprofitable markets and made significant reductions in field and regional sales personnel in our licensing operations, curtailed our managed treatment center operations (including terminating the management services agreements associated with our managed treatment center in Dallas, Texas) and shut-down our international operations. These actions resulted in a decline in licensed sites contributing to revenue and in the number of patients treated at our U.S licensed sites and the managed treatment centers, resulting from our decision to streamline our Healthcare Services operation by shutting down unprofitable markets and reducing field staff. We also shut down sites in our international operations during the first quarter of 2009. The number of patients

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~~treated decreased by 80% and 71% in the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008.~~number of patients treated. The number of licensed sites that contributed to revenues decreased from 36 to 1714 and the number of patients treated decreased by 66% for the three months ended ~~June~~September 30, 2009, compared to ~~31 for~~ the same period in 2008. The average revenue per patient treated at U.S. licensed sites and managed treatment centers decreased during the three ~~and six~~ months ended ~~June~~September 30, 2009 compared to the same ~~periods~~period in 2008 ~~due to~~ due to higher average discounts granted because of the economic downturn.

Revenue decreased by $3.9 million in the nine months ended September 30, 2009 compared to the same period in 2008, consistent with the discussion above relating to our ~~licensees~~decision to streamline our operations and focus on managed care opportunities. The number of licensed sites that contributed to revenues on a year-to-date basis decreased from 50 to 24 and the number of patients treated decreased by 70% for the nine months ended September 30, 2009, compared to the same period in 2008. The average revenue per patient treated at ~~the~~U.S. licensed sites and managed treatment centers ~~increased~~decreased during the ~~three and six~~nine months ended ~~June~~September 30, 2009 compared to the same ~~periods~~period in 2008, due to ~~an increase in non-PROMETA related services provided to patients.~~higher average discounts granted because of the economic downturn. Our revenue may be further impacted in the ~~third quarter and~~ fourth quarter of 2009 by market conditions due to the uncertain economy, impacting both the number of treatments and the average revenue per patient, and also as we maintain our commitment to reduce operating expenses in components of healthcare services that are revenue-generating, but unprofitable.

Cost of Healthcare Services

Cost of healthcare services consists of royalties we pay for the use of the PROMETA Treatment Program, and costs incurred by our consolidated managed treatment centers for direct labor costs for physicians and nursing staff, continuing care expense, medical supplies and treatment program medicine costs. The decrease in these costs primarily reflects the decrease in revenues from these treatment centers.

General and Administrative Expenses

General and administrative expense ~~included~~includes share-based compensation expense and costs associated with streamlining our operations, which ~~totaled $1.3~~amounted to $1.0 million and ~~$222,000,~~$1,000, respectively, for the three months ended ~~June~~September 30, 2009, compared to ~~$1.9~~$2.8 million and ~~$1.2~~$200,000, respectively for the same period in 2008. Excluding such costs, total general and administrative expense decreased by $2.9 million in 2009 when compared to 2008, due to reductions in all expense categories, but mainly to decreases in salaries and benefits and outside services, resulting from the continued streamlining of operations to focus on managed care opportunities in our Behavioral Health segment.

For the nine months ended September 30, 2009, share-based compensation expense and costs associated with streamlining our operations totaled $3.5 million and $275,000, respectively, compared to $7.0 million and $2.6 million, respectively for the same period in 2008. Excluding such costs, total general and administrative expense decreased by ~~$2.0~~$7.9 million in 2009 when compared to 2008, due to reductions in all categories, but mainly to decreases in ~~outside services,~~ salaries and benefits and ~~other expenses resulting from the continued streamlining of operations to focus on opportunities in our Behavioral Health segment.~~

For the six months ended June 30, 2009, share-based compensation expense and costs associated with streamlining our operations totaled $2.5 million and $360,000, respectively, compared to $4.2 million and $2.4 million, respectively for the same period in 2008. Excluding such costs, total general and administrative expense decreased by $5.2 million in 2009 when compared to 2008, due mainly to decreases in outside services, ~~salaries and benefits and other expenses~~ resulting from the continued streamlining of operations.

Research and Development

Our total research and development expenses decreased by $915,000 and $2.3 million for the three and six months ended June 30, 2009 compared to the same periods in 2008. These decreases are attributable to clinicalClinical studies undertaken in 2008 and prior years ~~that~~ were substantially completed in 2008 and ~~for which~~ no research and development expense was recognized during the three and ~~six~~nine months ended ~~June~~September 30, 2009. In addition, we agreed to terminate funding for the grant that supported the Cedar Sinai research study on alcohol-dependent subjects as the site had been unable to recruit patients with the desired clinical profile in a timely manner and in light of the two additional alcohol studies that had been completed. Such expenses totaled $713,000 and $3.0 million for the three and nine months ended September 30, 2008.

Impairment Losses

Impairment charges for the ~~six~~nine months ended ~~June~~September 30, 2009 included $122,000 for ~~intangible~~ assets related to ~~our~~the managed treatment center in Dallas, Texas, when we terminated the management services agreement and $233,000 for intellectual property related to additional indications for the use of the PROMETA Treatment Program that are currently non-revenue-generating, both of which resulted from impairment testing at March 31, 2009. ~~No further impairment was deemed~~ See additional information below under the heading “Critical Accounting Estimates -- Impairment of Intangible Assets.”

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Interest and Other Income

Interest and other income for the three and ~~six~~nine months ended ~~June~~September 30, 2009 decreased by ~~$119,000~~$94,000 and ~~$502,000,~~$596,000, respectively, compared to the same periods in 2008 due to decreases in the invested balance of marketable securities and a decrease in interest rates.

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Interest Expense

Interest expense for the three and ~~six~~nine months ended ~~June~~September 30, 2009 ~~increased~~decreased by ~~$123,000~~$416,000 and ~~$266,000,~~$150,000, respectively, compared to the same periods in 2008 due to ~~higher~~lower average debt balances ~~from~~on both the Highbridge note and UBS line of credit, ~~during the three and six months ended June 30, 2009,~~ partially offset by the effect of lower interest rates during this same period.

~~Loss~~Losses from Extinguishment of Debt

We recognized ~~a $276,000 loss~~$54,000 and $330,000 in losses on extinguishment of debt for the ~~six~~three and nine months ended ~~June~~September 30, 2009 resulting from ~~the~~pay-downs of $1.4 million ~~pay down~~and $318,000 on the Highbridge senior secured note in February and September 2009, ~~which reflected an unamortized~~respectively. Such losses included accelerated amortization of debt discount of $22,000 and $208,000 for the three and nine months ended September 30, 2009, respectively..

Gain on the Sale of Marketable Securities

In August 2009, $1.1 million of our auction rate securities (ARS) was redeemed at par by the issuer, resulting in proceeds of approximately $1.3 million and a ~~$68,000 prepayment penalty.~~gain of approximately $160,000.

Other than Temporary Impairment on Marketable Securities

Impairment charges of ~~$28,000~~$25,000 and ~~$160,000~~$185,000 related to certain of our ~~auction-rate securities (ARS)~~ARS were recognized for the three and ~~six~~nine months ended ~~June~~September 30, 2009. The charges were based on ~~an updated valuation~~valuations of the securities performed by management ~~as of March 31,~~at each balance sheet reporting date in 2009, ~~and June~~including September 30, 2009, and were deemed necessary after an analysis of other-than-temporary impairment factors, most notably, the likelihood that we will be required to sell the ARS before they recover in value.

Change in fair value of warrant ~~liability~~liabilities

~~Warrants~~We issued warrants in connection with aour registered direct stock ~~placement~~placements completed onin November 7, 2007 and ~~warrants issued~~September 2009, and the amended and restated Highbridge senior secured note in ~~connection with the Highbridge note issued on January 18, 2007 and amended on~~ July ~~31, 2008,~~2008. The warrants are being accounted for as liabilities in accordance with ~~EITF 00-19,~~ ~~Accounting for Derivative Financial Instruments Indexed~~FASB accounting rules, due to provisions in some warrants that protect the holders from declines in the Company’s stock price and ~~Potentially Settled in,~~ a ~~Company’s Own Stock~~ ~~(EITF 00-19), based on an analysis~~requirement to deliver registered shares upon exercise of the ~~terms and conditions~~warrants, which is considered outside the control of the ~~warrant agreement.~~

~~Both~~Company. The warrants are ~~re-valued at~~marked-to-market each reporting period, using the Black-Scholes pricing model, ~~to determine the fair market value per share.~~ until they are completely settled or expire.

The change in fair value of the warrants ~~issued in connection with the November 7, 2007 registered direct stock placement~~ amounted to ~~$7,000~~net losses of $4.8 million and ~~$33,000~~$4.7 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to net gains of $3.8 million and $4.7 million for the same periods in 2008, respectively. The ~~change~~losses in ~~fair value~~2009 resulted mainly from a $5.4 million charge in September 2009 for anti-dilution adjustments to 1.9 million warrants outstanding from the November 2007 registered direct placement that were triggered by the September 2009 registered direct financing. Due to the relative lower offering price in the September 2009 registered direct financing, the adjustment resulted in an increase to the number of warrant outstanding totaling 12.4 million warrants ~~issued~~and a decrease in ~~connection with~~ the ~~Highbridge note amounted~~exercise price from $5.75 to ~~$8,000 and $43,000 for the three and six months ended June 30, 2009, respectively. We will continue to mark the warrants to market value each quarter end until they are completely settled.~~$0.75 per share.

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Behavioral Health

The following table summarizes the operating results for Behavioral Health for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008:

Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
2009 2008 2009 2008

Revenues $ - $ - $ - $ -

Operating Expenses
General and administrative expenses
Salaries and benefits $ 556 $ 658 $ 1,210 $ 1,096
Other expenses 78 740 275 1,558
Impairment charges - - 758 -
Depreciation and amortization - - 83 -
Total operating expenses $ 634 $ 1,398 $ 2,326 $ 2,654

Loss before provision for income taxes $ (634 ) $ (1,398 ) $ (2,326 ) $ (2,654 )

		Three Months Ended						Nine Months Ended
(in thousands)		September 30,						September 30,
		2009			2008			2009			2008

Revenues		$	-		$	-		$	-		$	-

Operating Expenses
	General and administrative expenses
	Salaries and benefits	$	773		$	963		$	1,983		$	2,059
	Other expenses		88			475			363			2,033
	Impairment charges		-			-			758			-
	Depreciation and amortization		-			-			83			-
	Total operating expenses	$	861		$	1,438		$	3,187		$	4,092

Loss before provision for income taxes		$	(861	)	$	(1,438	)	$	(3,187	)	$	(4,092	)

Revenues

~~Table~~Operational implementation of ~~Contents~~the Ford contract began immediately after signing, and the program is anticipated to launch late in the fourth quarter of 2009. Revenue recognized in the fourth quarter is not expected to be material. Contractual revenues from the agreement are based on a combination of monthly fees for the member population for Catasys, with additional monthly fees for members enrolled into the Catasys program.

General and Administrative Expenses

Total general and administrative expenses decreased by ~~$764,000~~$577,000 in the three months ended ~~June~~September 30, 2009 when compared to the same period in 2008, due mainly to a ~~$483,000~~$264,000 reduction in consulting and outside services expense, a ~~$102,000~~$190,000 decrease in salaries and a ~~$179,000~~$123,000 decline in other general expenses.

Total general and administrative expenses decreased by ~~$1.2~~$1.7 million in the ~~six~~nine months ended ~~June~~September 30, 2009 when compared to the same period in 2008, due mainly to a ~~$899,000~~$1.3 million reduction in consulting and outside services expense and a ~~$384,000~~$419,000 decline in other general ~~expenses, partially offset by a $114,000 increase in salaries and related benefits due to increased labor allocations to our Behavioral Health segment.~~expenses.

Impairment Losses

An impairment charge of $758,000 was recognized during the ~~six~~nine months ended ~~June~~September 30, 2009 related to capitalized software for our Behavioral Health segment. ~~We performed an~~As part of our quarterly impairment analysis, ~~in accordance with SFAS 144 and~~we determined as of March 31, 2009 that the carrying value was not recoverable and was fully impaired.

Depreciation and Amortization

Depreciation and amortization for the three and ~~six~~nine months ended ~~June~~September 30, 2009 consisted of depreciation of the capitalized software prior to the impairment discussed above. There was no depreciation during the same periods in 2008 as the asset had not yet been placed in service.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Going Concern

As of ~~June~~September 30, 2009, we had a balance of approximately ~~$3.0~~$7.1 million in cash and cash equivalents and $10.5 million of current marketable securities, of which approximately $10.4 million are ARS, which are classified as marketable securities in current assets as of June 30, 2009 and are discussed below.

~~As of June 30, 2009,~~ we had a working capital ~~deficit~~ of approximately $1.9 million. Our working capital is impacted by $9.2 million of ARS that are currently illiquid. We have incurred significant net losses and negative operating cash flows since our inception. During the three and nine months ended September 30, 2009, our cash and cash equivalents used in operating activities amounted to $2.6 million and $12.0 million, respectively. We expect to continue to incur negative cash flows and net losses for at least the next twelve months. As of ~~June~~September 30, 2009, these conditions raised substantial doubt from our auditors as to our ability to continue as a going concern.

Our ability to fund our ongoing operations and continue as a going concern is dependent on raising additional capital, signing and generating revenue from new contracts for our Catasys managed care programs and the success of management’s plans to increase revenue and continue to decrease expenses. InBeginning in the fourth quarter of 2008, and continuing in each of the quarter during 2009, management ~~took~~has taken actions that ~~resulted~~we expect will result in reducing annual operating expenses by ~~$10.2~~a total of approximately $15.9 million, compared to the third quarter of ~~2008.~~2008, including $10.2 million from actions taken in the fourth quarter of 2008 and $5.7 million from further actions taken in the first three quarters of 2009. The actions we took included significant reductions in field and regional sales personnel and related corporate support personnel, curtailment of our international operations, a reduction in outside consultant expense and overall reductions in overhead costs. Additionally, we took further actions in the first half of 2009 to streamline our operations and increase the focus on managed care opportunities and to renegotiate certain leasing and vendor agreements to obtain more favorable pricing and to restructure payment terms with vendors, which included negotiating settlements for outstanding liabilities. The actions we took to streamline operations and related cost reductions implemented in 2008, and the additional actions we took in the first half of 2009, are expected to reduce our operating expenditures significantly for 2009 compared to 2008. As discussed in ~~Recent Developments~~ above, these additional efforts have resulted in delays and reductions in operating expenses, resulting in additional annual savings in total budgeted operating expenses of approximately $4.5 million. In addition, management currently has plans for additional cost reductions from the elimination of certain positions in our licensee and managed treatment center operations and related corporate ~~staff and~~support personnel, curtailment of our international operations, a reduction in certain support and occupancy costs, ~~consulting~~a reduction in outside consultant expense and ~~other outside services if required. Certain of these reductions have already been implemented as of the reporting date, resulting in additional estimated annual~~overall reductions in ~~operating expenses totaling $1.2 million.~~overhead costs. In addition, we took further actions in the first three-quarters of 2009 to streamline our operations and increase the focus on managed care opportunities. Also, we have renegotiated certain leasing and vendor agreements to obtain more favorable pricing and to restructure payment terms. We have also negotiated and plan to negotiate settlements for outstanding liabilities. We have exited certain markets in our licensee operations that management has determined will not provide short-term profitability. We may exit additional markets in our licensee operations and further curtail or restructure our ~~company~~Company managed treatment center to reduce costs or if management determines that those markets will not provide short-term profitability.

~~Table~~ We do not expect the cost impact of ~~Contents~~

~~Additionally,~~such actions to be material. In September 2009, we signed an agreement with Ford® Motor Company (Ford) to provide the Catasys integrated substance dependence solution to Ford’s hourly employees in Michigan enrolled in the National PPO and who meet certain criteria and we raised approximately $7 million in a registered direct equity financing with select institutional investors. We are pursuing additional new Catasys contracts and additional capital. As of ~~July~~October 31, 2009, we had net cash on hand of approximately ~~$2.0~~$6.1 million. Excluding short-term debt and non-current accrued liability payments, our current plans call for expending cash at a rate of approximately $650,000 per month. At presently anticipated rates, which do not include management’s plans for additional cost reductions, we will need to obtain additional funds within the next ~~two~~eleven to ~~three~~twelve months to avoid drastically curtailing or ceasing our operations. We are currently in discussions with third parties regarding financing. There can be no assurance that we will be successful in our efforts to generate, increase, or maintain revenue; or raise necessary funds on acceptable terms or at all, and we may not be able to offset this by sufficient reductions in expenses and increases in revenue. If this occurs, we may be unable to meet our cash obligations as they become due and we may be required to further delay or reduce operating expenses and curtail our operations, which would have a material adverse effect on us, or we may be unable to continue as a going concern.

In February 2008, the market for ARS effectively ceased when the vast majority of auctions failed and prevented holders from selling their investments. Although the securities are Aaa/AAA rated and collateralized by portfolios of student loans guaranteed by the U.S. government, based on current market conditions it is likely that auctions will continue to be unsuccessful in the short-term, limiting the liquidity of these investments until the issuer calls the securities. As a result, our ability to liquidate our investment and fully recover the carrying value of our investment in the near term may be limited or does not exist. In October 2008, UBS made a ~~rights~~Rights offering to its clients, pursuant to which we are entitled to sell to UBS all ~~auction-rate securities~~ARS held by us in our UBS account. The rights offering permits us to require UBS to purchase our ARS for a price equal to original par value plus any accrued but unpaid interest beginning on June 30, 2010 and ending on July 2, 2012 if the securities are not earlier redeemed or sold. We accepted this offer in November 2008. Because of our ability to sell the ARS under the UBS rights offering, the ARS investments have been classified in current assets at September 30, 2009. In August 2009, $1.1 million of our ARS was redeemed at par by the issuer, resulting in proceeds of approximately $1.3 million and a gain of approximately $160,000. As discussed below in Capital Structure & Financing Activities, all of the proceeds were used to pay down the balance of the UBS line of credit facility.

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As part of the rights offering, UBS provided to us a line of credit equal to 75% of the market value of the ARS until they are purchased by UBS. ~~We accepted this offer in November 2008.~~ At ~~June~~September 30, 2009, we had ~~$7.3~~$6.5 million of outstanding borrowing under the UBS line of credit that is payable on demand and is secured by the ~~ARS.We~~ARS. We granted Highbridge additional redemption rights in connection with the amendment of the senior secured note that would require us to use any margin loan proceeds in excess of $5.8 million to pay down the principal amount of the senior secured note. The line of credit has certain restrictions described in the prospectus.

ARS are variable-rate instruments with longer stated maturities whose interest rates are reset at predetermined short-term intervals through a Dutch auction system. However, commencing in February 2008, auctions for these securities have failed, meaningConsidering the parties desiring to sell securities could not be matched with an adequate number of buyers, resulting in our having to continue to hold these securities. We believe that we ultimately should be able to liquidate all of our ARS investments without significant loss because the securities are Aaa/AAA rated and collateralized by portfolios of student loans guaranteed by the U.S. government. However, current conditions in theilliquid ARS market, ~~make it likely that auctions will continue to be unsuccessful in~~ the ~~short-term, limiting the liquidity~~recent deterioration of ~~these investments until the auction succeeds, the issuer calls or refinances the securities, or they mature. As a result of the current turmoil in the credit markets,~~overall market conditions and our ability to liquidate our investment and fully recover the carrying value of our investment in the near term may be limited or not exist. However, because of our ability to sell the ARS under the UBS rights offering discussed above, the ARS investments have been classified in current assets at June 30, 2009.

~~Due to our current~~ financial condition and near-term liquidity needs, we have concluded that it is likely that we ~~will likely be required~~would need to sell ~~the~~our ARS before they would recover in value and any decline in the fair value of ARS should be considered as ‘other-than-temporary’. Based on the current estimated fair value at September 30, 2009 (see discussion under the heading Fair Value Measurements for a complete discussion of our valuation methods), we ~~are able to recover full value for them. Accordingly,~~recognized approximately $25,000 and $185,000, respectively, in impairment charges for the three and ~~six~~nine months ended ~~June~~September 30, ~~2009, we recognized approximately $28,000 and $160,000, respectively, in other-than-temporary decline in value related to our investment in certain ARS.~~2009. We also recognized unrealized gains of approximately $14,000 and $467,000 for temporary increases in estimated fair value of ~~approximately $27,000 and $453,000 related to our investment in~~ certain other ARS for the three and ~~six~~nine months ended September 30, 2009, respectively.

These securities will continue to be analyzed each reporting period for other-than-temporary impairment factors, which may require us to recognize additional impairment charges. If our efforts to raise additional capital as discussed in Note 1 are successful, we believe that we will not require access to the underlying ARS prior to June 30, 2009, respectively, based on the estimated fair value as determined by management. If current market conditions deteriorate further, the credit rating of the ARS issuers deteriorates, or the anticipated recovery in the market values does not occur, we may be required to make further adjustments to the carrying value of the ARS through impairment charges in the Consolidated Statement of Operations, and any such impairment adjustments may be material. In accordance with SFAS 115, other-than-temporary declines in value are reflected as a non-operating expense in our Consolidated Statements of Operations, whereas subsequent temporary increases in value are reflected in Stockholders’ Equity on our Consolidated Balance Sheets.2010.

Cash Flows

We used ~~$8.3~~$10.9 million of cash for continuing operating activities during the ~~six~~nine months ended ~~June~~September 30, ~~2009.~~2009, compared to $18.1 million during the same period in 2008. Use of funds in operating activities include general and administrative expense, excluding share-based expense, provision for doubtful accounts and loss on disposition of assets, the cost of healthcare services revenue and research and development costs, which totaled approximately ~~$14.0~~$10.5 million for the ~~six~~nine months ended ~~June~~September 30, 2009, compared to ~~$19.2~~$23.0 million for the same period in 2008. ~~This~~The decrease in net cash used reflects the decline in such expenses, resulting mainly from our efforts to streamline operations, as described above.

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Capital expenditures for the ~~six~~nine months ended ~~June~~September 30, 2009 were $17,000, compared to ~~$698,000~~$899,000 for the same period in 2008 and we do not expect capital expenditures to be material for the remainder of 2009. Our future capital requirements will depend upon many factors, including progress with our marketing efforts, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the necessity of, and time and costs involved in obtaining, regulatory approvals, competing technological and market developments, and our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements.

As discussed above, our current plans call for expending cash at a rate of approximately ~~$750,000~~$650,000 per month, excluding short-term debt, non-current accrued liability payments and the impact of management’s plans for additional cost reductions.

~~Debt~~

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Capital Structure & Financing Activities

~~Effective July 18,~~Public and Private Placement Stock Offerings

We have financed our operations, since inception, primarily through the sale of shares of our common stock in public and private placement stock offerings. The following table sets forth a summary of our equity offering proceeds, net of expenses, since our inception (in millions):

Date	Transaction Type	Amount
September 2003	Private Placement	$	21.3
December 2004	Private Placement		21.3
November 2005	Public Offering		40.2
December 2006	Private Placement		24.4
November 2007	Registered Direct Placement		42.8
September 2009	Registered Direct Placement		6.3
		$	156.3

On September 17, 2009, we completed a registered direct placement with select institutional investors, in which we issued an aggregate of 9,333,000 shares of common stock at a price of $0.75 per share, for gross proceeds of approximately $7 million. We also issued three-year warrants to purchase an aggregate of approximately 2,333,000 additional shares of our common stock at an exercise price of $0.85 per share. The fair value of the warrants at the date of issue was estimated at $814,000, and this portion of the proceeds was accounted for as a liability since accounting rules require us to presume a cash settlement of the warrants because there is a requirement to deliver registered shares of stock upon exercise, which is considered outside the control of the Company. We incurred approximately $883,000 in fees to placement agents and other transaction costs in connection with the transaction, which includes approximately $184,000 relating to 560,000 warrants issued to placement agents, representing the estimated fair value on the date of issue. These warrants are also being accounted for as liabilities on our consolidated balance sheet.

Highbridge Senior Secured Note

On August 11, 2009, we amended our amended and restated senior secured note with Highbridge ~~is callable, pursuant to Highbridge’s optional redemption rights under the amended note agreement dated July 31, 2008. We are currently negotiating with Highbridge~~International LLC (Highbridge), to extend the maturity date from January 15, 2010 to July 15, 2010, and Highbridge agreed to give up its optional redemption rights. We also committed to exercising our right to sell our ARS in accordance with the terms of the rights offering by UBS, who sold them to us, and use the proceeds from the sale to redeem the note. If we borrow or raise capital, we will use all or a portion of the funds raised to redeem the note at 110%. We also amended all 1.8 million warrants that had been previously issued to Highbridge to purchase shares of our common stock (including 1.3 million issued in conjunction with the amended and restated note in 2008 and 540,000 issued in conjunction with the November 2007 registered direct financing), to change the exercise price to $0.28 per share, and extend the expiration date to five years from the amendment date. ~~There can be no assurance~~

During the nine months ended September 30, 2009, we drew down additional proceeds under the UBS line of credit facility, and used the proceeds to pay down the principal balance on our senior secured note with Highbridge.. We made an additional $318,000 pay down on the senior secured note in September 2009, using proceeds that we ~~will be successful~~received from the registered direct stock financing that was completed in the same month. We recognized losses of $54,000 and $330,000, respectively, on extinguishment of debt resulting from these pay downs, which are included in our ~~efforts.~~loss from continuing operations for the three and nine months ended September 30, 2009.

UBS Line of Credit

In May 2008, our investment portfolio manager, UBS, provided us with a demand margin loan facility collateralized by our ARS, which allowed us to borrow up to 50% of the UBS-determined market value of our ARS.

As discussed above in “Liquidity and Going Concern,” UBS made a “Rights” offering to its clients in October 2008, pursuant to which we are entitled to sell to UBS all ARS held in our UBS account. As part of the offering, UBS has provided us a line of credit (replacing the demand margin loan), subject to certain restrictions as described

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in the prospectus, equal to 75% of the market value of the ARS, until they are purchased by UBS. We accepted the UBS offer on November 6, 2008.

As of September 30, 2009, the outstanding balance on our line of credit was $6.5 million. In August 2009, we paid down $1.3 million on the UBS line of credit, using 100% of the proceeds received from the redemption of certain ARS by the issuer, at par. The loan is subject to a rate of interest based upon the current 91-day U.S. Treasury bill rate plus 120 basis points, payable monthly, and is carried in short-term liabilities on our Consolidated Balance Sheet.

LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business, financial condition or operating results.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table sets forth a summary of our material contractual obligations and commercial commitments as of ~~June~~September 30, 2009 (in thousands):

			Less than		1 - 3		3 - 5		More than				Less than		1 - 3		3 - 5		More than
Contractual Commitments	Total		1 year		years		years		5 years
Contractual Obligations											Total		1 year		years		years		5 years
Outstanding Debt Obligations	$	11,128	$	11,128							$	9,986	$	9,986		-		-	-
Capital Lease Obligations		176		109		67		-		-		118		67		51		-		-
Operating Lease Obligations		2,143		878		1,265		-		-		1,934		1,352		582		-		-
Clinical Studies		1,503		1,452		51		-		-		1,473		1,452		21		-		-
Total	$	14,950	$	13,567	$	1,383	$	-	$	-	$	13,511	$	12,857	$	654	$	-	$	-

OFF BALANCE SHEET ARRANGEMENTS

As of ~~June~~September 30, 2009, we had no off-balance sheet arrangements.

CRITICAL ACCOUNTING ESTIMATES

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. 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. Our actual results may differ from these estimates.

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We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different results when using different assumptions. We have discussed these critical accounting estimates, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the ~~audit committee~~Audit Committee of our Board of Directors. We believe our accounting policies ~~specific~~related to share-based compensation expense, the impairment assessments for intangible assets, ~~and~~ valuation of marketable securities and estimation of the fair value of warrant liabilities involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below:

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Share-based expense

Commencing January 1, 2006, we implemented changes that the FASB issued related to the accounting ~~provisions of Statement of Financial Accounting Standards (SFAS) 123R~~for employee stock options, on a modified-prospective basis to recognize share-based compensation for employee stock option awards in our statements of operations for future periods. We ~~accounted~~account for the issuance of stock, stock options and warrants for services from non-employees ~~in accordance with SFAS 123,~~ Accounting for Stock-Based Compensation and FASB Emerging Issues Task Force Issue No. 96-18, Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiring Or In Conjunction With Selling Goods Or Services ~~.. We~~based an estimate the fair value of options and warrants ~~issued~~ using the Black-Scholes pricing model. This model’s calculations include the exercise price, the market price of shares on grant date, weighted average assumptions for risk-free interest rates, expected life of the option or warrant, expected volatility of our stock and expected dividend yield.

The amounts recorded in the financial statements for share-based expense could vary significantly if we were to use different assumptions. For example, the assumptions we have made for the expected volatility of our stock price have been based on the historical volatility of our stock and the stock of other public healthcare companies, measured over a period generally commensurate with the expected term, since we have a limited history as a public company and complete reliance on our actual stock price volatility would not be meaningful. If we were to use the actual volatility of our stock price, there may be a significant variance in the amounts of share-based expense from the amounts reported. Based on the 2009 assumptions used for the Black-Scholes pricing model, a 50% increase in stock price volatility would have increased the fair values of options by approximately 25%. The weighted average expected option term for 2009 and 2008 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

From time to time, we have retained terminated employees as part-time consultants upon their resignation from the ~~company.~~Company. Because the employees continued to provide services to us, their options continued to vest in accordance with the original terms. Due to the change in classification of the option awards, the options were considered modified at the date of ~~termination in accordance with SFAS 123R.~~termination. The modifications were treated as exchanges of the original awards in return for the issuance of new awards. At the date of termination, the unvested options were no longer accounted for as employee awards ~~under SFAS 123R~~ and were accounted for as new non-employee ~~awards under EITF 96-18.~~awards. The accounting for the portion of the total grants that have already vested and have been previously expensed as equity awards is not changed.

Impairment of Intangible Assets

We have capitalized significant costs for acquiring patents and other intellectual property directly related to our products and services. ~~In accordance with SFAS 144,~~ ~~Accounting for the Impairment or Disposal of Long-Lived Assets~~ ~~, we~~We review our intangible assets for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. In reviewing for impairment, we compare the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and/or their eventual disposition. If the estimated undiscounted future cash flows are less than their carrying amount, we record an impairment loss to recognize a loss for the difference between the assets’ fair value and their carrying value. Since we have not recognized significant revenue to date, our estimates of future revenue may not be realized and the net realizable value of our capitalized costs of intellectual property or other intangible assets may become impaired.

We performed an impairment test on intellectual property as of March 31, 2009 and after considering numerous factors, including a valuation of the intellectual property by an independent third party, we determined that the carrying value of certain intangible assets was not recoverable and exceeded the fair ~~value and we~~value. We recorded an

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impairment ~~charge~~charges totaling $355,000 for these assets as of March 31, 2009. These charges included $122,000 for intangible assets related to our managed treatment center in Dallas, Texas, and $233,000 related to intellectual property for additional indications for the use of the PROMETA Treatment Program that is currently non-revenue generating. In its valuation, the independent third-party valuation firm relied on the “relief from royalty” method, as this method was deemed to be most relevant to the intellectual property assets of the Company. We determined that the estimated useful lives of the remaining intellectual property properly reflected the current remaining economic useful lives of the assets. We also performed an additional impairment ~~test~~tests on intellectual property ~~as of~~on June 30 and September 30, 2009 and determined that no additional impairment ~~charge was~~charges were necessary.

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Valuation of Marketable Securities

Investments include ARS, U.S. Treasury bills, commercial paper and certificates of deposit with maturity dates greater than three months when purchased, which are classified as available-for-sale investments and reflected in current or long-term assets, as appropriate, as marketable securities at fair market ~~value in accordance with SFAS 115,~~ ~~Accounting for Certain Investments in Debt and Equity Securities~~ ~~(SFAS 115)~~.value. Unrealized gains and losses are reported in our Consolidated Balance Sheet within accumulated other comprehensive loss and within other comprehensive loss. Realized gains and losses and declines in value judged to be “other-than-temporary” are recognized as a non-reversible impairment charge in the Statement of Operations on the specific identification method in the period in which they occur.

Since there have been continued auction failures with our ARS portfolio, quoted prices for our ARS did not exist as of ~~June~~September 30, 2009 and un-observable inputs were used. We determined that use of a valuation model was the best available technique for measuring the fair value of our ARS portfolio and we based our estimates of the fair value using valuation models and methodologies that utilize an income-based approach to estimate the price that would be received if we sold our securities in an orderly transaction between market participants. The estimated price was derived as the present value of expected cash flows over an estimated period of illiquidity, using a risk adjusted discount rate that was based on the credit risk and liquidity risk of the securities.

Based on the valuation models and methodologies, and consideration of other factors, for the three and ~~six~~nine months ended ~~June~~September 30, 2009, we recognized approximately ~~$28,000~~$25,000 and ~~$160,000,~~$185,000, respectively, in other-than-temporary decline in value related to our investment in certain ARS. We also recognized temporary increases in value of approximately ~~$27,000~~$14,000 and ~~$453,000~~$467,000 related to our investment in certain other ARS for the three and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, based on the estimated fair value as determined by management. ~~In accordance with SFAS 115, other-than-temporary~~Other-than-temporary declines in value are reflected as a non-operating expense in our Consolidated Statements of Operations, whereas subsequent increases in value are reflected in Stockholders’ Equity on our Consolidated Balance Sheets. While our valuation model includes inputs based on observable measures (credit quality and interest rates) and un-observable inputs, we determined that the un-observable inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates and estimated periods of illiquidity.

We regularly review the fair value of our investments. If the fair value of any of our investments falls below our cost basis in the investment, we analyze the decrease to determine whether it represents an other-than-temporary decline in value. In making our determination for each investment, we consider the following factors:

●	How long and by how much the fair value of the investments have been below cost

●	The financial condition of the issuers

●	Any downgrades of the investment by rating agencies

●	Default on interest or other terms

●	The likeliness that we will be required to sell the investments before they recover their value

Warrant Liabilities

We have issued warrants in connection with the registered direct placements of our common stock in November 2007 and September 2009, and the amended and restated Highbridge senior secured note in July 2008. The warrant agreements include provisions that require us to record them as a liability, at fair value, pursuant to FASB accounting rules, including provisions in some warrants that protect the holders from declines in the Company’s stock price and a requirement to deliver registered shares upon exercise, which is considered outside the control of the Company. The warrant liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of operations, until they are completely settled or expire. The fair value of the warrants is determined each reporting period using the Black-Scholes option pricing model, and is affected by changes in inputs to that model including our stock price, expected stock price volatility, interest rates and expected term.

The change in fair value of the warrant liabilities amounted to net losses of $4.8 million and $4.7 million for the three and nine months ended September 30, 2009, respectively, compared to net gains of $3.8 million and $4.7 million for the same periods in 2008, respectively. The losses in 2009 resulted mainly from a $5.4 million charge for anti-dilution adjustments to 1.9 million warrants outstanding from the November 2007 registered direct placement, triggered by the terms of the September 2009 registered direct financing. The adjustment resulted in an increase to

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the number of warrant outstanding totaling 12.4 million warrants and a decrease in the exercise price from $5.75 to $0.75 per share, due to the relative lower offering price in the September 2009 registered direct financing.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements

Recently Adopted

On September 30, 2009, we adopted changes issued by the Financial Accounting Standards Board (FASB) to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting Standards Codification™ (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates (ASU). ASU’s will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on our consolidated financial statements.

On June 30, 2009, we adopted changes issued by the FASB to fair value disclosures of financial instruments. These changes require a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such disclosures include the fair value of all financial instruments, for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position; the related carrying amount of these financial instruments; and the method(s) and significant assumptions used to estimate the fair value. Other than the required disclosures (see “Fair Value Measurements”), the adoption of these changes had no impact on our consolidated financial statements.

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be used for all business combinations and for an acquirer to be identified for each business combination, these changes define the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. These changes require an acquirer in a business combination, including business combinations achieved in stages (step acquisition), to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This guidance also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. Additionally, these changes require acquisition-related costs to be expensed in the period in which the costs are incurred and the services are received instead of including such costs as part of the acquisition price. We have not engaged in any acquisitions since this new guidance was issued, so there has been no impact to our consolidated financial statements.

On January 1, 2009, we adopted changes issued by the FASB in December 2007 to accounting for business combinations. These changes apply to all assets acquired and liabilities assumed in a business combination that arise from certain contingencies and requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be recognized initially at fair value; (iii) subsequent measurements of assets and liabilities arising from contingencies be based on a systematic and rational method depending on their nature and contingent consideration arrangements be measured subsequently; and (iv) disclosures of the amounts and measurement basis of such assets and liabilities and the nature of the contingencies. We have not engaged in any acquisitions since this new guidance was issued, so there has been no impact to our consolidated financial statements.

On January 1, 2009, we adopted changes issued by the FASB to accounting for intangible assets. These changes amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset in order to improve the consistency between the useful life of a recognized intangible asset outside of a business combination and the period of expected cash flows used to measure the fair value of an intangible asset in a business combination. The adoption of these changes did not have a material impact on our consolidated results of operations, financial position or cash flows, and the required disclosures regarding our intangible assets are included under the heading Intangible Assets in Note 2 Summary of Significant Accounting Policies.

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In December 2008, the FASB issued ~~FSP FAS 140-4 and FASB Interpretation No. (FIN) 46R-8,~~ ~~Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities~~ ~~. This FSP amends FASB Statement No. 140~~ ~~Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities~~ ~~to require~~changes requiring public entities to provide additional disclosures about transfers of financial assets. It also ~~amends FIN 46,~~ ~~Consolidation of Variable Interest Entities~~ ~~as revised to require~~requires public ~~enterprises~~entities to provide additional disclosures about their involvement with VIEs. ~~FSP FAS 140-4 and FIN 46(R)-8 are effective~~These changes were adopted for the Company's fiscal year ending December 31, 2008. We are required to consolidate the revenues and expenses of the managed medical corporations. The financial results of managed treatment centers are included in our consolidated financial statements under accounting standards applicable to VIEs, and the required disclosures regarding our involvement with VIEs are included above under the heading Variable Interest Entities in Note 2 Summary of Significant Accounting Policies.

liabilities assumed and any non-controlling interests in the acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. We adopted this statement as of January 1, 2009, and it did not have a material impact on our consolidated financial statements.

~~In April 2008, the FASB issued FSP FAS 142-3,~~ ~~Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,~~ ~~Goodwill and Other Intangible Assets~~ . This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other generally accepted accounting principles in the United States (GAAP). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The adoption of this statement did not have a material impact on our consolidated results of operations, financial position or cash flows, and the required disclosures regarding our intangible assets are included above under the heading ~~Intangible Assets.~~

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In June 2008 ~~the FASB ratified EITF Issue 07-5, “Determining Whether an Instrument~~to provide guidance in determining whether certain financial instruments (or ~~Embedded Feature) Is Indexed~~embedded feature) are considered to be “indexed to an ~~Entity’s Own Stock” (EITF 07-5). Paragraph 11(a)~~entity’s own stock.” Existing guidance under GAAP considers certain financial instruments to be outside the scope of ~~Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies~~derivative accounting, specifying that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. ~~EITF 07-5 provides~~These changes provide a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an ~~issuer’s~~entity’s own stock and thus able to qualify for the ~~SFAS 133 paragraph 11(a)~~derivative accounting scope exception. ~~EITF 07-5 was effective for the first annual reporting period beginning after December 15, 2008, and early adoption was prohibited. EITF 07-5~~These changes did not have any impact on our consolidated financial ~~position, results of operations or cash flows.~~statements.

Recently Issued

●	~~FSP FAS 115-2 and FAS 124-2,~~ ~~Recognition and Presentation of Other-Than-Temporary Impairments~~;

●	~~FSP FAS 107-1 and APB 28-1,~~ ~~Interim Disclosures about Fair Value of Financial Instruments; and~~

●	~~FSP FAS 157-4,~~ ~~Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly~~

~~Recently Issued~~

Table of ~~SFAS 168 is not expected to have a material impact on our consolidated financial statements.~~Contents

ItIteemm 3. Quantitative and Qualitative Disclosures About Market Risk

We invest our cash in short term high grade commercial paper, certificates of deposit, money market accounts and marketable securities. We consider any liquid investment with an original maturity of three months or less when purchased to be cash equivalents. We classify investments with maturity dates greater than three months when purchased as marketable securities, which have readily determined fair values at the time of purchase and are classified as available-for-sale securities. Our investment policy requires that all investments be investment grade quality and no more than ten percent of our portfolio may be invested in any one security or with one institution. We have not invested in any instruments which are not classified as "available-for-sale" securities pursuant to ~~SFAS 115.~~

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~~As of June 30, 2009 our total~~accounting rules related to investment in ARS was $11.5 million. Since February 13, 2008, auctions for these securities have failed, meaning the parties desiring to sell securities could not be matched with an adequate number of buyers, resultingdebt securities.

Unrealized gains and losses are reported in our ~~having to continue to hold these securities. Although~~Consolidated Balance Sheet within the ~~securities~~caption entitled “Accumulated other comprehensive income (loss)” and within Comprehensive Income (Loss) under the caption “other comprehensive income (loss).” Realized gains and losses are ~~Aaa/AAA rated and collateralized by portfolios~~recognized in the statement of ~~student loans guaranteed by~~operations on the ~~U.S. government, based on current market conditions it is likely that auctions will continue~~specific identification method in the period in which they occur. Declines in estimated fair value judged to be ~~unsuccessful~~other-than-temporary are recognized as an impairment charge in the ~~short-term, limiting the liquidity~~statement of these investments until the auction succeeds, the issuer calls the securities, or they mature. The remaining maturity periods range from nineteen to thirty-eight years. As a result, our ability to liquidate our investment and fully recover the carrying value of our investmentoperations in the ~~near term may be limited or not exist.~~ period in which they occur.

In making our determination whether losses are considered to be “other-than-temporary” declines in value, we consider the following factors at each quarter-end reporting period:

●	How long and by how much the fair value of the ARS securities have been below cost,

●	The financial condition of the issuers,

●	Any downgrades of the securities by rating agencies,

●	Default on interest or other terms, and

●	The likeliness that we will be required to sell the ARS before they recover their value.

~~For~~In accordance with current accounting rules for investments in debt securities and additional application guidance issued by the ~~three and six months ended June~~FASB in April 2009, other-than-temporary declines in value are reflected as a non-operating expense in our Consolidated Statement of Operations because it is more likely than not that we will be required to sell the ARS before the recover in value, whereas subsequent increases in value are reflected in Stockholders’ Equity on our Consolidated Balance Sheet.

As of September 30, 2009 ~~we recognized approximately $28,000~~our total investment in ARS was $10.2 million (par value), which had an estimated fair value of $9.2 million. In February 2008, the market for ARS effectively ceased when the majority of auctions failed and ~~$160,000, respectively,~~prevented holders from selling their investments. Although the securities are Aaa/AAA rated and collateralized by portfolios of student loans guaranteed by the U.S. government, based on current market conditions it is likely that auctions will continue to be unsuccessful in ~~other-than-temporary decline in~~the short-term, limiting the liquidity of these investments until the issuer calls the securities, or they mature. As a result, our ability to liquidate our investment and fully recover the carrying value ~~related to~~of our investment in ~~certain ARS. We also recognized temporary increases in value of approximately $27,000 and $453,000 related to our investment in certain other ARS for~~ the ~~three and six months ended June 30, 2009, respectively, based on the estimated fair value as determined by management. These securities will~~near term may be ~~analyzed each reporting period for additional other-than-temporary impairment factors.~~

In May 2008, our investment portfolio manager, UBS AG (UBS), provided us with a demand margin loan facility, allowing us to borrow up to 50% of the market value of the ARS, as determined by UBS. The margin loan facility is collateralized by the ARS.limited or does not exist. In October 2008, UBS made a “Rights” offering to its clients, pursuant to which we are entitled to sell to UBS all ~~auction-rate securities~~ARS held by us in our UBS account. The Rights permit us to require UBS to purchase our ARS for a price equal to original par value plus any accrued but unpaid interest beginning on June 30, 2010 and ending on July 2, 2012 if the securities are not earlier redeemed or sold. Because of our ability to sell the ARS under the UBS rights offering, the ARS investments have been classified in current assets at September 30, 2009.

Considering the illiquid ARS market, the recent deterioration of overall market conditions and our financial condition and near-term liquidity needs, we have concluded that it is likely that we would need to sell our ARS before they would recover in value and any decline in the fair value of ARS should be considered as ‘other-than-temporary’. Based on the current estimated fair value at September 30, 2009, we recognized approximately $25,000 and $185,000, respectively, in impairment charges for other-than-temporary decline in value for the three and nine months ended September 30, 2009. We also recognized temporary increases in value of approximately $14,000 and $467,000 related to our investment in certain other ARS for the three and nine months ended September 30, 2009, respectively. These securities will continue to be analyzed each reporting period for other-than-temporary impairment factors, which may require us to recognize additional impairment charges. If our efforts to raise additional capital as discussed in Financial Condition and Liquidity are successful, we believe that we will not require access to the underlying ARS prior to June 30, ~~2009. As part~~2010.

Table of the rights offering, UBS would provide us a line of credit equal to 75% of the market value of the ARS until they are purchased by UBS. The line of credit has certain restrictions described in the prospectus. We accepted this offer on November 6, 2008.Contents

The weighted average interest rate of marketable securities held at ~~June~~September 30, 2009 was ~~1.30%~~1.06%. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk arising from changes in the level or volatility of interest rates; however interest rate movements do not materially affect the market value of our ARS because of the frequency of the rate resets and the short-term nature of these investments. A reduction in the overall level of interest rates may produce less interest income from our investment portfolio. If overall interest rates had declined by an average of 100 basis points during the three months ended ~~June~~September 30, 2009, the amount of interest income earned from our investment portfolio during that period would have decreased by an estimated amount of ~~$31,000.~~$27,000. The market risk associated with our investments in debt securities is substantially mitigated by the frequent turnover of our portfolio.

We have no material foreign exchange risk.

ItIteemm 4. Controls and Procedures

We have evaluated, with the participation of our chief executive officer and our chief financial officer, the effectiveness of our system of disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation our chief executive officer and our chief financial officer have determined that they are effective in connection with the preparation of this report. There were no changes in the internal controls over financial reporting that occurred during the ~~quarter~~three months ended ~~June~~September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3845

Table of Contents

PART II – OTHER INFORMATION

~~CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION~~Item 1A. Risk Factors

~~This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition,~~ Our results of operations ~~business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans~~ and objectives of management, markets for stock of Hythiam and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act and Section 27A of the Securities Act. Such forward-looking statements, including, without limitation, those relating to the future business prospects, revenue and income of Hythiam, wherever they occur, are necessarily estimates reflecting the best judgment of the senior management of Hythiam on the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statementsfinancial condition are subject to numerous risks ~~uncertainties~~ and ~~assumptions, including those~~uncertainties described in ~~the “Risk Factors” in Item 1 of Part I of~~ our ~~most recent~~ Annual Report on Form 10-K for 2008, filed on March 31, 2009, and amended on April 30, 2009, and incorporated herein by reference. You should carefully consider these risk factors in conjunction with the ~~SEC, that may affect the operations, performance, development and results of our business. Because the factors discussed~~other information contained in this ~~report~~report. Should any of these risks materialize, our business, financial condition and future prospects could ~~cause actual results or outcomes~~be negatively impacted. The risks described in the Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to ~~differ materially from those expressed in any forward-looking statements made by~~ us or ~~on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time~~that we currently deem to ~~time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on~~be immaterial may materially adversely affect our business, financial condition and/or operating results. As of September 30, 2009, there have been no material changes to the ~~extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.~~disclosures made on the above-referenced Form 10-K.

You should understand that the following important factors, in addition to those ~~discussed~~referred to above and described in the “Risk Factors” in the Form 10-K could affect our future results and could cause those results to differ materially from those expressed in such forward-looking statements:

●	the anticipated results of clinical studies on our treatment programs, and the publication of those results in medical journals

●	plans to have our treatment programs approved for reimbursement by third-party payers

●	plans to license our treatment programs to more healthcare providers

●	marketing plans to raise awareness of our PROMETA and Catasys treatment programs

●	anticipated trends and conditions in the industry in which we operate, including our future operating results, capital needs, and ability to obtain financing

●	~~CompCare’s ability to estimate claims, predict utilization and manage its contracts~~

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason. All subsequent forward-looking statements attributable to the Company or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to herein. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur.

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

In August 2009, we issued 600,000 shares of common stock to Investor Relations Services, Inc., a consultant providing investor relations services to us valued at approximately $168,000. The use of proceeds from the shares of common stock was used to pay for consulting services for the benefit of the Company. These securities were issued without registration pursuant to the exemption afforded by Section 4(2) of the Securities Act of 1933, as a transaction by us not involving any public offering.

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

Our annual meeting of stockholders was held on September 18, 2009. There were 42,529,257 shares present in person or by proxy. Our stockholders elected all of the board’s nominees for director. Proxies were solicited and there were 7,922,440 abstentions from the vote. The stockholders voted at the meeting as follows:

Five nominees of the Board of Directors were elected for one-year terms expiring on the date of the annual meeting in 2010.

	For	Withheld
Terren S. Peizer	41,132,401	1,396,857
Richard A. Anderson	41,367,870	1,161,388
Andrea Grubb Barthwell., M.D.	40,534,572	1,994,685
Marc G. Cummins	41,198,545	1,330,712
Jay A. Wolf	40,490,462	2,038,796

II-1

ItTable of Contentsem

Item 6. Exhibits

~~Exhibit 4.1~~		~~Form of Indenture, incorporated by reference to Exhibit 4.2 to Hythiam, Inc.'s Registration Statement on Form S-3 filed on April 3, 2009~~

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~II-1~~II-2

Table of Contents

SISIG~~GNATURES~~NATURES

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

	HYTHIAM, INC.
Date: ~~August 10,~~November 9, 2009	By:	/s/ TERREN S. PEIZER
		Terren S. Peizer
		Chief Executive Officer (Principal Executive Officer)

Date: ~~August 10,~~November 9, 2009	By:	s/ MAURICE HEBERT
		Maurice Hebert
		Chief Financial Officer (Principal Financial and Accounting Officer)

~~II-2~~II-3

Delaware		88-0464853
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

PART I - FINANCIAL INFORMATION			3

	ITEM 1. Consolidated Financial Statements		3

		Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2009
		and December 31, 2008 (unaudited)	3

		Condensed Consolidated Statement of Operations for the Three
		~~Three~~ and ~~Six~~Nine Months Ended ~~June~~September 30, 2009 and 2008 (unaudited)	4

		Condensed Consolidated Statement of Cash Flows for the
		~~Six~~Nine Months Ended ~~June~~September 30, 2009 and 2008	5

		Notes to Condensed Consolidated Financial Statements	7

	ITEM 2. Management's Discussion and Analysis of Financial
		Condition and Results of Operations	2326

	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		3744

	ITEM 4. Controls and Procedures		3845

PART II – OTHER INFORMATION			II-1

	ITEM 6. Exhibits		II-1

SIGNATURES			II-2

EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

(In thousands)	September 30,			December 31,
	2009			2008
ASSETS
Current assets
Cash and cash equivalents	$	7,068		$	9,756
Marketable securities, at fair value		9,209			146
Restricted cash		-			24
Receivables, net		305			654
Prepaids and other current assets		265			357
Current assets of discontinued operations		-			3,053
Total current assets		16,847			13,990
Long-term assets
Property and equipment, net of accumulated depreciation of
$6,493 and $5,035, respectively		1,060			2,625
Intangible assets, net of accumulated amortization of
$1,643 and $1,250, respectively		2,717			3,257
Deposits and other assets		210			318
Marketable securities, at fair value		-			10,072
Non-current assets of discontinued operations		-			1,604
Total Assets	$	20,834		$	31,866

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	2,555		$	3,396
Accrued compensation and benefits		776			1,476
Other accrued liabilities		2,069			2,082
Short-term debt		9,582			9,835
Current liabilities of discontinued operations		-			8,675
Total current liabilities		14,982			25,464
Long-term liabilities
Deferred rent and other long-term liabilities		103			127
Warrant liabilities		6,112			156
Capital lease obligations		51			81
Non-current liabilities of discontinued operations		-			4,930
Total liabilities		21,248			30,758

Commitments and contingencies		-			-

Stockholders' equity
Preferred stock, $.0001 par value; 50,000,000 shares authorized;
no shares issued and outstanding		-			-
Common stock, $.0001 par value; 200,000,000 shares authorized;
65,097,000 and 54,965,000 shares issued and outstanding
at September 30, 2009 and December 31, 2008, respectively		7			6
Additional paid-in-capital		183,475			174,721
Accumulated other comprehensive income		437			-
Accumulated deficit		(184,333	)		(173,619	)
Total Stockholders' Equity (Deficit)		(414	)		1,108
Total Liabilities and Stockholders' Equity	$	20,834		$	31,866

(In thousands)	June 30,			December 31,
	2009			2008
ASSETS
Current assets
Cash and cash equivalents	$	2,859		$	9,756
Marketable securities, at fair value		10,529			146
Restricted cash		6			24
Receivables, net		321			654
Prepaids and other current assets		223			357
Current assets of discontinued operations		-			3,053
Total current assets		13,938			13,990
Long-term assets
Property and equipment, net of accumulated depreciation of
$6,345 and $5,035, respectively		1,300			2,625
Intangible assets, less accumulated amortization of
$1,584 and $1,250, respectively		2,776			3,257
Deposits and other assets		215			318
Marketable securities, at fair value		-			10,072
Non-current assets of discontinued operations		-			1,604
Total Assets	$	18,229		$	31,866

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	2,364		$	3,396
Accrued compensation and benefits		974			1,476
Other accrued liabilities		1,673			2,082
Short-term debt		10,874			9,835
Current liabilities of discontinued operations		-			8,675
Total current liabilities		15,885			25,464
Long-term liabilities
Deferred rent and other long-term liabilities		183			127
Warrant liabilities		72			156
Capital lease obligations		63			81
Non-current liabilities of discontinued operations		-			4,930
Total liabilities		16,203			30,758

Commitments and contingencies

Stockholders' equity
Preferred stock, $.0001 par value; 50,000,000 shares authorized;
no shares issued and outstanding		-			-
Common stock, $.0001 par value; 200,000,000 shares authorized;
55,163,616 and 54,965,000 shares issued and outstanding
at June 30, 2009 and December 31, 2008, respectively		6			6
Additional paid-in-capital		177,058			174,721
Accumulated other comprehensive income		453			-
Accumulated deficit		(175,491	)		(173,619	)
Total Stockholders' Equity		2,026			1,108
Total Liabilities and Stockholders' Equity	$	18,229		$	31,866

				Weighted Avg.
	Shares			Exercise Price
Balance, December 31, 2008		8,260,000		$	3.07

Three months ended March 31, 2009
Granted		272,000			0.31
Exercised		-			-
Cancelled		(487,000	)		2.27
Balance, March 31, 2009		8,045,000		$	3.03

Three months ended June 30, 2009
Granted		225,000			0.28
Exercised		-			-
Cancelled		(167,000	)		3.25
Balance, June 30, 2009		8,103,000		$	2.94

	Three Months Ended						Nine Months Ended
(In thousands, except per share amounts)	September 30,						September 30,
	2009			2008			2009			2008
Revenues
Healthcare services		268			1,258			1,346			5,295
Total revenues		268			1,258			1,346			5,295

Operating expenses
Cost of healthcare services		68			330			502			1,335
General and administrative expenses		3,878			9,351			14,007			29,466
Research and development		-			713			-			2,986
Impairment losses		-			-			1,113			-
Depreciation and amortization		273			510			979			1,419
Total operating expenses		4,219			10,904			16,601			35,206

Loss from operations		(3,951	)		(9,646	)		(15,255	)		(29,911	)

Non-operating income (expenses)
Interest & other income		19			113			142			738
Interest expense		(221	)		(637	)		(999	)		(1,149	)
Loss on extinguishment of debt		(54	)		-			(330	)		-
Gain on the sale of marketable securities		160			-			160			-
Other than temporary impairment of
marketablesecurities		(25	)		-			(185	)		-
Change in fair value of warrant liabilities		(4,767	)		3,758			(4,683	)		4,713

Loss from continuing operations before
provision for income taxes		(8,839	)		(6,412	)		(21,150	)		(25,609	)
Provision for income taxes		3			6			13			23
Loss from continuing operations	$	(8,842	)	$	(6,418	)	$	(21,163	)	$	(25,632	)

Discontinued Operations:
Results of discontinued operations, net of tax		-			141			10,449			(5,449	)

Net loss	$	(8,842	)	$	(6,277	)	$	(10,714	)	$	(31,081	)

Basic and diluted net income (loss) per share:
Continuing operations	$	(0.16	)	$	(0.12	)	$	(0.38	)	$	(0.47	)
Discontinued operations		-			0.01			0.19			(0.10	)
Net loss per share	$	(0.16	)	$	(0.11	)	$	(0.19	)	$	(0.57	)

Weighted average number of shares outstanding		56,373			54,629			55,509			54,479

(Dollars in thousands)	Fair Market		Less than		More than
	Value		1 Year		10 Years
Balance at June 30, 2009
Certificates of deposit	$	164	$	164	$	-
Variable auction-rate securities		10,365		-		10,365
Total marketable securities	$	10,529	$	164		10,365
Balance at December 31, 2008
Certificates of deposit (short-term)	$	146	$	146	$	-
Variable auction-rate securities (long-term)		10,072		-		10,072
Total marketable securities	$	10,218	$	146	$	10,072

	Period from			Three Months			Six Months			Period from			Three Months			Nine Months
	January 1 to			Ended			Ended			January 1 to			Ended			Ended
	January 20,			June 30,			June 30,			January 20,			September 30,			September 30,
(in thousands)	2009			2008			2008			2009			2008			2008
Revenues:
Behavioral managed health care revenues	$	710		$	9,582		$	18,915		$	710		$	8,400		$	27,315

Expenses:
Behavioral managed health care operating expenses	$	703		$	11,707		$	21,446		$	703		$	7,466		$	28,912
General and administrative expenses		711			1,477			2,455			711			528			2,983
Other		50			303			598			50			269			867
Loss from discontinued operations before provision
for income tax	$	(754	)	$	(3,905	)	$	(5,584	)
Income (loss) from discontinued operations before
provision for income tax										$	(754	)	$	137		$	(5,447	)

Provision for income taxes	$	1		$	3		$	6		$	1		$	(4	)	$	2
Loss from discontinued operations, net of tax	$	(755	)	$	(3,908	)	$	(5,590	)
Income (loss) from discontinued operations, net of tax										$	(755	)	$	141		$	(5,449	)

Gain on sale	$	11,204		$	-		$	-		$	11,204		$	-		$	-
Results from discontinued operations, net of tax	$	10,449		$	(3,908	)	$	(5,590	)	$	10,449		$	141		$	(5,449	)