- -----------------------------------------------------------------------------
                        SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C.  20549

                           ---------------------------


                                  FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                      For the fiscal year ended September 30, 1995

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from                 to

                                Commission File No. 1-6639

                                MAGELLAN HEALTH SERVICES, INC.
                 (Exact name of Registrant as specified in its charter)
            Delaware                                              58-1076937
  (State or other jurisdiction of                             (I.R.S. Employer
  incorporation or organization)                            Identification No.)

  3414 Peachtree Road, N.E.
              Suite 1400
          Atlanta, Georgia                                            30326
(Address of principal executive offices)                            (Zip Code)

Registrant's telephone number, including area code:  (404) 841-9200

                        See Table of Additional Registrants below.

                              ---------------------------


Securities registered pursuant to Section 12(b)
of the Act:                                               Name of each exchange
                                                          on which registered
      Title of each class

Common Stock ($0.25 par value)                          American Stock Exchange
11 1/4% Series A Senior Subordinated Notes due 2004     American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

                                ---------------------------


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference in Part III of this Form 10-K or any mendment to this
Form 10-K. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant at November 30, 1995 was approximately $510 million.

Indicate by check mark whether the Registrant has filed all documents and
eports required to be filed by Section 12, 13 or 15(d) of the Securities
xchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  Yes X    No

The number of shares of the Registrant's Common Stock outstanding as of November
30, 1995 was 28,415,081.

DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the Registrant's Proxy
Statement for the annual meeting of stockholders (which Proxy Statement will be
filed with the Securities and Exchange Commission on or before January 29, 1996)
are incorporated by reference in Part III hereof.
- ------------------------------------------------------------------------------
PAGE>


<TABLE>
<CAPTION>
                                             ADDITIONAL REGISTRANTS(1)

                              State or                        Address including zip code,                                       
    Exact name of            jurisdiction  I.R.S. Employer   including area code,
registrant as specified    of incorporation   Identification    of registrant's principal
   in its charter          or organization       Number       executive offices
- --------------------        --------------   --------------   -----------------------                                          

<S>                        <C>              <C>                <C>

Beltway Community          Texas            58-1324281         3414 Peachtree Rd., N.E.
 Hospital, Inc.                                                Suite 1400
                                                               Atlanta, GA  30326
                                                               (404) 841-9200

C.A.C.O. Services, Inc.    Ohio             58-1751511         3414 Peachtree Rd., N.E.
                                                               Suite 1400
                                                               Atlanta, GA   30326
                                                               (404) 841-9200

CCM, Inc.                  Nevada           58-1662418         3414 Peachtree Rd., N.E.
                                                               Suite 1400
                                                               Atlanta, GA   30326
                                                               (404) 841-9200

CMCI, Inc.                 Nevada           88-0224620         1061 East Flamingo Road
                                                               Suite One
                                                               Las Vegas, NV   89119
                                                               (702) 737-0282

CMFC, Inc.                 Nevada           88-0215629         1061 East Flamingo Road
                                                               Suite One
                                                               Las Vegas, NV   89119
                                                               (702) 737-0282

CMSF, Inc.                 Florida          58-1324269         3550 Colonial Boulevard
                                                               Fort Myers, FL 33912
                                                               (813) 939-0403

CPS Associates, Inc.       Virginia         58-1761039         3414 Peachtree Rd., N.E.
                                                               Suite 1400
                                                               Atlanta, GA  30326
                                                               (404) 841-9200

Charter Alvarado           California       58-1394959         7050 Parkway Drive
 Behavioral Health                                             La Mesa, CA  91942-2352
 System, Inc.                                                  619) 465-4411

Charter Appalachian Hall   North Carolina   58-2097827         60 Caledonia Road
 Behavioral Health                                             Asheville, NC   28803
 System, Inc.                                                  (704) 253-3681

Charter Arbor Indy         Indiana          35-1916340         11075 N. Pennsylvania
 Behavioral Health                                             Indianapolis, IN 46280
 System, Inc.                                                  (317) 575-1000

Charter Augusta            Georgia          58-1615676         3100 Perimeter Parkway
 Behavioral Health                                             P.O. Box 14939
 System, Inc.                                                  Augusta, GA 30909
                                                               (404) 868-6625



                                                         i


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                            Address including zip code,
                                 State or other                           and telephone number
    Exact name of               jurisdiction of      I.R.S. Employer       including area code,
registrant as specified          incorporation        Identification     of registrant's principal
   in its charter               or organization          Number              executive offices
- --------------------             --------------       --------------     -----------------------


Charter Bay Harbor Behavioral   Florida               58-1640244          3414 Peachtree Rd., N.E.
 Health System, Inc.                                                      Suite 1400
                                                                          Atlanta, Georgia  30326
                                                                          (404) 841-9200

Charter Beacon Behavioral       Indiana               58-1524996          1720 Beacon Street
 Health System, Inc.                                                      Fort Wayne, IN  46805
                                                                          (219) 423-3651

Charter Behavioral Health       New Jersey            58-2097832          19 Prospect Street
 System at Fair Oaks, Inc.                                                Summit, NJ   07901
                                                                          (908) 277-9102

Charter Behavioral Health       Maryland              52-1866212          522 Thomas Run Road
 System at Hidden Brook, Inc.                                             Bel Air, MD    21014
                                                                          (410) 879-1919

Charter Behavioral Health       California            33-0606642          3340 Los Coyotes Diagonal
 System at Los Altos, Inc.                                                Long Beach, CA 90808
                                                                          (310) 421-9311

Charter Behavioral Health       Florida               65-0519663          1324 37th Avenue, East
 System at Manatee Adolescent                                             Bradenton, FL  4208
 Treatment Services, Inc.                                                 (813) 746-1388

Charter Behavioral Health       Maryland              52-1866221          14901 Broschart Road
 System at Potomac Ridge, Inc.                                            Rockville, MD  20850
                                                                          (301) 251-4500

Charter Behavioral Health       Georgia               58-1513304          240 Mitchell Bridge Road
 System of Athens, Inc.                                                   Athens, GA 30606
                                                                          (404) 546-7277

Charter Behavioral Health       Texas                 58-1440665          8402 Cross Park Drive
 System of Austin, Inc.                                                   Austin, TX  78754
                                                                          (512) 837-1800

Charter Behavioral Health       Texas                 76-0430571          3414 Peachtree Rd., N.E.
 System of Baywood, Inc.                                                  Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Behavioral Health       Florida               58-1527678          4480 51st Street, West
 System of Bradenton, Inc.                                                Bradenton, FL  34210
                                                                          (813) 746-1388

Charter Behavioral Health       Georgia               58-1408670          3500 Riverside Drive
 System of Central Georgia, Inc.                                          Macon, GA  31210
                                                                          (912) 474-6200

Charter Behavorial Health       Virginia              54-1765921          1500 Westbrook Avenue
 System of Central Virginia, Inc.                                         Richmond, VA 23227
                                                                          (804) 266-9671


                                                        ii


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                         Address including zip code,
                               State or other                              and telephone number
    Exact name of              jurisdiction of      I.R.S. Employer        including area code,
registrant as specified         incorporation         Identification      of registrant's principal
   in its charter              or organization           Number               executive offices
- --------------------            --------------        --------------     -----------------------



Charter Behavioral Health       South Carolina        58-1761157          2777 Speissegger Drive
 System of Charleston, Inc.                                               Charleston, SC  29405-8299
                                                                          (803) 747-5830

Charter Behavioral Health       Virginia              58-1616917          2101 Arlington Boulevard
 System of Charlottesville, Inc.                                          Charlottesville, VA  22903-1593
                                                                          (804) 977-1120

Charter Behavioral Health       Illinois              58-1315760          4700 North Clarendon Avenue
 System of Chicago, Inc.                                                  Chicago, IL   60640
                                                                          (312) 728-7100

Charter Behavioral Health       California            58-1473063          3414 Peachtree Rd., N.E.
 System of Chula Vista, Inc.                                              Suite 1400
                                                                          Atlanta, GA   30326
                                                                          (404) 841-9200

Charter Behavioral Health       Missouri              61-1009977          200 Portland Street
 System of Columbia, Inc.                                                 Columbia, MO   65201
                                                                          (314) 876-8000

Charter Behavioral Health       Texas                 58-1513305          3126 Rodd Field Road
 System of Corpus Christi, Inc.                                           Corpus Christi, TX   78414
                                                                          (512) 993-8893

Charter Behavioral Health       Texas                 58-1513306          6800 Preston Road
 System of Dallas, Inc.                                                   Plano, TX 75024
                                                                          (214) 964-3939

Charter Behavioral Health       Maryland              52-1866214          3680 Warwick Road, Route 1
 System of Delmarva, Inc.                                                 East New Market, MD  21631
                                                                          (410) 943-8108

Charter Behavioral Health       Indiana               35-1916338          7200 East Indiana
 System of Evansville, Inc.                                               Evansville, IN  47715
                                                                          (812) 476-7200

Charter Behavioral Health       Texas                 58-1643151          3414 Peachtree Rd., N.E.
 System of Fort Worth, Inc.                                               Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Behavioral Health       Mississippi           58-1616919          3531 Lakeland Drive
 System of Jackson, Inc.                                                  Jackson, MS 39208
                                                                          (601) 939-9030

Charter Behavioral Health       Florida               58-1483015          3947 Salisbury Road
 System of Jacksonville, Inc.                                             Jacksonville, FL  32216
                                                                          (904) 296-2447

Charter Behavioral Health       Indiana               35-1916342          2700 River City Park Drive
 System of Jefferson, Inc.                                                Jeffersonville, IN  47130
                                                                          (812) 284-3400


                                                        iii


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                          Address including zip code,
                                State or other                              and telephone number
    Exact name of               jurisdiction of        I.R.S. Employer      including area code,
registrant as specified          incorporation        Identification      of registrant's principal
   in its charter               or organization            Number            executive offices
- --------------------            --------------         --------------     ------------------------



Charter Behavioral Health       Kansas                58-1603154          8000 West 127th Street
 System of Kansas City, Inc.                                              Overland Park, KS  66213
                                                                          (913) 897-4999

Charter Behavioral Health       Louisiana             72-0686492          302 Dulles Drive
 System of Lafayette, Inc.                                                Lafayette, LA  70506
                                                                          (318) 233-9024

Charter Behavioral Health       Louisiana             62-1152811          4250 Fifth Avenue, South
 System of Lake Charles, Inc.                                             Lake Charles, LA  70605
                                                                          (318) 474-6133

Charter Behavioral Health       Indiana               35-1916343          3714 S. Franklin Street
 System of Michigan City, Inc.                                            Michigan City, IN  46360
                                                                          (219) 872-0531

Charter Behavioral Health       Alabama               58-1569921          3414 Peachtree Rd., N.E.
 System of Mobile, Inc.                                                   Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Behavioral Health       New Hampshire         02-0470752          29 Northwest Boulevard
 System of Nashua, Inc.                                                   Nashua, NH  03063
                                                                          (603) 886-5000

Charter Behavioral Health       Nevada                58-1321317          7000 West Spring Mountain Rd.
 System of Nevada, Inc.                                                   Las Vegas, NV  89117
                                                                          (702) 876-4357

Charter Behavioral Health       New Mexico            58-1479480          5901 Zuni Road, SE
 System of New Mexico, Inc.                                               Albuquerque, NM  87108
                                                                          (505) 265-8800

Charter Behavioral Health       California            58-1857277          101 Cirby Hills Drive
 System of Northern California,                                           Roseville, CA  95678
 Inc.                                                                     (916) 969-4666

Charter Behavioral Health       Arkansas              58-1449455          4253 Crossover Road
 System of Northwest Arkansas,                                            Fayetteville, AR  72703
 Inc.                                                                     (501) 521-5731

Charter Behavioral Health       Indiana               58-1603160          101 West 61st Avenue
 System of Northwest Indiana,                                             State Road 51
 Inc.                                                                     Hobart, IN  46342
                                                                          (219) 947-4464

Charter Behavioral Health       Kentucky              61-1006115          435 Berger Road
 System of Paducah, Inc.                                                  Paducah, KY  42002-7609
                                                                          (502) 444-0444

Charter Behavioral Health       Georgia               66-0523678          Caso Bldg., Suite 1504
 of Puerto Rico, Inc.                                                     1225 Ponce de Leon Avenue
                                                                          Santurce, PR 00907


                                                        iv


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                                Address including zip code,
                                State or other                              and telephone number
    Exact name of               jurisdiction of     I.R.S. Employer         including area code,
registrant as specified          incorporation        Identification        of registrant's principal
   in its charter               or organization          Number               executive offices
- --------------------             --------------      --------------        ------------------------



Charter Behavioral Health       California           58-1747020           455 Silicon Valley Boulevard
 System of San Jose, Inc.                                                 San Jose, CA  95138
                                                                          (408) 224-2020

Charter Behavioral Health       Georgia              58-1750583           1150 Cornell Avenue
 System of Savannah, Inc.                                                 Savannah, GA  31406
                                                                          (912) 354-3911

Charter Behavioral Health       Florida              58-1616916           4004 North Riverside Drive
 System of Tampa Bay, Inc.                                                Tampa, FL  33603
                                                                          (813) 238-8671

Charter Behavioral Health       Arkansas             71-0752815           3414 Peachtree Rd., N.E.
 System of Texarkana, Inc.                                                Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Behavioral Health       California           95-2685883           2055 Kellogg Drive
 System of the Inland Empire,                                             Corona, CA  91719
 Inc.                                                                     (714) 735-2910

Charter Behavioral Health       Ohio                 58-1731068           1725 Timberline Road
 System of Toledo, Inc.                                                   Maumee, Ohio 43537
                                                                          (419) 891-9333

Charter Behavioral Health       Arizona              86-0757462           3414 Peachtree Rd., N.E.
 System of Tucson, Inc.                                                   Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Behavioral Health       California           33-0606644           3414 Peachtree Rd., N.E.
 System of Visalia, Inc.                                                  Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Behavioral Health       Minnesota            41-1775626           109 North Shore Drive
 System of Waverly, Inc.                                                  Waverly, MN  55390                      (612) 658-4811

Charter Behavioral Health       North Carolina       56-1050502           3637 Old Vineyard Road
 System of Winston-Salem, Inc.                                            Winston-Salem, NC  27104
                                                                          (919) 768-7710

Charter Behavioral Health       California           33-0606646           16850 Bastanchury Avenue
 System of Yorba Linda, Inc.                                              Yorba Linda, CA 92686
                                                                          (714) 993-3002

Charter Behavioral Health       Georgia              58-1900736           811 Juniper St., N.E.
 Systems of Atlanta, Inc.                                                 Atlanta, GA 30308
                                                                          (404) 881-5800



                                                         v


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                         Address including zip code,
                              State or other                              and telephone number
    Exact name of             jurisdiction of      I.R.S. Employer        including area code,
registrant as specified        incorporation        Identification       of registrant's principal
   in its charter             or organization          Number              executive offices
- --------------------           --------------        --------------      -----------------------



Charter Brawner Behavioral      Georgia               58-0979827          3414 Peachtree Rd., N.E.
 Health System, Inc.                                                      Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter By-The-Sea              Georgia               58-1351301          2927 Demere Road
 Behavioral Health System,                                                St. Simons Island, GA 31522
 Inc.                                                                     (912) 638-1999

Charter Canyon Behavioral       Utah                  58-1557925          3414 Peachtree Rd., N.E.
 Health System, Inc.                                                      Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Canyon Springs          California            33-0606640          69696 Ramon Road
 Behavioral Health System,                                                Cathedral City, CA  92234
 Inc.                                                                     (619) 321-2000

Charter Centennial Peaks        Colorado              58-1761037          2255 South 88th Street
 Behavioral Health System,                                                Louisville, CO 80027
 Inc.                                                                     (303) 673-9990

Charter Community Hospital,     California            58-1398708          21530 South Pioneer Boulevard
 Inc                                                                      Hawaiian Gardens, CA 90716
                                                                          (310) 860-0401

Charter Contract Services,      Georgia               58-2100699          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Cove Forge Behavioral   Pennsylvania          25-1730464          New Beginnings Road
 Health System, Inc.                                                      Williamsburg, PA 16693
                                                                          (814) 832-2121

Charter Fairbridge              Maryland              52-1866218          14907 Broschart Road
 Behavioral Health System,                                                Rockville, MD 20850
 Inc.                                                                     (301) 251-4565

Charter Fairmount Behavioral    Pennsylvania          58-1616921          561 Fairthorne Avenue
 Health System, Inc.                                                      Philadelphia, PA  19128
                                                                          (215) 487-4000

Charter Fenwick Hall            South Carolina        57-0995766          3414 Peachtree Rd., N.E.
 Behavioral Health System,                                                Suite 1400
 Inc.                                                                     Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Financial Offices,      Georgia               58-1527680          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200



                                                        vi


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                         Address including zip code,
                                State or other                            and telephone number
    Exact name of               jurisdiction of      I.R.S. Employer      including area code,
registrant as specified          incorporation        Identification     of registrant's principal
   in its charter               or organization         Number              executive offices
- --------------------            --------------        --------------     ------------------------



Charter Forest Behavioral       Louisiana             58-1508454          9320 Linwood Avenue
 Health System, Inc.                                                      Shreveport, LA 71106
                                                                          (318) 688-3930

Charter Grapevine Behavioral    Texas                 58-1818492          2300 William D. Tate Ave.
 Health System, Inc.                                                      Grapevine, TX 76051
                                                                          (817) 481-1900

Charter Greensboro Behavioral   North Carolina        58-1335184          700 Walter Reed Drive
 Health System, Inc.                                                      Greensboro, NC  27403
                                                                          (919) 852-4821

Charter Health Management       Texas                 58-2025056          6800 Park Ten Blvd.
 of Texas, Inc.                                                           Suite 275-W
                                                                          San Antonio, TX 78213
                                                                          (210) 699-8585

Charter Hospital of             Ohio                  58-1598899          3414 Peachtree Rd., N.E.
 Columbus, Inc.                                                           Suite 1400
                                                                          Atlanta, GA     30326
                                                                          404) 841-9200

Charter Hospital of Denver,     Colorado              58-1662413          3414 Peachtree Rd., N.E.
 Inc                                                                      Suite 1400
                                                                          Atlanta, GA     30326
                                                                          (404) 841-9200

Charter Hospital of Ft.         Colorado              58-1768534          3414 Peachtree Rd., N.E.
 Collins, Inc                                                             Suite 1400
                                                                          Atlanta, GA     30326
                                                                          (404) 841-9200

Charter Hospital of Laredo,     Texas                 58-1491620          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA     30326
                                                                          (404) 841-9200

Charter Hospital of Miami,      Florida               61-1061599          11100 N.W. 27th Street
 Inc.                                                                     Miami, FL       33172
                                                                          (305) 591-3230

Charter Hospital of Mobile,     Alabama               58-1318870          5800 Southland Drive
 Inc.                                                                     Mobile, AL      36693
                                                                          (334) 661-3001

Charter Hospital of Santa       New Mexico            58-1584861          3414 Peachtree Rd., N.E.
 Teresa, Inc.                                                             Suite 1400
                                                                          Atlanta, GA     30326
                                                                          (404) 841-9200

Charter Hospital of St. Louis,  Missouri              58-1583760          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA     30326
                                                                          (404) 841-9200

                                                        vii


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                          Address including zip code,
                                State or other                                 and telephone number
    Exact name of               jurisdiction of       I.R.S. Employer       including area code,
registrant as specified          incorporation        Identification     of registrant's principal
   in its charter               or organization           Number               executive offices
- --------------------             --------------       --------------      ------------------------



Charter Hospital of Torrance,   California            58-1402481          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA      30326
                                                                          (404) 841-9200

Charter Indianapolis            Indiana               58-1674291          5602 Caito Drive
 Behavioral Health System,                                                Indianapolis, IN  46226
 Inc.                                                                     (317) 545-2111

Charter Lafayette Behavioral    Indiana               58-1603158          3700 Rome Drive
 Health System, Inc.                                                      Lafayette, IN  47905
                                                                          (317) 448-6999

Charter Lakehurst               New Jersey            22-3286879          3414 Peachtree Rd., N.E.
 Behavioral Health System,                                                Suite 1400
 Inc.                                                                     Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Lakeside Behavioral     Tennessee             62-0892645          2911 Brunswick Road
 Health System, Inc.                                                      Memphis, TN 38134
                                                                          (901) 377-4700

Charter Laurel Heights          Georgia               58-1558212          3414 Peachtree Rd., N.E.
 Behavioral Health System,                                                Suite 1400
 Inc.                                                                     Atlanta, GA      30326
                                                                          (404) 841-9200

Charter Linden Oaks             Illinois              36-3943776          852 West Street
 Behavioral Health System,                                                Naperville, IL 60540
 Inc.                                                                     (708) 305-5500

Charter Little Rock Behavioral  Arkansas              58-1747019          1601 Murphy Drive
 Health System, Inc.                                                      Maumelle, AR 72113
                                                                          (501) 851-8700

Charter Louisville Behavioral   Kentucky              58-1517503          1405 Browns Lane
 Health System, Inc.                                                      Louisville, KY 40207
                                                                          (502) 896-0495

Charter Meadows                 Maryland              52-1866216          730 Maryland, Route 3
 Behavioral Health System,                                                Gambrills, MD 21054
 Inc.                                                                     (410) 923-6022

Charter Medfield Behavioral     Florida               58-1705131          12891 Seminole Blvd.
 Health System, Inc.                                                      Largo, FL 34648
                                                                          (813) 581-8757

Charter Medical - California,   Georgia               58-1357345          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA      30326
                                                                          (404) 841-9200



                                                       viii


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                          Address including zip code,
                                State or other                               and telephone number
    Exact name of               jurisdiction of       I.R.S. Employer        including area code,
registrant as specified          incorporation         Identification     of registrant's principal
   in its charter               or organization           Number             executive offices
- --------------------             --------------       --------------      ------------------------



Charter Medical - Clayton       Georgia               58-1579404          3414 Peachtree Rd., N.E.
 County, Inc.                                                             Suite 1400
                                                                          Atlant30326
                                                                          (404) 841-9200

Charter Medical - Cleveland,    Texas                 58-1448733          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlant30326
                                                                          (404) 841-9200

Charter Medical - Dallas,       Texas                 58-1379846          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlant30326
                                                                          (404) 841-9200

Charter Medical - Long          California            58-1366604          3414 Peachtree Rd., N.E.
 Beach, Inc.                                                              Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200

Charter Medical - New York,     New York              58-1761153          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlant30326
                                                                          (404) 841-9200

Charter Medical (Cayman        Cayman Islands, BWI    58-1841857          Caledonian Bank & Trust
 Islands) Ltd.                                                            Swiss Bank Building
                                                                          Caledonian House
                                                                          Georgetown-Grand Cayman
                                                                          Cayman Islands
                                                                          (809) 949-0050

Charter Medical Executive       Georgia               58-1538092          3414 Peachtree Rd., N.E.
 Corporation                                                              Suite 1400
                                                                          Atlanta, Ga  30326
                                                                          (404) 841-9200

Charter Medical Information     Georgia               58-1530236          3414 Peachtree Rd., N.E.
 Services, Inc.                                                           Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Medical International,  Cayman Islands, BWI   N/A                 Caledonian Bank & Trust
 Inc                                                                      Swiss Bank Building
                                                                          Caledonian House
                                                                          Georgetown-Grand Cayman
                                                                          Cayman Islands
                                                                          (809) 949-0050

Charter Medical International,  Nevada                58-1605110          3414 Peachtree Rd., N.E.
 S.A., Inc.                                                               Suite 1400
                                                                          Atlanta, GA 30326
                                                                          (404) 841-9200


                                                        ix


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                         Address including zip code,
                                State or other                              and telephone number
    Exact name of               jurisdiction of       I.R.S. Employer       including area code,
registrant as specified          incorporation         Identification     of registrant's principal
   in its charter               or organization           Number             executive offices
- --------------------             --------------        --------------     ------------------------



Charter Medical Management      Georgia               58-1195352          3414 Peachtree Rd., N.E.
 Company                                                                  Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Medical of East         Arizona               58-1643158          2190 N. Grace Boulevard
 Valley, Inc.                                                             Chandler, AZ  85224
                                                                          (602) 899-8989

Charter Medical of England,     United Kingdom        N/A                 111 Kings Road
 Ltd.                                                                     Box 323
                                                                          London SW3 4PB
                                                                          London, England
                                                                          44-71-351-1272

Charter Medical of Florida,     Florida               58-2100703          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Medical of North        Arizona               58-1643154          6015 W. Peoria Avenue
 Phoenix, Inc.                                                            Glendale, AZ  85302
                                                                          (602) 878-7878

Charter Medical of Puerto       Commonwealth of       58-1208667          Caso Building, Suite 1504
 Rico, Inc.                      Puerto Rico                              1225 Ponce De Leon Avenue
                                                                          Santurce, P.R.  00907
                                                                          (809) 723-8666

Charter Mental Health           Florida               58-2100704          3414 Peachtree Rd., N.E.
 Options, Inc.                                                            Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Milwaukee Behavioral    Wisconsin             58-1790135          11101 West Lincoln Avenue
 Health System, Inc.                                                      West Allis, WI  53227
                                                                          (414) 327-3000

Charter Mission Viejo           California            58-1761156          23228 Madero
 Behavioral Health System,                                                Mission Viejo, CA  92691
 Inc.                                                                     (714) 830-4800

Charter MOB of                  Virginia              58-1761158          1023 Millmont Avenue
 Charlottesville, Inc.                                                    Charlottesville, VA  22901
                                                                          (804) 977-1120

Charter North Behavioral        Alaska                58-1474550          2530 DeBarr Road
 Health System, Inc.                                                      Anchorage, AK  99508-2996
                                                                          (907) 258-7575

Charter Northbrooke             Wisconsin             39-1784461          46000 W. Shroeder Drive
 Behavioral Health System,                                                Brown Deer, WI 53223
 Inc.                                                                     (414) 355-2273


                                                         x


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                          Address including zip code,
                                State or other                              and telephone number
    Exact name of               jurisdiction of       I.R.S. Employer       including area code,
registrant as specified          incorporation         Identification      of registrant's principal
   in its charter               or organization           Number              executive offices
- --------------------             --------------        --------------     ------------------------



Charter North Counseling        Alaska                58-2067832          2530 DeBarr Road
 Center, Inc.                                                             Anchorage, AL    99508-2996
                                                                          (907) 258-7575

Charter Northridge Behavioral   North Carolina        58-1463919          400 Newton Road
 Health System, Inc.                                                      Raleigh, NC  27615
                                                                          (919) 847-0008

Charter Oak Behavioral          California            58-1334120          1161 East Covina Boulevard
 Health System, Inc.                                                      Covina, CA 91724
                                                                          (818) 966-1632 

Charter of Alabama, Inc.        Alabama               63-0649546          3414 Peachtree Rd., N.E.
                                                                          Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Palms Behavioral        Texas                 58-1416537          1421 E. Jackson Avenue
 Health System, Inc.                                                      McAllen, TX   78502
                                                                          (512) 631-5421

Charter Peachford Behavioral    Georgia               58-1086165          2151 Peachford Road
 Health System, Inc.                                                      Atlanta, GA  30338
                                                                          (404) 455-3200

Charter Petersburg Behavioral   Virginia              58-1761160          3414 Peachtree Rd., N.E.
 Health System, Inc.                                                      Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Pines Behavioral        North Carolina        58-1462214          3621 Randolph Road
 Health System, Inc.                                                      Charlotte, NC 28211
                                                                          (704) 365-5368

Charter Plains Behavioral       Texas                 58-1462211          801 N. Quaker Avenue
 Health System, Inc.                                                      Lubbock, TX  79408
                                                                          (806) 744-5505

Charter-Provo School, Inc.      Utah                  58-1647690          4501 North University Ave.
                                                                          Provo, UT  84604
                                                                          (801) 227-2000

Charter Real Behavioral         Texas                 58-1485897          8550 Huebner Road
 Health System, Inc.                                                      San Antonio, TX   78240
                                                                          (512) 699-8585

Charter Regional Medical        Texas                 74-1299623          3414 Peachtree Rd., N.E.
 Center, Inc.                                                             Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Ridge Behavioral        Kentucky              58-1393063          3050 Rio Dosa Drive
 Health System, Inc.                                                      Lexington, KY 40509
                                                                          (606) 269-2325

                                                        xi


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                          Address including zip code,
                                State or other                               and telephone number
    Exact name of               jurisdiction of       I.R.S. Employer        including area code,
registrant as specified          incorporation        Identification      of registrant's principal
   in its charter               or organization           Number             executive offices
- --------------------             --------------        --------------     ------------------------



Charter Rivers Behavioral       South Carolina        58-1408623          2900 Sunset Boulevard
 Health System, Inc.                                                      West Columbia, SC 29169
                                                                          (803) 796-9911

Charter San Diego Behavioral    California            58-1669160          11878 Avenue of Industry
 Health System, Inc.                                                      San Diego, CA  92128
                                                                          (619) 487-3200

Charter Sioux Falls Behavioral  South Dakota          58-1674278          2812 South Louise Avenue
 Health System, Inc.                                                      Sioux Falls, SD 57106
                                                                          (605) 361-8111

Charter South Bend Behavioral   Indiana               58-1674287          6704 N. Gumwood Drive
 Health System, Inc.                                                      Granger, IN  46530
                                                                          (219) 272-9799

Charter Springs Behavioral      Florida               58-1517461          3130 S.W. 27th Avenue
 Health System, Inc.                                                      Ocala, FL  32674
                                                                          (904) 237-7293

Charter Springwood              Virginia              58-2097829          Route 4, Box 50
 Behavioral Health System,                                                Leesburg, VA  22075
 Inc.                                                                     (703) 777-0800

Charter Suburban Hospital       Texas                 75-1161721          3414 Peachtree Rd., N.E.
 of Mesquite, Inc.                                                        Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Terre Haute Behavioral  Indiana               58-1674293          1400 Crossing Boulevard
 Health System, Inc.                                                      Terre Haute, IN 47802
                                                                          (812) 299-4196

Charter Thousand Oaks           California            58-1731069          150 Via Merida
 Behavioral Health System,                                                Thousand Oaks, CA   91361
 Inc.                                                                     (805) 495-3292

Charter Treatment Center of     Michigan              58-2025057          3414 Peachtree Rd., N.E.
 Michigan, Inc.                                                           Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Charter Westbrook Behavioral    Virginia              54-0858777          1500 Westbrook Avenue
 Health System, Inc.                                                      Richmond, VA  23227
                                                                          (804) 266-9671

Charter White Oak               Maryland              52-1866223          1441 Taylors Island Road
 Behavioral Health System,                                                Woolford, MD   21677
 Inc.                                                                     (410) 228-7000

Charter Wichita Behavioral      Kansas                58-1634296          8901 East Orme
 Health System, Inc.                                                      Wichita, KS 67207
                                                                          (316) 686-5000


                                                        xii


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                          Address including zip code,
                                State or other                              and telephone number
    Exact name of               jurisdiction of       I.R.S. Employer       including area code,
registrant as specified          incorporation        Identification      of registrant's principal
   in its charter               or organization          Number             executive offices
- --------------------             --------------       --------------      ------------------------



Charter Woods Behavioral        Alabama               58-1330526          700 Cottonwood Road
 Health System, Inc.                                                      Dothan, AL 36301
                                                                          (205) 794-4357

Desert Springs Hospital, Inc.   Nevada                88-0117696          414 Peachtree Rd., N.E.
                                                                          Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Employee Assistance Services,   Georgia               58-1501282          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Florida Health Facilities,      Florida               58-1860493          21808 State Road 54
 Inc.                                                                     Lutz, FL  33549
                                                                          (813) 948-2441

Gulf Coast EAP Services,        Alabama               58-2101394          3414 Peachtree Rd., N.E.
 Inc.                                                                     Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Hospital Investors, Inc.        Georgia               58-1182191          3414 Peachtree Rd., N.E.
                                                                          Suite 1400
                                                                          Atlanta, Ga  30326
                                                                          (404) 841-9200

Illinois Mentor, Inc.           Illinois              36-3643670          45 Milk Street
                                                                          Boston, MA  02109
                                                                          (617) 654-0500

Magellan Public Solutions,      Delaware              04-3250732          45 Milk Street
 Inc.                                                                     Boston, MA  02109
                                                                          (617) 654-0500

Mandarin Meadows, Inc.          Florida               58-1761155          3414 Peachtree Rd., N.E.
                                                                          Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Massachusetts Mentor, Inc.      Massachusetts         04-2799071          45 Milk Street
                                                                          Boston, MA  02109
                                                                          (617) 654-0500

National Mentor, Inc.           Delaware              04-2794857          45 Milk Street
                                                                          Boston, MA  02109
                                                                          (617) 654-0500

National Mentor Healthcare,     Massachusetts         04-2893910          45 Milk Street
 Inc.                                                                     Boston, MA  02109
                                                                          (617) 654-0500



                                                       xiii


<PAGE>


                                             ADDITIONAL REGISTRANTS(1)

                                                                          Address including zip code,
                                State or other                              and telephone number
    Exact name of               jurisdiction of       I.R.S. Employer       including area code,
registrant as specified          incorporation        Identification      of registrant's principal
   in its charter               or organization          Number            executive offices
- --------------------            --------------        --------------     ------------------------


NEPA - Massachusetts, Inc.      Massachusetts         58-2116751          #6 Courthouse Lane
                                                                          Chelmsford, MA  01863
                                                                          (508) 441-2332

NEPA - New Hampshire, Inc.      New Hampshire         58-2116398          29 Northwest Boulevard
                                                                          Nashua, NH  03063
                                                                          (603) 886-5000

Ohio Mentor, Inc.               Ohio                  31-1098345          45 Milk Street
                                                                          Boston, MA  02109
                                                                          (617) 654-0500

Pacific-Charter Medical, Inc.   California            58-1336537          3414 Peachtree Rd., N.E.
                                                                          Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

South Carolina Mentor, Inc.     South Carolina        57-0782160          45 Milk Street
                                                                          Boston, MA  02109
                                                                          (617) 654-0500

Southeast Behavioral Systems,   Georgia               58-2100700          3414 Peachtree Rd., N.E.
 Inc                                                                      Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

Schizophrenia Treatment and     Georgia               58-1672912          209 Church Street
 Rehabilitation, Inc.                                                     Decatur, GA 30030
                                                                          (404) 377-1986

Sistemas De Terapia             Georgia               58-1181077          3414 Peachtree Rd., N.E.
 Respiratoria, S.A., Inc.                                                 Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200


Western Behavioral              California            58-1662416          3414 Peachtree Rd., N.E.
 Systems, Inc.                                                            Suite 1400
                                                                          Atlanta, GA  30326
                                                                          (404) 841-9200

</TABLE>



(1)      The Additional Registrants listed are wholly-owned  subsidiaries of the
         Registrant  and are  guarantors  of the  Registrant's  11 1/4% Series A
         Senior  Subordinated  Notes due 2004. The Additional  Registrants  have
         been  conditionally   exempted,   pursuant  to  Section  12(h)  of  the
         Securities Exchange Act of 1934, from filing reports under Section 13
         of the Securities Exchange Act of 1934.


                                                        xiv


<PAGE>


<TABLE>
<CAPTION>

                                           MAGELLAN HEALTH SERVICES, INC.
                                            ANNUAL REPORT ON FORM 10-K

                   For the Fiscal Year Ended September 30, 1995

                               Table of Contents
                                                                           Page


                                  PART I
<S>   <C>     <C>                 <C>                                      <C>


Item   1.     Business                                                        1

Item   2.     Properties                                                     12

Item   3.     Legal Proceedings                                              12

Item   4.     Submission of Matters to a Vote of Security Holders            12


                                  PART II


Item   5.     Market Price for Registrant's Common Equity and Related        13
              Stockholder Matters                                            13

Item   6.     Selected Financial Data                                        15

Item   7.     Management's Discussion and Analysis of Financial Condition 
              and Results of Operations                                      23

Item   8.     Financial Statements and Supplementary Data

Item   9.     Changes in and Disagreements with Accountants on Accounting 
              and Financial Disclosure                                       23


                                  PART III


Item 10.      Directors and Executive Officers of the Registrant             24

Item 11.      Executive Compensation                                         24

Item 12.      Security Ownership of Certain Beneficial Owners and Management 24

Item 13.      Certain Relationships and Related Transactions                 24


                                  PART IV


Item 14.      Exhibits, Financial Statement Schedule and Reports on Form 8-K 25


</TABLE>




<PAGE>




                                     PART I



Item 1.  Business

General

         Magellan Health Services, Inc. (the "Company") (formerly Charter
Medical Corporation) ,  which was incorporated in 1969, is a behavioral
healthcare company. As of September 30, 1995, the Company operated 98 acute 
care psychiatric  hospitals  and four  residential  treatment centers with an 
aggregate  capacity of 8,939 licensed beds.  Ninety-three of the Company's 
hospitals operate partial  hospitalization  programs,  and the Company operates
144 outpatient centers, staffed by mental health professionals. In this report,
the Company uses the term  "psychiatric  hospitals" or  "hospitals"  to refer 
to the 98 facilities licensed as acute care psychiatric  hospitals and the four
facilities  licensed  as  residential  treatment  centers.  A  residential 
treatment  center offers less intensive and longer stay services than acute 
care psychiatric hospitals.

         The  Company's  business  strategy  is to  develop  and  operate  fully
integrated behavioral healthcare delivery systems in certain markets in which it
presently  operates one or more hospitals and in selected other markets in which
the Company does not presently operate a hospital. The fully integrated delivery
systems that the Company is developing offer a comprehensive range of behavioral
healthcare   services   including   inpatient   treatment,   day   and   partial
hospitalization services, group and individual outpatient treatment, residential
treatment programs and other less intensive behavioral healthcare services.  The
Company is  establishing  such  systems by using its  hospitals as a base and by
arranging for other services  through  acquisitions,  contracts or  affiliations
with physicians,  psychologists  and other mental health  professionals  and, in
some  markets,  with  general  acute  care  hospitals  and  other  institutional
healthcare providers.

Recent Developments

         Green Spring Health Services Acquisition

         On December 13, 1995, the Company acquired a 51% ownership  interest in
Green Spring Health  Services,  Inc. ("Green  Spring") for  approximately  $73.2
million  in cash  and  Common  Stock  and the  contribution  of  Group  Practice
Affiliates  ("GPA"),  a  wholly-owned Magellan   subsidiary,   which  became  a
wholly-owned  subsidiary of Green  Spring.  GPA was organized by the Company for
the purpose of  acquiring  and managing  professional  group  practices  and has
acquired five group  practices  through  September  30, 1995.  Green Spring is a
leading  provider of managed  behavioral  healthcare  services,  which  includes
utilization management, care management and employee assistance programs through
a 50-state provider network for approximately 12 million people nationwide.

         The  Green  Spring  acquisition  creates  the  first  fully  integrated
national  behavioral  healthcare  system and gives the Company the capability to
provide case management and delivery services to large private organizations and
a public sector marketplace seeking  increased  privatization of services.  The
Company changed its name to Magellan Health Services,  Inc. on December 21, 1995
to reflect  the  broader  range of services it expects to provide as a result of
the Green Spring acquisition.

         The Company will operate its integrated national behavioral  healthcare
system through three principal subsidiaries beginning in fiscal 1996 engaging in
(i) the  provider  business,  (ii) the managed  care  business and (iii) the
public sector business.  Each principal subsidiary will operate autonomously and
enter into contractual arrangements with the other subsidiaries as necessary.

         The  minority  shareholders  of  Green  Spring  consist  of  four  Blue
Cross/Blue  Shield  organizations  (the "Blues") that are key customers of Green
Spring. In addition, two other Blues organizations that formerly owned a portion
of Green  Spring will  continue  as  customers  of Green  Spring.  The  minority
shareholders of Green Spring will have the option, under certain  circumstances,
to exchange their ownership interests ("exchange option") in Green Spring for



<PAGE>



approximately  3.6 million  shares of Magellan Common Stock or $81.8  million in
subordinated  notes.  The  Company  may elect to pay cash in lieu of issuing the
subordinated notes. The exchange option expires December 13, 1998.

         On December 20, 1995, the Company  acquired an additional 10% ownership
interest in Green Spring for approximately  $16.7 million in cash as a result of
an exchange  option  exercised by certain of the minority  shareholders of Green
Spring.  The Company has a 61% ownership  interest in Green Spring subsequent to
the exercise of the aforementioned exchange option.

         Fiscal 1994 and Prior Developments

NME Acquisition

         During  fiscal  1994,  the  Company  agreed to acquire  40  psychiatric
hospitals (the "Acquired  Hospitals")  from National Medical  Enterprises,  Inc.
("NME").  The purchase price for the Acquired Hospitals was approximately $120.4
million in cash plus an  additional  cash amount of  approximately  $51 million,
subject to  adjustment,  for the net working  capital of the Acquired  Hospitals
(the "Hospital  Acquisition".)  The Acquired Hospitals had an aggregate capacity
of 2,873  licensed beds when  acquired and were located in 19 states.  For their
fiscal  year ended May 31,  1994,  the  Acquired  Hospitals  had net  revenue of
approximately $315.1 million.

         On June 30,  1994,  the  Company  completed  the  purchase of 27 of the
Acquired  Hospitals for a cash purchase price of  approximately  $129.6 million,
which included approximately $39.3 million,  subject to adjustment,  for the net
working  capital of the facilities.  On October 31, 1994, the Company  completed
the purchase of three additional Acquired Hospitals for a cash purchase price of
approximately $5 million,  which included  approximately $2.2 million related to
the net working  capital of the  facilities.  On November 30, 1994,  the Company
completed  the  purchase of the  remaining  ten  Acquired  Hospitals  for a cash
purchase price of  approximately  $36.8 million,  including  approximately  $9.5
million related to the net working capital of the ten Acquired Hospitals. During
the year ended September 30, 1995, the Company received approximately $3.5 
million from NME as a partial  payment  related to the settlement of the 
working capital portion of the purchase price. The Company accounted for the 
Hospital Acquisition using the purchase method of accounting.

Debt Refinancing

         In  order  to  finance  the  Hospital   Acquisition  and  to  refinance
substantially all of the Company's  outstanding  long-term debt, on May 2, 1994,
the Company  entered into a Second  Amended and Restated  Credit  Agreement with
certain  financial  institutions  for a  five-year  reducing,  revolving  credit
facility in an aggregate committed amount of $300 million (the "Revolving Credit
Agreement")  and issued  $375  million of 11 1/4%  Series A Senior  Subordinated
Notes which  mature on April 15, 2004 (the  "Notes")  and are general  unsecured
obligations of the Company. (See Note 6 of the Company's  Consolidated Financial
Statements.)

Sale of General Hospitals

         On September  30,  1993,  the Company  sold its general  hospitals  and
related  assets to Quorum,  Inc. for  approximately  $338  million.  The Company
retained the assets and liabilities relating to these hospitals for professional
liability  claims  incurred  and cost report  settlements  for periods  prior to
September 30, 1993.

         For fiscal 1993, the general hospitals had net revenue of approximately
$347  million,  a net loss of  approximately  $15 million,  and  admissions  and
patient days of 39,669 and 205,843,  respectively. In 1993, the Company restated
its  consolidated  financial  statements  to  reflect  the sales of the  general
hospitals  and  its  interest  in  a  non-hospital  subsidiary  as  discontinued
operations.





<PAGE>



Financial Restructuring

         In its 1992 fiscal year, the Company  completed a restructuring  of its
debt and equity capitalization (the  "Restructuring")  pursuant to a prepackaged
plan of  reorganization  filed under Chapter 11 of the United States  Bankruptcy
Code (the "Plan"),  which became  effective on July 21, 1992. As a result of the
Restructuring,  the Company's  long-term debt was reduced by approximately  $700
million and its redeemable  preferred stock of $233 million was eliminated.  The
holders of the debt and preferred stock that were reduced or eliminated received
approximately 97% of the Company's common stock outstanding on July 21, 1992.

Psychiatric Hospital Operations

         The Company's  psychiatric hospitals in operation on September 30, 1995
are located in well-populated  urban and suburban locations in 32 states and two
foreign countries.  Five of the Company's  hospitals are affiliated with medical
schools for residency and other post-graduate teaching programs.

         Most of the Company's  hospitals  offer a full  continuum of behavioral
care in their service area. The continuum  includes  inpatient  hospitalization,
partial  hospitalization,  intensive  outpatient  services and, in some markets,
residential treatment services.

         The Company's  hospitals  provide  structured  and intensive  treatment
programs  for  mental  health  and  alcohol  and drug  dependency  disorders  in
children,  adolescents and adults.  The  specialization  of programs enables the
clinical  staff to provide  care that is  specific  to the  patient's  needs and
facilitates  monitoring the patient's  progress.  A typical treatment program of
the Company  integrates  physicians and other  patient-care  professionals  with
structured  activities,  providing patients with testing,  adjunctive  therapies
(occupational,  recreational and other),  group therapy,  individual therapy and
educational  programs.  A treatment program includes one or more of the types of
treatment  settings  provided  by the  Company's  continuum  of care.  For those
patients  who do not  have a  personal  psychiatrist  or other  specialist,  the
hospital refers the patient to a member of its medical staff.

         A significant  portion of hospital admissions are provided by referrals
from former patients, local marketplace advertising,  managed care organizations
and physician referrals.  Professional  relationships are an important aspect of
the Company's ongoing business. Management believes the quality of the Company's
treatment  programs,  staff  employees  and physical  facilities  are  important
factors in maintaining good professional relationships.

         The Company's hospitals work closely with mental health  professionals,
non-psychiatric physicians,  emergency rooms and community agencies that come in
contact with  individuals who may need treatment for mental illness or substance
abuse. A portion of the Company's  marketing  efforts is directed at increasing
general  awareness  of mental  health and  addictive  disease  and the  services
offered by the Company's hospitals.

Seasonality

         The Company's business is seasonal in nature, with a reduced demand for
certain  services  generally  occurring in the first fiscal quarter around major
holidays,  such as Thanksgiving  and Christmas, and during the summer months 
comprising the fourth fiscal quarter.

Related Businesses

         As part of the Company's business strategy during the past three fiscal
years,  the Company (i) acquired a company  that  develops  information  systems
relating to the financing and delivery of behavioral  healthcare services,  (ii)
acquired  a  company  that  provides  outpatient   treatment  for  schizophrenia
patients, and (iii) acquired a company that provides specialized health services
in mentor homes.  To date,  the activities of these  subsidiaries  have not been
material to the Company.






<PAGE>





Hospital Properties

         The following table provides  information relating to the 102 hospitals
operated by the Company as of September 30, 1995.


<TABLE>
<CAPTION>
         State/Country          Number of Hospitals      Number of Licensed Beds
         -------------          -------------------      -----------------------

         <S>                    <C>                      <C>
         Alabama                        2                           169
         Alaska                         1                            74
         Arizona                        2                           170
         Arkansas                       2                           125
         California                    11                           889
         Colorado                       1                            72
         England                        2                           123
         Florida                       10                           833
         Georgia                        8                           840
         Illinois                       2                           215
         Indiana                       10                           746
         Kansas                         2                           160
         Kentucky                       3                           256
         Louisiana                      3                           259
         Maryland                       6                           350
         Massachusetts                  2                           215
         Minnesota                      1                            40
         Mississippi                    1                           111
         Missouri                       1                            96
         Nevada                         1                            84
         New Hampshire                  1                           100
         New Jersey                     1                           150
         New Mexico                     2                           172
         North Carolina                 4                           398
         Ohio                           1                            38
         Pennsylvania                   2                           265
         South Carolina                 3                           260
         South Dakota                   1                            60
         Switzerland                    1                            69
         Tennessee                      1                           204
         Texas                          8                           662
         Utah                           1                           212
         Virginia                       3                           362
         Wisconsin                      2                           160
                                    -----                         -----
                  Total               102                         8,939
                                    =====                         =====
</TABLE>



         All of the Company's  hospitals  located in the United States have been
accredited by the Joint Commission on Accreditation of Healthcare  Organizations
(the "Joint  Commission").  The Joint Commission is a national  commission which
establishes standards relating to the physical plant, administration, quality of
patient care, governing body and medical staffs of hospitals.





<PAGE>



         The Company operates 13 leased hospitals, including one 150-bed general
hospital, not listed above, which is managed by an unaffiliated third party. The
leases for such hospitals have terms expiring  between 1996 and 2069. The leases
for two  hospitals  contain  options to  purchase  these  hospitals  for nominal
consideration at the end of their respective lease terms.

         Sixty-two  of the  Company's  hospitals  listed  above are  subject  to
mortgages.  The stock of substantially  all of the domestic  subsidiaries of the
Company has been pledged as collateral for the Company's secured bank financing.

         The Company owns 16 medical  office  buildings and leases an additional
19 such buildings. Five of the Company's medical office buildings are subject to
mortgages.

         The Company leases office space for its outpatient centers.  The leases
generally have terms of less than five years.

Divestitures

         During fiscal 1995, the Company sold the following facilities:

<TABLE>
<CAPTION>

   Location                   Size/Type of Facility               Date
   --------                   ---------------------               ----
<S>                       <C>                                 <C>
Chesapeake, VA            Outpatient psychiatric hospital     December 1994
Norfolk, VA               65-bed psychiatric hospital         December 1994
Virginia Beach, VA        61-bed psychiatric hospital         December 1994
</TABLE>


         In  addition,  the  Company  leases,  with  options to  purchase by the
lessees, three facilities which it previously operated prior to fiscal 1991. The
Company  is also  attempting  to sell or  lease  11  other  previously  operated
hospitals  and related  medical  office  buildings and certain  unimproved  real
estate.

Competition

         Each of the Company's hospitals competes with other hospitals,  some of
which are larger and have greater financial resources.  Some competing hospitals
are  owned  and  operated  by   governmental   agencies,   others  by  nonprofit
organizations supported by endowments and charitable contributions and others by
proprietary hospital  corporations.  The hospitals frequently draw patients from
areas outside their immediate  locale and,  therefore,  the Company's  hospitals
may,  in certain  markets,  compete  with both local and distant  hospitals.  In
addition,  the  Company's  hospitals  compete  not only with  other  psychiatric
hospitals,  but also with psychiatric units in general hospitals, and outpatient
services  provided by the Company may compete  with  private  practicing  mental
health  professionals.   The  competitive  position  of  a  hospital  is,  to  a
significant  degree,  dependent  upon the number and quality of  physicians  who
practice at the hospital and who are members of its medical  staff.  The Company
has entered into joint venture  arrangements with other healthcare  providers in
certain markets to promote more efficiency in the local delivery system.

         In  recent  years,  the  competitive  position  of  hospitals  has been
affected by the ability of such  hospitals to obtain  contracts  with  Preferred
Provider Organizations ("PPO's"), Health Maintenance Organizations ("HMO's") and
other  managed  care  programs to provide  inpatient  and other  services.  Such
contracts normally involve a discount from the hospital's  established  charges,
but provide a base of patient referrals. These contracts also frequently provide
for pre-admission  certification and for concurrent length of stay reviews.  The
importance  of  obtaining  contracts  with HMO's,  PPO's and other  managed care
companies  varies  from market to market,  depending  on the  individual  market
strength of the managed  care  companies.  The  Company's  acquisition  of Green
Spring creates  opportunities to increase its revenues through managed
care  contracts  utilizing the continuum of care  described  above,  information
systems that support care management and at-risk pricing mechanisms.

         State  certificate of need laws place  limitations on the Company's and
its  competitors'  ability  to  build  new  hospitals  and  to  expand  existing
hospitals.  Protection  from new  competition  is reduced in those  states where
there is no  certificate  of need law.  The Company  operates 44 hospitals in 12
states (Arizona,  Arkansas,  California,  Colorado,  Indiana, Kansas, Louisiana,
Nevada, New Mexico,  South Dakota, Texas and Utah) which do not have certificate
of need



<PAGE>



laws  applicable to hospitals.  In most cases,  these state laws do not restrict
the ability of the Company or its competitors to offer new outpatient services.

Industry Trends

         The  Company's  hospitals  have  been  adversely  affected  by  factors
influencing the entire psychiatric  hospital industry.  Factors which affect the
Company  include  (i)  the  imposition  of more  stringent  length  of stay  and
admission  criteria by payors;  (ii) the failure of reimbursement rate increases
from certain  payors that reimburse on a per diem or other  discounted  basis to
offset  increases  in the cost of providing  services;  (iii) an increase in the
percentage of its business that the Company  derives from payors that  reimburse
on a per diem or other discounted  basis;  (iv) a trend toward higher deductible
and  co-insurance  for  individual  patients;  and (v) a trend  toward  limiting
employee  health  benefits,  such as reductions in annual and lifetime limits on
mental health  coverage.  In response to these  conditions,  the Company has (i)
strengthened  controls to reduce costs and capital  expenditures,  (ii) reviewed
its portfolio of hospitals and sold,  closed or leased hospitals or consolidated
operations  in  certain  locations,   (iii)  developed  strategies  to  increase
outpatient services and partial hospitalization  programs to meet the demands of
the  marketplace,  and (iv)  created a  national,  fully  integrated  behavioral
healthcare  system  upon  acquiring  Green  Spring  in  December  1995,  thereby
improving  the  Company's  ability to obtain  contracts  with large  private and
public payors.

Governmental Budgetary Constraints and Healthcare Reform

         In the  1995  session  of the  United  States  Congress,  the  focus of
healthcare  legislation  has been on  budgetary  and related  funding  mechanism
issues.  A number of reports,  including  the 1995 Annual Report of the Board of
Trustees of the Federal  Hospital  Insurance  Program  (Medicare) have projected
that the Medicare "trust fund" is likely to become insolvent by the year 2002 if
the current growth rate of approximately 10% per annum in Medicare  expenditures
continues.  Similarly, federal and state expenditures under the Medicaid program
are projected to increase  significantly  during the same seven-year  period. In
response to these projected expenditure  increases,  and as part of an effort to
balance the federal  budget,  both the Congress  and the Clinton  Administration
have made  proposals  to reduce the rate of increase in  projected  Medicare and
Medicaid expenditures and to change funding mechanisms and other aspects of both
programs.  Congress has passed legislation that would reduce projected 
expenditure  increases  substantially and would make significant  changes in the
Medicare  and the  Medicaid  programs.  The Clinton Administration  has 
proposed  alternate  measures to reduce, to a lesser extent, projected  
increases in Medicare and  Medicaid  expenditures.  As of the date of this 
filing, neither proposal has become law. 

         The  Medicare  legislation  that  has  been  adopted  by Congress 
would, with some  differences,  reduce projected expenditure  increases  by a
variety of means,  including  reduced  payments  to providers (including the 
Company),  increased beneficiary premiums for physician and  certain  other   
services,   and  creation  of   incentives   for  Medicare beneficiaries  to 
enroll in managed  care plans or to accept  Medicare  coverage with a 
substantially  increased deductible,  with the savings being available to the 
beneficiaries to pay non-covered  expenses.  Changes in the Medicaid program 
would  reduce the number and  extent of federal  mandates  concerning  how state
Medicaid  programs operate  (including levels of benefits provided and levels of
payments to  providers)  and would change the funding  mechanism  from a sharing
formula between the federal government and a state to "block grant" funding. The
Company cannot predict the effect of any such  legislation,  if adopted,  on its
operations;  but the Company  anticipates  that,  although  overall Medicare and
Medicaid  funding  may be reduced  from  projected  levels,  the changes in such
programs may provide  opportunities to the Company to obtain increased  Medicare
and Medicaid  business through  risk-sharing or partial  risk-sharing  contracts
with managed care plans and state Medicaid programs.

         Although  the  United  States  Congress,  in 1995,  has not  considered
healthcare reform proposals,  the Company  anticipates that numerous  healthcare
reform  proposals will continue to be introduced in future sessions of Congress.
The Company  cannot  predict  whether any such  proposal  will be adopted or the
effect on the Company of any proposal that does become law.





<PAGE>