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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K
 

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

 
                  For the fiscal year ended September 30, 2000
 

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

 
        For the transition period from ______________ to ______________
 
                           COMMISSION FILE NO. 1-6639
 
                         MAGELLAN HEALTH SERVICES, INC.
             (Exact name of registrant as specified in its charter)
 

<TABLE>
<S>                                            <C>
               DELAWARE                                     58-1076937
    (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                     Identification No.)
 
      6950 COLUMBIA GATEWAY DRIVE
               SUITE 400
          COLUMBIA, MARYLAND                                  21046
    (Address of principal executive                         (Zip Code)
               offices)
</TABLE>

 
       Registrant's telephone number, including area code: (410) 953-1000
                            ------------------------
 
Securities registered pursuant to Section 12(b) of the Act:
 

<TABLE>
<S>                                            <C>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
       Common Stock ($0.25 par value)                     New York Stock Exchange
</TABLE>

 
    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 amendment to this
Form 10-K. / /
 
    The aggregate market value of the common stock held by non-affiliates of the
registrant at November 30, 2000 was approximately $93,939,264.
 
    The number of shares of the registrant's common stock outstanding as of
November 30, 2000 was 34,921,746.
 
    DOCUMENTS INCORPORATED BY REFERENCE: The registrant's definitive proxy
materials on Schedule 14A relating to its annual meeting of stockholders to be
held on February 21, 2001 are incorporated by reference into Part III as set
forth herein.
--------------------------------------------------------------------------------
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<PAGE>
                         MAGELLAN HEALTH SERVICES, INC.
                           ANNUAL REPORT ON FORM 10-K
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
 
                               TABLE OF CONTENTS
 

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<CAPTION>
                                                                                       PAGE
                                                                                     --------
<S>                    <C>                                                           <C>

                                           PART I

ITEM 1.                Business....................................................      3

ITEM 2.                Properties..................................................     26

ITEM 3.                Legal Proceedings...........................................     27

ITEM 4.                Submission of Matters to a Vote of Security Holders.........     29
 

                                           PART II
 

ITEM 5.                Market Price for Registrant's Common Equity and Related
                         Stockholder Matters.......................................     29

ITEM 6.                Selected Financial Data.....................................     29

ITEM 7.                Management's Discussion and Analysis of Financial Condition
                         and Results of Operations.................................     31

ITEM 7A.               Quantitative and Qualitative Disclosures About Market
                         Risk......................................................     42

ITEM 8.                Financial Statements and Supplementary Data.................     42

ITEM 9.                Changes in and Disagreements with Accountants on Accounting
                         and Financial Disclosure..................................     42
 

                                          PART III
 

ITEM 10.               Directors and Executive Officers of the Registrant..........     43

ITEM 11.               Executive Compensation......................................     43

ITEM 12.               Security Ownership of Certain Beneficial Owners and
                         Management................................................     43

ITEM 13.               Certain Relationships and Related Transactions..............     43
 

                                           PART IV
 

ITEM 14.               Exhibits, Financial Statement Schedule and Reports on
                         Form 8-K..................................................     43
</TABLE>

 
                                       2

<PAGE>

                                     PART I
 

ITEM 1. BUSINESS
 
    Magellan Health Services, Inc. (the "Company"), which was incorporated in
1969 under the laws of the State of Delaware, is a national healthcare company.
The Company primarily operates through two principal segments and engages in the
behavioral managed healthcare business and the human services business The
Company's executive offices are located at Suite 400, 6950 Columbia Gateway
Drive, Columbia, Maryland 21046, and its telephone number at that location is
(410) 953-1000.
 
RECENT DEVELOPMENTS
 
    DIVESTITURE OF SPECIALTY MANAGED HEALTHCARE BUSINESS.  On October 4, 2000
the Board of Directors of the Company, adopted a formal plan of disposal of the
specialty managed healthcare business segment. This action represents a disposal
of a business segment under Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"). APB 30 requires that the results of
continuing operations be reported separately from those of discontinued
operations for all periods presented and that any gain or loss from disposal of
a segment of a business be reported in conjunction with the related results of
discontinued operations. Accordingly, the Company has restated its results of
operations for all prior periods. The Company recorded an after-tax loss on
disposal of its specialty managed healthcare segment of approximately
$17.7 million (primarily non-cash), in the fourth quarter of fiscal 2000. See
Note 3--"Discontinued Operations" to the Company's audited consolidated
financial statements set forth elsewhere herein.
 
    The specialty managed healthcare segment includes the businesses acquired in
conjunction with the purchase of Vivra, Inc. ("Vivra") on February 29, 2000 and
Allied Health Group, Inc. ("Allied") on December 5, 1997. The initial purchase
price of Vivra was $10.25 million and additional consideration of $10.0 million
may be payable based upon future results. Approximately 30% of the voting
interest in Vivra was owned by the investment firm Texas Pacific Group ("TPG")
at the time of the Company's acquisition. Three of the Company's twelve board
members are affiliated with TPG; however, these three Board members did not
participate in the Board's approval of the Vivra acquisition. TPG is the holder
of 59,063 shares of the Company's redeemable preferred stock, representing
approximately 16% of the outstanding voting securities of the Company at
September 30, 2000. See Note 7--"Redeemable Preferred Stock" to the Company's
audited consolidated financial statements set forth elsewhere herein. The
Company paid approximately $54.5 million for Allied.
 
    BANK AMENDMENT.  On August 11, 2000, the Company was successful in amending
certain financial covenants and terms of the Credit Agreement (as defined). The
Company believes the amended Credit Agreement will enable the Company to comply
with all future financial covenants based on the Company's projected operating
performance. The Company incurred approximately $3.1 million in fees to obtain
this amendment and the Company's borrowing rate on its term debt was increased
by 1.25%, resulting in increased interest cost in future periods.
 
    TPG INVESTMENT.  On December 15, 1999, the Company entered into an amended
and restated definitive agreement with TPG Magellan, LLC, an affiliate of the
investment firm Texas Pacific Group ("TPG"), pursuant to which TPG purchased
approximately $59.1 million of the Company's Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock") and an Option (the "Option") to
purchase an additional approximately $21.0 million of Series A Preferred Stock.
Net proceeds from issuance of the Series A Preferred Stock were $54.0 million.
Approximately 50% of the net proceeds received from the issuance of the
Series A Preferred Stock was used to reduce debt outstanding under the Term Loan
Facility (as defined) with the remaining 50% of the proceeds being used for
general corporate purposes. The Series A Preferred Stock carries a dividend of
6.5% per annum, payable in quarterly installments in cash or common stock,
subject to certain conditions. Dividends not paid in cash or common
 
                                       3

<PAGE>
stock will accumulate. The Series A Preferred Stock is convertible at any time
into the Company's common stock at a conversion price of $9.375 per share (which
would result in approximately 6.3 million shares of common stock if all of the
currently issued Series A Preferred Stock were to convert) and carries "as
converted" voting rights. The Company may, under certain circumstances, require
the holders of the Series A Preferred Stock to convert such stock into common
stock. The Series A Preferred Stock, plus accrued and unpaid dividends thereon,
must be redeemed by the Company on December 15, 2009. The Option may be
exercised in whole or in part at any time on or prior to June 15, 2002. The
terms of the shares of Series A Preferred Stock issuable pursuant to the Option
are identical to the terms of the shares of Series A Preferred Stock issued to
TPG at the closing of the TPG Investment. See Note 7--"Redeemable Preferred
Stock" to the Company's audited consolidated financial statements set forth
elsehwere herein.
 
    TPG has three representatives on the Company's twelve-member Board of
Directors.
 
HISTORY
 
    Prior to June 1997, the Company's primary business was the operation of
psychiatric hospitals. During the first quarter of fiscal 1996, the Company
acquired a 61% ownership interest in Green Spring Health Services, Inc. ("Green
Spring"), a managed care company specializing in mental health and substance
abuse/dependence services. At that time, the Company intended to become a fully
integrated behavioral healthcare provider by combining the behavioral managed
healthcare products offered by Green Spring with the direct treatment services
offered by the Company's psychiatric hospitals. Subsequent to the Company's
acquisition of Green Spring, the growth of the behavioral managed healthcare
industry accelerated. The Company concluded that the behavioral managed
healthcare industry offered growth and earnings prospects superior to those of
the psychiatric hospital industry. Therefore, the Company decided to sell its
domestic psychiatric facilities to obtain capital for expansion of its managed
healthcare business.
 
    In June 1997, the Company sold substantially all of its domestic acute-care
psychiatric hospitals and residential treatment facilities (collectively, the
"Psychiatric Hospital Facilities") to Crescent Real Estate ("Crescent") for
approximately $400.0 million (the "Crescent Transactions"). Simultaneously with
the sale of the Psychiatric Hospital Facilities, the Company and Crescent
Operating, Inc. ("COI"), an affiliate of Crescent, formed Charter Behavioral
Health Systems, LLC ("CBHS") to conduct the operations of the Psychiatric
Hospital Facilities and certain other facilities transferred to CBHS by the
Company. The Company retained a 50% ownership of CBHS; the other 50% of the
ownership interest of CBHS was owned by COI.
 
    During fiscal 1999, the Company completed its exit from the healthcare
provider and franchising businesses. In April 1999, the Company sold its
European psychiatric provider operations to Investment AB Bure of Sweden for
approximately $57.0 million. On September 10, 1999, the Company consummated the
transfer of certain assets and other interests pursuant to a Letter Agreement
dated August 10, 1999 with Crescent, COI and CBHS. Under the Letter Agreement,
the Company redeemed 80% of its common interest and all of its preferred
interest in CBHS, agreed to transfer to CBHS its interests in five of its six
hospital-based joint ventures ("Provider JVs") and related real estate as soon
as practicable, transferred certain assets to CBHS, agreed to pay $2.0 million
to CBHS in 12 equal monthly installments beginning on the first anniversary of
the closing date, transferred its healthcare franchising interest to CBHS and
forgave unpaid franchise fees of approximately $115 million (the "CBHS
Transaction").
 
    The CBHS Transaction, together with the formal plan of disposal authorized
by the Company's Board of Directors on September 2, 1999, represents the
disposal of the Company's healthcare provider and healthcare franchising
business segments under APB 30. Pursuant to APB 30, the Company has restated its
results of operations for all prior periods. The Company recorded an after-tax
loss on disposal of its healthcare provider and healthcare franchising business
segments of approximately $47.4 million (primarily non-cash), in the fourth
quarter of fiscal 1999.
 
                                       4

<PAGE>
    The Crescent Transactions provided the Company with approximately
$200 million of net cash proceeds, after debt repayment, for use in implementing
its business strategy of expanding its managed care operations. The Company used
the proceeds to finance the acquisition of Allied as well as two important
acquisitions in managed behavioral healthcare (collectively, the "Managed Care
Acquisitions"). A summary of the Managed Care Acquisitions and related
transactions are as follows:
 
    HUMAN AFFAIRS INTERNATIONAL, INCORPORATED ACQUISITION.  On December 4, 1997,
the Company consummated the purchase of Human Affairs International,
Incorporated ("HAI"), formerly a unit of Aetna/U.S. Healthcare ("Aetna"), for
approximately $122.1 million, which the Company funded from cash on hand. HAI
managed behavioral healthcare programs primarily through employee assistance
programs ("EAPs") and other behavioral managed healthcare plans. The Company may
be required to make additional contingent payments of up to $60.0 million
annually to Aetna through 2003. The Company has made additional purchase price
payments totaling $120 million through September 30, 2000. The amount and timing
of the payments will be contingent upon the number of HAI's covered lives in
specified products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Outlook--Liquidity and Capital Resources."
 
    MERIT ACQUISITION.  On February 12, 1998, the Company consummated the
acquisition of Merit Behavioral Care Corporation ("Merit") for cash
consideration of approximately $450 million plus the repayment of Merit's debt.
Merit managed behavioral healthcare programs across all segments of the
healthcare industry, including health maintenance organizations ("HMO's"), Blue
Cross/Blue Shield organizations and other insurance companies, corporations and
labor unions, federal, state and local governmental agencies and various state
Medicaid programs. In connection with the consummation of the Merit acquisition,
the Company entered into a new senior secured bank credit agreement (the "Credit
Agreement"), providing for a revolving credit facility (the "Revolving
Facility") and a term loan facility (the "Term Loan Facility") which provides
for borrowings of up to $700 million and the Company issued the 9% Series A
Senior Subordinated Notes due 2008 (the "Notes") pursuant to an indenture which
governs the Notes ("Indenture").
 
INDUSTRY
 
    According to industry sources, 22.1 percent of American adults suffer from a
diagnosable mental disorder in any given year. Applied to recent population
census, this would translate to approximately 44 million individuals. In the
United States during 1996, approximately $69 billion was spent or more than
seven percent of total health spending, was on mental health services. Further,
direct costs associated with substance abuse were nearly $13 billion. These
direct costs have grown, in part, as society has begun to recognize and address
behavioral health concerns and employers have realized that rehabilitation of
employees suffering from substance abuse and relatively mild mental health
problems can reduce losses due to absenteeism and decreased productivity. In
addition, estimation of indirect costs associated with these issues approach
$79 billion annually, reflecting the fact that four of the ten leading causes of
disability in the United States are mental disorders.
 
    In response to these escalating costs, behavioral managed healthcare
companies such as Green Spring, HAI and Merit were formed. Behavorial managed
healthcare companies focus on matching an appropriate level of specialist and
treatment setting with the patient to provide care in a cost-efficient manner
while improving early access to care and utilizing the most modern and effective
treatments. As the growth of behavioral managed healthcare has increased, there
has been a significant decrease in occupancy rates and average lengths of stay
for inpatient psychiatric facilities and an increase in outpatient treatment and
alternative care services.
 
    According to an industry trade publication entitled "Open Minds Year Book of
Managed Behavioral Health Market Share in the United States 2000-2001" published
by Open Minds, Gettysburg, Pennsylvania (hereinafter referred to as "OPEN
MINDS"), as of July 2000, approximately 209.2 million beneficiaries were
 
                                       5

<PAGE>
covered by some form of behavioral managed healthcare plan. The number of
covered beneficiaries has grown from approximately 86.3 million beneficiaries in
1993 to approximately 209.2 million as of July 2000, representing a 13% compound
annual growth rate since 1993 and 15% growth just in the last year. In addition,
according to OPEN MINDS, beneficiaries covered under risk-based programs, see
below, are growing even more rapidly, from approximately 13.6 million as of
January 1993 to approximately 62.9 million as of July, 2000, representing a
compound annual growth rate of 24% and growth of over 27% since last year.
 
    OPEN MINDS divides the managed behavioral healthcare industry as of
July 2000 into the following categories of care, based on services provided,
extent of care management and level of risk assumption:
 

<TABLE>
<CAPTION>
                                                              BENEFICIARIES   PERCENT OF
CATEGORY OF CARE                                              (IN MILLIONS)     TOTAL
----------------                                              -------------   ----------
<S>                                                           <C>             <C>
Risk-Based Network Products.................................       62.9           30.1%
EAPs........................................................       51.0           24.3
Integrated Products.........................................       15.5            7.4
Utilization Review/Care Management Products.................       37.4           17.9
Non-Risk-Based Network Products.............................       42.4           20.3
                                                                  -----          -----
      Total.................................................      209.2          100.0%
                                                                  =====          =====
</TABLE>

 
    Management believes the current trends in the behavioral healthcare industry
include increased risk-based network managed care products and significant
expansion of EAP services offered to employees. Management believes that these
trends have developed in response to the attempt by payors to reduce rapidly
escalating behavioral healthcare costs and to limit their risk associated with
such costs while continuing to provide access to high quality care. Expansion of
EAP services is a reflection of the tight labor market and represents a
relatively inexpensive way to help retain workers and reduce turnover. According
to OPEN MINDS, risk-based network products and EAPs are the most rapidly growing
segments of the behavioral managed healthcare industry.
 
    The following is a summary of each of these categories of care.
 
    RISK-BASED NETWORK PRODUCTS.  Under risk-based network products, the
behavioral managed healthcare company assumes all or a portion of the
responsibility for the cost of providing a full or specified range of behavioral
healthcare treatment services. Most of these programs have payment arrangements
in which the managed care company agrees to arrange for services in exchange for
a fixed fee per member per month that varies depending on the profile of the
beneficiary population or otherwise shares the responsibility for arranging for
all or some portion of the treatment services at a specific cost per member.
Under these products, the behavioral managed healthcare company not only reviews
and monitors a course of treatment, but also arranges and pays for the provision
of patient care. Therefore, the behavioral managed healthcare company must
contract with, credential and manage a network of specialized providers and
facilities that covers the complete continuum of care. The behavioral managed
healthcare company must also see that the appropriate level of care is delivered
in the appropriate setting. Given the ability of payors of behavioral healthcare
benefits to reduce their risk with respect to the cost of treatment services
through risk-based network products while continuing to provide access to high
quality care, this market segment has grown rapidly in recent years. In addition
to the expected growth in total beneficiaries covered under behavioral managed
healthcare products, this shift of beneficiaries into risk-based network
products should further contribute to revenue growth for the behavioral managed
healthcare industry because such contracts generate significantly higher revenue
than non-risk based contracts. The higher revenue is intended to compensate the
behavioral managed healthcare company for bearing the financial responsibility
for the cost of delivering care. The Company's risk-based products are
risk-based network products as defined by OPEN MINDS.
 
                                       6

<PAGE>
    According to OPEN MINDS, industry enrollment in risk-based products has
grown from approximately 13.6 million covered lives in 1993 to approximately
62.9 million covered lives in 2000, a compound annual growth rate of over 24%.
Despite this growth, only approximately 30% of total managed behavioral
healthcare covered lives were enrolled in risk-based products as of July, 2000.
The Company believes that the market for risk-based products has grown and will
continue to grow as payors attempt to reduce their responsibility for the cost
of providing behavioral healthcare while ensuring an appropriate level of access
to care. Risk-based products can generate significantly greater revenue per
covered life than other non-risk product types. See "Cautionary
Statements--Risk--Based Products."
 
    EMPLOYEE ASSISTANCE PROGRAMS.  An EAP is a worksite-based program designed
to assist in the early identification and resolution of productivity problems
associated with behavioral conditions or other personal concerns of employees
and their dependants. Under an EAP, staff or network providers or other
affiliated clinicians provide assessment and referral services to employee
beneficiaries and their dependants. These services consist of evaluating a
patient's needs and, if indicated, providing limited counseling and/or
identifying an appropriate provider, treatment facility or other resource for
more intensive treatment services. The EAP industry developed largely out of
employers' efforts to combat alcoholism and substance abuse problems afflicting
workers. A recent industry survey estimated the total cost of this dependency at
approximately $98.6 billion per year. Many businesses have implemented
alcoholism and drug abuse treatment programs in the workplace, and in some cases
have expanded those services to cover a wider spectrum of personal problems
experienced by workers and their families. As a result, EAP products now
typically include consultation services, evaluation and referral services,
employee education and outreach services. The Company believes that federal and
state "drug-free workplace" measures and Federal Occupational Safety and Health
Act requirements, taken together with the growing public perception of increased
violence in the workplace, have prompted many companies to implement EAPs.
Although EAPs originated as a support tool to assist managers in dealing with
troubled employees, payors increasingly regard EAPs as an important component in
the continuum of behavioral healthcare services.
 
    INTEGRATED EAP/MANAGED BEHAVIORAL HEALTHCARE PRODUCTS.  EAPs are utilized in
a preventive role and in facilitating early intervention and brief treatment of
behavioral healthcare problems before more extensive treatment is required.
Consequently, EAPs often are marketed and sold in tandem with managed behavioral
healthcare programs through "integrated" product offerings. Integrated products
offer employers comprehensive management and treatment of all aspects of
behavioral healthcare. In an effort to reduce costs, increase accessibility and
ease of treatment, employers are increasingly attempting to consolidate EAP and
managed behavioral healthcare services into a single product. Although
integrated EAP/managed behavioral healthcare products are currently only a small
component of the overall industry, the Company expects this market segment to
grow.
 
    UTILIZATION REVIEW/CARE MANAGEMENT PRODUCTS.  Under utilization review/care
management products, a managed behavioral healthcare company manages and often
arranges for treatment, but does not maintain a network of providers or assume
any of the responsibility for the cost of providing treatment services. The
Company categorizes its products within this segment of the managed behavioral
healthcare industry (as it is defined by OPEN MINDS) as administrative services
only ("ASO") products. The Company does not expect this segment of the industry
to experience significant growth.
 
    NON-RISK-BASED NETWORK PRODUCTS.  Under non-risk-based network products, the
behavioral managed healthcare company provides a full array of managed care
services, including selecting, credentialing and managing a network of providers
(such as psychiatrists, psychologists, social workers and hospitals), and
performs utilization review, claims administration and care management
functions. The third-party payor remains responsible for the cost of providing
the treatment services rendered. The Company categorizes its products within
this segment of the behavioral managed healthcare industry (as it is defined by
OPEN MINDS) as ASO products.
 
                                       7

<PAGE>
    Management believes that the growth of the behavioral managed healthcare
industry will continue, as payors of behavioral healthcare benefits attempt to
reduce the costs of behavioral healthcare while maintaining high quality care.
Management also believes that a number of opportunities exist in the behavioral
managed healthcare industry for continued growth, primarily for risk-based
products, including state and federal parity legislation.
 
    State and federal legislation that eliminates the difference in coverage
limits for medical health coverage as compared to mental health coverage is
referred to as parity legislation or anti-discrimination legislation.
Historically, copayments and deductibles have been higher for mental health
treatment than for traditional medical coverage. This has served as an
artificial barrier to utilization in some cases. Currently, 29 states have
passed legislation that requires insurance companies to provide the same levels
of coverage between medical and mental health coverage. The Company believes
that this trend will continue, and perhaps accelerate. All federal employees
will be covered by mental health parity effective January 1, 2001 due to an
executive order signed by President Clinton. Additional federal legislation is
under consideration that could apply to all companies regardless of the
exemptions provided under the Employee Retirement Income Security Act of 1974
("ERISA"). The Company believes parity and other legislation may result in
additional demands for its products due to: (1) increased need for managed
behavioral healthcare services to mitigate increased cost and (2) current
customers of ASO products switching to risk arrangements due to the higher
coverage requirements associated with parity.
 
    HUMAN SERVICES.  The Company's human services business (see below) is
conducted in three markets, the mental retardation/developmental disability
community-based ("MR/DD") market, the at-risk youth market and the acquired
brain injury market. It is estimated that in 1998, approximately $25 billion was
spent for MR/DD services for approximately 400,000 persons, which is believed to
represent only 10% of the estimated potential market of persons with some level
of developmental disability. Over the past twenty years, the preferred care for
these persons has been shifting from institutional to community-based care and
the demand continues to outpace capacity. State Medicaid programs are the
primary source of funding for MR/DD services. The at-risk youth market, which
includes children with severe emotional, developmental and behavioral disorders
and youth under the auspices of the juvenile justice system, is expected to grow
from $22 billion in 1998 to approximately $29.3 billion in 2003. Program models
utilized to treat at-risk youth include residential treatment facilities,
alternative schools and community-based programs. The acquired brain injury
market ("ABI") serves the more than 2 million individuals who suffer traumatic
brain injuries each year. Improvements in medicine result in more persons
surviving ABI but often with a resulting substantial disability, often for
extended periods of time. The Company believes the improvements in medicine,
pressures of managed care, and other factors will result in increasing need for
community-based, post-acute long-term care options.
 
COMPANY OVERVIEW
 
    The Company conducts operations in two business segments: behavioral managed
healthcare and human services.
 
    BEHAVIORAL MANAGED HEALTHCARE.  According to enrollment data reported in
OPEN MINDS, the Company is the nation's largest provider of behavioral managed
healthcare services. As of September 30, 2000, the Company had approximately
71.0 million covered lives under behavioral managed healthcare contracts and
managed behavioral healthcare programs for approximately 3,300 customers.
Through its current network of over 40,000 providers and 5,000 treatment
facilities, the Company manages behavioral healthcare programs for HMOs, Blue
Cross/Blue Shield organizations and other insurance companies, corporations,
federal, state and local governmental agencies, labor unions and various state
Medicaid programs. The Company believes it has the largest and most
comprehensive behavioral healthcare provider network in the United States.
 
                                       8

<PAGE>
    The Company's professional care managers coordinate and manage the delivery
of behavioral healthcare treatment services through the Company's network of
providers, which includes psychiatrists, psychologists, licensed clinical social
workers, marriage and family therapists and licensed clinical professional
counselors. The treatment services provided by the Company's behavioral provider
network include outpatient programs (such as counseling and therapy),
intermediate care programs (such as sub-acute emergency care, intensive
outpatient programs and partial hospitalization services), inpatient treatment
services and alternative care services (such as residential treatment, home and
community-based programs and rehabilitative and support services). The Company
provides these services through: (i) risk-based products; (ii) EAPs; (iii) ASO
products and (iv) products that combine features of some or all of these
products. Under risk-based products, the Company arranges for the provision of a
full range of behavioral healthcare services for beneficiaries of its customers'
healthcare benefit plans through fee arrangements under which the Company
assumes all or a portion of the responsibility for the cost of providing such
services in exchange for a fixed per member per month fee. Under EAPs, the
Company provides assessment services to employees and dependents of its
customers, and if required, referral services to the appropriate behavioral
healthcare service provider. Under ASO products, the Company provides services
such as utilization review, claims administration and provider network
management. The Company does not assume the responsibility for the cost of
providing behavioral healthcare services pursuant to its ASO products.
 
    HUMAN SERVICES.  The Company's human services business provided specialty
home-based behavioral healthcare services through its wholly-owned subsidiary
National Mentor, Inc. ("Mentor"), to approximately 7,800 individuals in 21
states as of September 30, 2000. Mentor was founded in 1983 and was acquired by
the Company in January 1995. Mentor's services include specialty home-based
behavioral healthcare services, which feature individualized home and
community-based health and human services delivered in highly structured and
professionally monitored family environments or "mentor" homes. The mentor homes
serve clients with chronic behavioral disorders and disabilities requiring
long-term care, including children and adolescents with behavioral problems,
individuals with mental retardation or developmental disabilities, and
individuals with neurological impairment or other medical and behavioral
frailties. Mentor also provides various residential and day services for
individuals with acquired brain injuries and for individuals with mental
retardation and developmental disabilities.
 
    For financial information regarding the business segments see
Note 14--"Business Segment Information" to the Company's audited consolidated
financial statements set forth elsewhere herein.
 
BUSINESS STRATEGY
 
    The Company's business strategy is comprised of two primary objectives:
(i) evaluate the potential to sell or exit non-core and/or under performing
assets and (ii) take advantage of our market leadership position and economies
of scale to improve cost structure and overall efficiency in providing service
in the behavioral managed healthcare arena.
 
    The Company has taken aggressive action recently to dispose of those assets
that are not generating cash for debt reduction or are not part of its ongoing
strategy. These activities include: (i) the exit from its specialty managed
healthcare segment; (ii) the exit from its psychiatric practice management
business; and (iii) the sale of its Canadian operations. The Company is
currently evaluating the potential to divest on acceptable terms certain other
assets and businesses, including Mentor, and is currently involved in
discussions with various parties. There can be no assurance that the Company
will be able to divest any asset or businesses or that such divestiture would
result in significant reductions of long-term debt or improvements in liquidity.
 
                                       9

<PAGE>
    The second part of the Company's strategy centers on improving the
efficiencies of its business. In the past two years, Magellan consolidated its
behavioral managed healthcare businesses, elminating duplicate staffing and
facilities. The Company is now focusing on the next level of integration that
includes reduction in computer system platforms, best practices analysis,
standardization of provider contracting and utilization of the internet to
reduce administrative burden to both providers, customers and beneficiaries. The
Company believes that it will reduce administrative costs and improve customer
service through these measures; however, there can be no assurance that the
Company will be able to implement these initiatives or realize the anticipated
savings.
 
    The Company believes this strategy will position the Company to take
advantage of favorable macro-economic trends that support continued growth in
the behavioral managed healthcare industry.
 
BEHAVIORAL MANAGED HEALTHCARE PRODUCTS AND SERVICES
 
    GENERAL.  The following table sets forth the approximate number of covered
lives as of September 30, 1999 and 2000 and revenue for fiscal 1999 and 2000 for
the types of behavioral managed healthcare programs offered by the Company:
 

<TABLE>
<CAPTION>
PROGRAMS                                                COVERED LIVES   PERCENT       REVENUE    PERCENT
--------                                                -------------   --------      --------   --------
                                                                (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                     <C>             <C>           <C>        <C>
1999
Risk-Based Products(1)................................      35.8          53.9%       $1,282.8     86.5%
ASO products..........................................      30.6          46.1           200.4     13.5
                                                            ----         -----        --------    -----
    Total.............................................      66.4         100.0%       $1,483.2    100.0%
                                                            ====         =====        ========    =====
2000
Risk-Based Products(1)................................      39.1          55.1%       $1,453.4     87.8%
ASO products..........................................      31.9          44.9           201.7     12.2
                                                            ----         -----        --------    -----
    Total.............................................      71.0         100.0%       $1,655.1    100.0%
                                                            ====         =====        ========    =====
</TABLE>

 
------------------------
 
(1) Includes Risk-Based Products, Employee Assistance Programs and Integrated
    Products.
 
The number of covered lives fluctuates based on several factors, including the
number of contracts entered into by the Company and changes in the number of
employees, subscribers or enrollees of the Company's customers covered by such
contracts.
 
    RISK-BASED PRODUCTS.  Under the Company's risk-based products, the Company
typically arranges for the provision of a full range of outpatient, intermediate
and inpatient treatment services to beneficiaries of its customers' healthcare
benefit plans, primarily through arrangements in which the Company assumes all
of the responsibility for the cost of providing such services in exchange for a
per member per month fee. The Company's experience with risk-based contracts
covering a large number of lives has given it a broad base of data from which to
analyze utilization rates. The Company believes that this broad database permits
it to estimate utilization trends and costs more accurately than many of its
competitors, which allows it to bid effectively. The Company believes that its
experience has also allowed it to develop effective measures for managing the
cost of providing a unit of care to its covered lives. The Company has developed
or acquired clinical protocols, which permit it to assist its network providers
to administer effective treatment in a cost efficient manner, and claims
management technology, which permits the Company to reduce the cost of
processing claims. The Company's care managers are an essential element in its
provision of cost-effective care. Care managers, in consultation with treating
professionals, and using the Company's clinical protocols, authorize an
appropriate level and intensity of services that can be delivered in a
cost-efficient manner.
 
                                       10

<PAGE>
    EMPLOYEE ASSISTANCE PROGRAMS.  The Company's EAP products typically provide
assessment and referral services to employees and dependents of the Company's
customers in an effort to assist in the early identification and resolution of
productivity problems associated with the employees who are impaired by
behavioral conditions or other personal concerns. For many EAP customers, the
Company also provides limited outpatient therapy (typically limited to eight or
fewer sessions) to patients requiring such services. For these services, the
Company typically is paid a fixed fee per member per month; however, the Company
is usually not responsible for the cost of providing care beyond these services.
If further services are necessary beyond limited outpatient therapy, the Company
will refer the beneficiary to an appropriate provider or treatment facility.
 
    INTEGRATED PRODUCTS.  Under its integrated products, the Company typically
establishes an EAP to function as the "front end" of a managed care program that
provides a full range of services, including more intensive treatment services
not covered by the EAP. The Company typically manages the EAP and accepts all or
some of the responsibility for the cost of any additional treatment required
upon referral out of the EAP, thus integrating the two products and using both
the Company's care management and clinical care techniques to manage the
provision of care.
 
    ASO PRODUCTS.  Under its ASO products, the Company provides services ranging
from utilization review and claims administration to the arrangement for and
management of a full range of patient treatment services, but does not assume
any of the responsibility for the cost of providing treatment services. Services
include member assistance, management reporting and claims processing in
addition to utilization review and care management. The Company is paid a fee
for such services.
 
BEHAVIORAL MANAGED HEALTHCARE CUSTOMERS
 
    GENERAL.  The following table sets forth the approximate number of covered
lives as of September 30, 1999 and 2000 and revenue for fiscal 1999 and 2000 in
each of the Company's behavioral customer groups described below:
 

<TABLE>
<CAPTION>
MARKET                                                 COVERED LIVES   PERCENT    REVENUE    PERCENT
------                                                 -------------   --------   --------   --------
                                                             (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                    <C>             <C>        <C>        <C>
1999
Workplace (Corporations and Labor Unions)............      27.0          40.7%    $  230.6     15.5%
Health Plans.........................................      36.5           54.9       846.9      57.1
Public Sector (Primarily Medicaid)...................       2.9            4.4       405.9      27.4
                                                           ----         ------    --------    ------
    Total............................................      66.4         100.0%    $1,483.2    100.0%
                                                           ====         ======    ========    ======
2000
Workplace (Corporations and Labor Unions)............      27.9          39.3%    $  234.4     14.1%
Health Plans.........................................      40.1           56.5       951.1      57.5
Public Sector (Primarily Medicaid)...................       3.0            4.2       469.6      28.4
                                                           ----         ------    --------    ------
    Total............................................      71.0         100.0%    $1,655.1    100.0%
                                                           ====         ======    ========    ======
</TABLE>

 
    CORPORATIONS AND LABOR UNIONS.  Corporations and, to a lesser extent, labor
unions, account for a large number of the Company's contracts to provide
behavioral managed healthcare services and, in particular, EAP and integrated
EAP/managed care services. The Company has structured a variety of fee
arrangements with corporate customers to cover all or a portion of the
responsibility of the cost of providing treatment services. In addition, the
Company operates a number of programs for corporate customers on an ASO basis.
Management believes the corporate market is an area of potential growth for the
Company, as corporations are anticipated to increase their utilization of
behavioral managed healthcare services. In an effort to increase penetration of
the corporate market, the Company intends to build upon its experience in
managing programs for large corporate customers (such as IBM, Federal Express
 
                                       11

<PAGE>
and AT&T) and to market integrated programs to existing EAP customers and other
prospective corporate clients.
 
    HEALTH PLANS.  The Company is a leader in providing behavioral managed
healthcare services to HMO beneficiaries. HMO contracts are Risk-Based or ASO
contracts. Although certain large HMOs provide their own behavioral managed
healthcare services, many HMOs "carve out" behavioral healthcare from their
general healthcare services and subcontract such services to behavioral managed
healthcare companies such as the Company. The Company anticipates that its
business with HMOs will continue to grow. The Company believes that it is one of
the nation's leading providers of behavioral managed healthcare services to Blue
Cross/Blue Shield organizations, serving 33 such organizations as of
September 30, 2000.
 
    PUBLIC SECTOR.  The Company provides behavioral managed healthcare services
to Medicaid recipients through both direct contracts with state and local
governmental agencies and through subcontracts with HMOs focused on Medicaid
beneficiary populations. In addition to the Medicaid population, other public
entitlement programs, such as Medicare and state insurance programs for the
uninsured, offer the Company areas of potential future growth. The Company
expects that governmental agencies will continue to implement a significant
number of managed care Medicaid programs through contracts with HMOs and that
many HMOs will subcontract with behavioral managed healthcare organizations,
such as the Company, for behavioral healthcare services. The Company also
expects that other states will continue the trend of "carving-out" behavioral
healthcare services from their general healthcare benefit plans and contracting
directly with behavioral managed healthcare companies such as the Company. See
"Cautionary Statements--Dependence on Government Spending for Managed
Healthcare; Possible Impact of Healthcare Reform" and "Cautionary
Statements--Regulation".
 
BEHAVIORAL MANAGED HEALTHCARE CONTRACTS
 
    The Company's contracts with customers typically have terms of one to three
years, and in certain cases contain renewal provisions (at the customer's
option) for successive terms of between one and two years (unless terminated
earlier). Substantially all of these contracts may be immediately terminated
with cause and many are terminable without cause by the customer or the Company
either upon the giving of requisite notice and the passage of a specified period
of time (typically between 60 and 180 days) or upon the occurrence of other
specified events. In addition, the Company's contracts with federal, state and
local governmental agencies, under both direct contract and subcontract
arrangements with HMOs, generally are conditioned on legislative appropriations.
These contracts, notwithstanding terms to the contrary, generally can be
terminated or modified by the customer if such appropriations are not made. See
"Cautionary Statements--Risk-Based Products" and "Cautionary
Statements--Reliance on Customer Contracts."
 
    The specific terms of the Company's contracts are determined by whether the
contracts are for risk-based, EAP, integrated or ASO products. Risk-based, EAP
and ASO contracts generally provide for payment of a per member per month fee to
the Company. The Company's billing arrangements for integrated products vary on
a case by case basis.
 
BEHAVIORAL MANAGED HEALTHCARE NETWORK
 
    The Company's behavioral managed healthcare and EAP treatment services are
provided by a network of third-party providers. The number and type of providers
in a particular area depend upon customer preference, site, geographic
concentration and demographic make-up of the beneficiary population in that
area. Network providers include a variety of specialized behavioral healthcare
personnel, such as psychiatrists, psychologists, licensed clinical social
workers, substance abuse counselors and other professionals.
 
                                       12

<PAGE>
    As of September 30, 2000, the Company had contractual arrangements covering
over 40,000 individual third-party network providers. The Company's network
providers are independent contractors located throughout the local areas in
which the Company's customers' beneficiary populations reside. Network providers
work out of their own offices, although the Company's personnel are available to
assist them with consultation and other needs. Network providers include both
individual practitioners, as well as individuals who are members of group
practices or other licensed centers or programs. Network providers typically
execute standard contracts with the Company for which they are typically paid by
the Company on a fee-for-service basis. In some cases, network providers are
paid on a "case rate" basis, whereby, the provider is paid a set rate for an
entire course of treatment, or through other risk sharing arrangements.
 
    As of September 30, 2000, the Company's behavorial managed healthcare
network also included contractual arrangements with approximately 5,000
third-party treatment facilities, including inpatient psychiatric and substance
abuse hospitals, intensive outpatient facilities, partial hospitalization
facilities, community health centers and other community-based facilities,
rehabilitative and support facilities, and other intermediate care and
alternative care facilities or programs. This variety of facilities enables the
Company to offer patients a full continuum of care and to refer patients to the
most appropriate facility or program within that continuum. Typically, the
Company contracts with facilities on a per diem or fee-for-service basis and, in
some cases, on a "case rate" or capitated basis. The contracts between the
Company and inpatient and other facilities typically are for one year terms and,
in some cases, are automatically renewable at the Company's option. Facility
contracts are usually terminable by the Company or the facility owner upon 30 to
120 days' notice.
 
COMPETITION
 
    Each segment of the Company's business is highly competitive. With respect
to its behavioral managed healthcare business, the Company competes with large
insurance companies, HMOs, PPOs, third-party administrators ("TPAs"),
independent practitioner associations ("IPAs"), multi-disciplinary medical
groups and other managed care companies. Many of the Company's competitors are
significantly larger and have greater financial, marketing and other resources
than the Company, and some of the Company's competitors provide a broader range
of services. The Company may also encounter substantial competition in the
future from new market entrants. Many of the Company's customers that are
managed care companies may, in the future, seek to provide behavioral managed
healthcare services directly to their employees or subscribers directly, rather
than by contracting with the Company for such services. Because of competition,
the Company does not expect to be able to rely on price increases to achieve
revenue growth and expects to continue experiencing pressure on direct operating
margins. See "Cautionary Statements--Highly Competitive Industry."
 
    The Company's human services operations compete with various for profit and
not-for-profit entities, including, but not limited to: (i) behavioral managed
healthcare companies that have started managing human services for governmental
agencies; (ii) home health care organizations; (iii) proprietary nursing home
companies; and (iv) proprietary human services companies. The Company believes
that the most significant factors in a customer's selection of services include
price, quality of services and outcomes. The pricing aspect of such services is
especially important to attract public sector agencies looking to outsource
public services to the private sector as demand for quality services escalates
while budgeted dollars for healthcare services are reduced. The Company's
management believes that it competes effectively with respect to these factors.
 
    The Company believes it benefits from the competitive strengths described
below:
 
    INDUSTRY LEADERSHIP.  The Company is the largest provider of behavioral
managed healthcare services in the United States, according to enrollment data
reported in OPEN MINDS. The Company believes, based on data reported in OPEN
MINDS, that it also now has the number one market position in each of the major
behavioral managed healthcare product markets in which it competes. The Company
believes its position
 
                                       13

<PAGE>
will enhance its ability to: (i) provide a consistent level of high quality
service on a nationwide basis; (ii) enter into agreements with behavioral
healthcare providers that allow it to control healthcare costs for its
customers; and (iii) market its behavioral managed care products to large
corporate, HMO and health insurance customers, which, the Company believes,
increasingly prefer to be serviced by a single-source provider on a national
basis. See "Cautionary Statements--Highly Competitive Industry" and "--Reliance
on Customer Contracts" for a discussion of the risks associated with the highly
competitive nature of the behavioral managed healthcare industry and the
Company's reliance on contracts with payors of behavioral healthcare benefits,
respectively.
 
    BROAD PRODUCT OFFERING AND NATIONWIDE PROVIDER NETWORK.  The Company offers
behavioral managed care products that can be designed to meet specific customer
needs, including risk-based and partial risk-based products, integrated EAPs,
stand-alone EAPs and ASO products. The Company's provider network encompasses
approximately 40,000 providers and 5,000 treatment facilities in all 50 states.
The Company believes that the combination of its product offerings and its
provider network allows the Company to meet its customers needs for behavioral
managed healthcare on a nationwide basis, and positions the Company to capture
incremental revenue opportunities resulting from the continued growth of the
behavioral managed healthcare industry and the continued migration of its
customers from ASO and EAP products to higher revenue risk-based products. See
"Cautionary Statements--Risk-Based Products" for a discussion of the risks
associated with risk-based products, which are the Company's primary source of
revenue.
 
    BROAD BASE OF CUSTOMER RELATIONSHIPS.  The Company believes that the breadth
of its customer relationships are attributable to the Company's broad product
offerings, nationwide provider network, commitment to quality care and ability
to manage behavioral healthcare costs effectively. The Company's customers
include: (i) Blue Cross/Blue Shield organizations; (ii) national HMOs and other
large insurers, such as Aetna and Humana; (iii) large corporations, such as IBM,
Federal Express and AT&T; (iv) state and local governmental agencies through
commercial, Medicaid and other programs; and (v) the federal government through
contracts with CHAMPUS, as defined, and the U.S. Postal Service. This broad base
of customer relationships provides the Company with stable and diverse sources
of revenue, earnings and cash flows and an established base from which to
continue to increase covered lives and revenue. See "Cautionary
Statements--Reliance on Customer Contracts" for a discussion of the risks
associated with the Company's reliance on certain contracts with payors of
behavioral healthcare benefits.
 
    PROVEN RISK MANAGEMENT EXPERIENCE.  The Company had approximately
39.1 million covered lives under risk-based contracts at September 30, 2000,
making it the nation's industry leader in at-risk behavioral managed healthcare
products, based on data reported in OPEN MINDS. The Company's experience with
risk-based products covering a large number of lives has given it a broad base
of data from which to analyze utilization rates. The Company believes that this
broad database permits it to estimate utilization trends and costs more
accurately than many of its competitors, which allows it to bid effectively. The
Company believes that its experience has also allowed it to develop effective
measures for controlling the cost of providing a unit of care to its covered
lives. Among other cost control measures, the Company has developed or acquired
clinical protocols, which permit the Company to assist its network providers to
administer effective treatment in a cost efficient manner, and claims management
technology, which permits the Company to reduce the cost of processing claims.
 
INSURANCE
 
    The Company maintains a general, professional and managed care liability
insurance policy with an unaffiliated insurer. The policy is written on a
"claims-made" basis, subject to a $250,000 per claim and $1.0 million annual
aggregate self-insured retention for general and professional liability, and
also subject to a $500,000 per claim and $2.5 million annual aggregate
self-insured retention for managed care liability, for a two-year policy period
ending June 17, 2002.
 
                                       14

<PAGE>
REGULATION
 
    GENERAL.  The behavioral managed healthcare industry and the provision of
behavioral healthcare services are subject to extensive and evolving state and
federal regulation. The Company is subject to certain state laws and
regulations, including those governing: (i) the licensing of insurance
companies, HMOs, PPOs, TPAs and companies engaged in utilization review and
(ii) the licensing of healthcare professionals, including restrictions on
business corporations from practicing, controlling or exercising excessive
influence over behavioral healthcare services through the direct employment of
psychiatrists or, in a few states, psychologists and other behavioral healthcare
professionals. These laws and regulations vary considerably among states and the
Company may be subject to different types of laws and regulations depending on
the specific regulatory approach adopted by each state to regulate the managed
care business and the provision of behavioral healthcare treatment services. In
addition, the Company is subject to certain federal laws as a result of the role
the Company assumes in connection with managing its customers' employee benefit
plans. The regulatory scheme generally applicable to the Company's behavioral
managed healthcare operations is described in this section.
 
    The Company believes its operations are structured to comply with applicable
laws and regulations in all material respects and that it has received all
licenses and approvals that are material to the operation of its business.
However, regulation of the managed healthcare industry is evolving, with new
legislative enactments and regulatory initiatives at the state and federal
levels being implemented on a regular basis. Consequently, it is possible that a
court or regulatory agency may take a position under existing or future laws or
regulations, or as a result of a change in the interpretation thereof, that such
laws or regulations apply to the Company in a different manner than the Company
believes such laws or regulations apply. Moreover, any such position may require
significant alterations to the Company's business operations in order to comply
with such laws or regulations, or interpretations thereof. Expansion of the
Company's business to cover additional geographic areas, to serve different
types of customers, to provide new services or to commence new operations could
also subject the Company to additional licensure requirements and/or regulation.
 
    LICENSURE.  Certain regulatory agencies having jurisdiction over the Company
possess discretionary powers when issuing or renewing licenses or granting
approval of proposed actions such as mergers, a change in ownership, transfer or
assignment of licenses and certain intracorporate transactions. One or multiple
agencies may require as a condition of such licensure or approval that the
Company cease or modify certain of its operations in order to comply with
applicable regulatory requirements or policies. In addition, the time necessary
to obtain licensure or approval varies from state to state, and difficulties in
obtaining a necessary license or approval may result in delays in the Company's
plans to expand operations in a particular state and, in some cases, lost
business opportunities. Compliance activities, mandated changes in the Company's
operations, delays in the expansion of the Company's business or lost business
opportunities as a result of regulatory requirements or policies could have a
material adverse effect on the Company.
 
    INSURANCE, HMO AND PPO ACTIVITIES.  To the extent that the Company operates
or is deemed to operate in one or more states as an insurance company, HMO, PPO
or similar entity, it may be required to comply with certain laws and
regulations that, among other things, may require the Company to maintain
certain types of assets and minimum levels of deposits, capital, surplus,
reserves or net worth. In many states, entities that assume risk under contracts
with licensed insurance companies or HMOs have not been considered by state
regulators to be conducting an insurance or HMO business. As a result, the
Company has not sought licensure as either an insurer or HMO in certain states.
The National Association of Insurance Commissioners (the "NAIC") has undertaken
a comprehensive review of the regulatory status of entities arranging for the
provision of healthcare services through a network of providers that, like the
Company, may assume risk for the cost and quality of healthcare services, but
that are not currently licensed as an HMO or similar entity. As a result of this
review, the NAIC developed a "health organizations risk-based capital" formula,
designed specifically for managed care organizations, that
 
                                       15

<PAGE>
establishes a minimum amount of capital necessary for a managed care
organization to support its overall operations, allowing consideration for the
organization's size and risk profile. The NAIC initiative also may result in the
adoption of a model NAIC regulation in the area of health plan standards, which
could be adopted by individual states in whole or in part, and could result in
the Company being required to meet additional or new standards in connection
with its existing operations. Individual states have also recently adopted their
own regulatory initiatives that subject entities such as the Company to
regulation under state insurance laws. This includes, but is not limited to,
requiring licensure as an insurance company or HMO and requiring adherence to
specific financial solvency standards. State insurance laws and regulations may
limit the ability of the Company to pay dividends, make certain investments and
repay certain indebtedness. Licensure as an insurance company, HMO or similar
entity could also subject the Company to regulations governing reporting and
disclosure, mandated benefits, rate setting, and other traditional insurance
regulatory requirements. PPO regulations to which the Company may be subject may
require the Company to register with a state authority and provide information
concerning its operations, particularly relating to provider and payor
contracting. The imposition of such requirements could increase the Company's
cost of doing business and could delay the Company's conduct or expansion of its
business in some areas. The licensure process under state insurance laws can be
lengthy and, unless the applicable state regulatory agency allows the Company to
continue to operate while the licensure process is ongoing, the Company could
experience a material adverse effect on its operating results and financial
condition while its licensure application is pending. In addition, failure by
the Company to obtain and maintain required licenses typically also constitutes
an event of default under the Company's contracts with its customers. The loss
of business from one or more of the Company's major customers as a result of
such an event of default or otherwise could have a material adverse effect on
the Company.
 
    UTILIZATION REVIEW AND THIRD-PARTY ADMINISTRATOR ACTIVITIES.  Numerous
states in which the Company does business have adopted, or are expected to
adopt, regulations governing entities engaging in utilization review and TPA
activities. Utilization review regulations typically impose requirements with
respect to the qualifications of personnel reviewing proposed treatment,
timeliness and notice of the review of proposed treatment, and other matters.
TPA regulations typically impose requirements regarding claims processing and
payments and the handling of customer funds. Utilization review and TPA
regulations may increase the Company's cost of doing business in the event that
compliance requires the Company to retain additional personnel to meet the
regulatory requirements and to take other required actions and make necessary
filings. Although compliance with utilization review regulations has not had a
material adverse effect on the Company, there can be no assurance that specific
regulations adopted in the future would not have such a result, particularly
since the nature, scope and specific requirements of such provisions vary
considerably among states that have adopted regulations of this type.
 
    There is a trend among states to require licensure or certification of
entities performing utilization review or TPA activities; however, certain
federal courts have held that such licensure requirements are preempted by the
Employee Retirement Income Security Act of 1974, as amended, ("ERISA"). ERISA
preempts state laws that mandate employee benefit structures or their
administration, as well as those that provide alternative enforcement
mechanisms. The Company believes that its TPA activities performed for its
self-insured employee benefit plan customers are exempt from otherwise
applicable state licensing or registration requirements based upon federal
preemption under ERISA and has relied on this general principle in determining
not to seek licensure for certain of its activities in many states. Existing
case law is not uniform on the applicability of ERISA preemption with respect to
state regulation of utilization review or TPA activities. There can be no
assurance that additional licensure will not be required with respect to
utilization review or TPA activities in certain states.
 
    "ANY WILLING PROVIDER" LAWS.  Several states in which the Company does
business have adopted, or are expected to adopt, "any willing provider" laws.
Such laws typically impose upon insurance companies, PPOs, HMOs or other types
of third-party payors an obligation to contract with, or pay for the services
of, any healthcare provider willing to meet the terms of the payor's contracts
with similar providers.
 
                                       16

<PAGE>
Compliance with any willing provider laws could increase the Company's costs of
assembling and administering provider networks and could, therefore, have a
material adverse effect on its operations.
 
    LICENSING OF HEALTHCARE PROFESSIONALS.  The provision of behavioral
healthcare treatment services by psychiatrists, psychologists and other
providers is subject to state regulation with respect to the licensing of
healthcare professionals. In addition, the oversight supervision and case
management of the human services business is subject to similar regulation
requiring licensure or accreditation of personnel performing such functions. The
Company believes that the healthcare professionals who provide behavioral
healthcare treatment on behalf of or under contracts with the Company and the
case managers and other personnel of the health services business are in
compliance with the applicable state licensing requirements and current
interpretations thereof; however, there can be no assurance that changes in such
state licensing requirements or interpretations thereof will not adversely
affect the Company's existing operations or limit expansion. With respect to the
Company's crisis intervention program, additional licensure of clinicians who
provide telephonic assessment or stabilization services to individuals who are
calling from out-of-state may be required if such assessment or stabilization
services are deemed by regulatory agencies to be treatment provided in the state
of such individual's residence. The Company believes that any such additional
licensure could be obtained; however, there can be no assurance that such
licensing requirements will not adversely affect the Company's existing
operations or limit expansion.
 
    PROHIBITION ON FEE SPLITTING AND CORPORATE PRACTICE OF PROFESSIONS.  The
laws of some states limit the ability of a business corporation to directly
provide, control or exercise excessive influence over behavioral healthcare
services through the direct employment of psychiatrists, psychologists, or other
behavioral healthcare professionals, who are providing direct clinical services.
In addition, the laws of some states prohibit psychiatrists, psychologists, or
other healthcare professionals from splitting fees with other persons or
entities. These laws and their interpretations vary from state to state and
enforcement by the courts and regulatory authorities may vary from state to
state and may change over time. The Company believes that its operations as
currently conducted are in material compliance with the applicable laws,
however, there can be no assurance that the Company's existing operations and
its contractual arrangements with psychiatrists, psychologists and other
healthcare professionals will not be successfully challenged under state laws
prohibiting fee splitting or the practice of a profession by an unlicensed
entity, or that the enforceability of such contractual arrangements will not be
limited. The Company believes that it could, if necessary, restructure its
operations to comply with changes in the interpretation or enforcement of such
laws and regulations, and that such restructuring would not have a material
adverse effect on its operations.
 
    DIRECT CONTRACTING WITH LICENSED INSURERS.  Regulators in several states in
which the Company does business have adopted policies that require HMOs or, in
some instances, insurance companies, to contract directly with licensed
healthcare providers, entities or provider groups, such as IPAs, for the
provision of treatment services, rather than with unlicensed intermediary
companies. In such states, the Company's customary model of contracting directly
with its customers may need to be modified so that, for example, the IPAs
(rather than the Company) contract directly with the HMO or insurance company,
as appropriate, for the provision of treatment services. The Company intends to
work with a number of these HMO customers to restructure existing contractual
arrangements, upon contract renewal or in renegotiations, so that the entity
which contracts with the HMO directly is an IPA. The Company does not expect
this method of contracting to have a material adverse effect on its operations.
 
    CONFIDENTIALITY AND PATIENT PRIVACY.  Confidentiality and patient privacy
requirements are particularly strict in the field of behavioral healthcare
services, and additional legislative initiatives relating to confidentiality and
privacy are expected. The Health Insurance Portability and Accountability Act of
1996 ("HIPAA") requires the Secretary of the Department of Health and Human
Services ("HHS") to adopt standards relating to the transmission of health
information by healthcare providers and healthcare plans. HIPAA calls for HHS to
create regulations in several different areas to address security, privacy and
 
                                       17

<PAGE>
administrative simplification. The regulations specifically relate to electronic
transactions and code sets, security and electronic signatures, privacy,
provider and employer IDs as well as health plan and individual IDs. While only
the regulations relating to electronic transactions and code sets section are
final, other areas of the regulations are expected to be finalized in the next
few months. The regulations go into effect 26 months after they are released,
with a deadline to implement the regulations governing electronic transaction
and code sets by October 16, 2002. On November 3, 1999, the Secretary
promulgated proposed regulations to protect the privacy of such health
information that is electronically transmitted or maintained. In addition, on
August 17, 2000, HHS published a final rule establishing standard data content
and formats for the submission of electronic claims and other administrative and
health transactions. The wide reaching implications of these regulations are
beginning to be addressed now to ensure the Company's compliance with the
regulations by the implementation dates. These regulations, while creating a
need for some software changes, present more business and policy issues rather
than technology issues. The regulations will require changes to the Company's
provider contracts, as well as the creation of new policies for transmitting
patient information to ensure that the new privacy and electronic security
measures are satisfied. In some cases, these changes will mean executing chain
of trust agreements with business partners and ensuring that encryption
technology is used when transmitting electronic files. In addition, the
Company's systems must be equipped to handle both the electronic transactions
governed by the regulations, as well as paper transactions, which are not
affected by the regulations and to manage different sets of data depending on
whether the transaction is electronic or paper in nature. While the Company
believes it has existing systems and policies in place in many instances that
will assist in the Company's compliance, the Company expects that significant
resources will be required over the next two years to ensure compliance.
 
    REGULATION OF CUSTOMERS.  Regulations imposed upon the Company's customers
include, among other things, benefits mandated by statute, exclusions from
coverages prohibited by statute, procedures governing the payment and processing
of claims, record keeping and reporting requirements, requirements for and
payment rates applicable to coverage of Medicaid and Medicare beneficiaries,
provider contracting and enrollee rights, and confidentiality requirements.
Although the Company believes that such regulations do not at present materially
impair the Company's operations, there can be no assurance that such indirect
regulation will not have a material adverse effect on the Company in the future.
 
    ERISA.  Certain of the Company's services are subject to the provisions of
ERISA. ERISA governs certain aspects of the relationship between
employer-sponsored healthcare benefit plans and certain providers of services to
such plans through a series of complex laws and regulations that are subject to
periodic interpretation by the Internal Revenue Service and the Department of
Labor. In some circumstances, and under certain customer contracts, the Company
may be expressly named as a "fiduciary" under ERISA, or be deemed to have
assumed duties that make it an ERISA fiduciary, and thus be required to carry
out its operations in a manner that complies with ERISA requirements in all
material respects. Although the Company believes that it is in material
compliance with the applicable ERISA requirements and that such compliance does
not currently have a material adverse effect on the Company's operations, there
can be no assurance that continuing ERISA compliance efforts or any future
changes to the applicable ERISA requirements will not have a material adverse
effect on the Company.
 
    OTHER PROPOSED LEGISLATION.  In the last five years, legislation has
periodically been introduced at the state and federal level providing for new
healthcare regulatory programs and materially revising existing healthcare
regulatory programs. Any such legislation, if enacted, could materially
adversely affect the Company's business, financial condition or results of
operations. Such legislation could include both federal and state bills
affecting the Medicaid programs which may be pending in or recently passed by
state legislatures and which are not yet available for review and analysis. Such
legislation could also include proposals for national health insurance and other
forms of federal regulation of health insurance and healthcare delivery. It is
not possible at this time to predict whether any such legislation will be
adopted at the federal or state level, or the nature, scope or applicability to
the Company's business of any such
 
                                       18

<PAGE>
legislation, or when any particular legislation might be implemented. No
assurance can be given that any such federal or state legislation will not have
a material adverse effect on the Company.
 
    REGULATION OF HUMAN SERVICES.  The human services business is subject to
certain state laws, regulations, and/or requirements with respect to its
services, including those governing: (i) the licensing of child placement
agencies; (ii) the registration or certification of Medicaid participating
providers; and (iii) a state's authorization or recognition of a provider's
capacity to deliver services to adults with developmental disabilities and/or
mental retardation. These laws and regulations vary considerably among states
and the Company may be subject to different types of laws and regulations
depending on the specific regulatory approach adopted by each state to regulate
the provision of these services.
 
    OTHER REGULATION OF HEALTHCARE PROVIDERS.  The Company's business is
affected indirectly by regulations imposed upon healthcare providers.
Regulations imposed upon healthcare providers include provisions relating to the
conduct of, and ethical considerations involved in, the practice of psychiatry,
psychology, social work and related behavioral healthcare professions and, in
certain cases, the common law duty to warn others of danger or to prevent
patient self-injury.
 
CAUTIONARY STATEMENTS
 
    This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially from the
Company's forward-looking statements are set forth below and elsewhere in this
Form 10-K. All forward-looking statements attributable to the Company or persons
acting on behalf of the Company are expressly qualified in their entirety by the
cautionary statements set forth below.
 
    LEVERAGE AND DEBT SERVICE OBLIGATIONS.  The Company is currently highly
leveraged, with indebtedness that is substantial in relation to its
stockholders' equity. As of September 30, 2000, the Company's aggregate
outstanding indebtedness was approximately $1.1 billion and the Company's
stockholders' equity was approximately $128.5 million. The Credit Agreement and
the Indenture permit the Company to incur or guarantee certain additional
indebtedness, subject to certain limitations.
 
    The Company's high degree of leverage could have important consequences to
the Company, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flows
from operations must be dedicated to the payment of principal and interest on
its indebtedness; (iii) the Company is substantially more leveraged than certain
of its competitors, which might place the Company at a competitive disadvantage;
(iv) the Company may be hindered in its ability to adjust rapidly to changing
market conditions and (v) the Company's high degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or its
business or in the event of adverse changes in the regulatory environment or
other adverse circumstances applicable to the Company.
 
    The Company's ability to repay or to refinance its indebtedness and to pay
interest on its indebtedness will depend on its financial and operating
performance, which, in turn, is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors, many of which
are beyond the Company's control. These factors could include operating
difficulties, increased operating costs, the actions of competitors, regulatory
developments and delays in implementing strategic projects. The Company's
ability to meet its debt service and other obligations may depend in significant
part on the extent to which the Company can successfully implement its business
strategy. There can be no assurance
 
                                       19

<PAGE>
that the Company will be able to implement its strategy fully or that the
anticipated results of its strategy will be realized. See "Business--Business
Strategy."
 
    If the Company's cash flows and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets or seek to obtain additional equity capital or
to restructure its debt. There can be no assurance that the Company's cash flows
and capital resources will be sufficient for payment of principal of and
interest on its indebtedness in the future, or that any such alternative
measures would be successful or would permit the Company to meet its scheduled
debt service obligations.
 
    In addition, because the Company's obligations under the Credit Agreement
bear interest at floating rates, an increase in interest rates could adversely
affect, among other things, the Company's ability to meet its debt service
obligations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Outlook--Results of Operations."
 
    RESTRICTIVE FINANCING COVENANTS.  The Credit Agreement and the Indenture
contain a number of covenants that restrict the operations of the Company and
its subsidiaries. In addition, the Credit Agreement, as amended, requires the
Company to comply with specified financial ratios and tests, including a minimum
interest coverage ratio, a maximum leverage ratio, a minimum net worth test, a
maximum senior debt ratio and a minimum "EBITDA" test (as defined in the Credit
Agreement, as amended). There can be no assurance that the Company will be able
to comply with such covenants, ratios and tests in the future. The Company's
ability to comply with such covenants, ratios and tests may be affected by
events beyond its control, including prevailing economic, financial and industry
conditions. The breach of any such covenants, ratios or tests could result in a
default under the Credit Agreement that would permit the lenders to declare all
amounts outstanding thereunder to be immediately due and payable, together with
accrued and unpaid interest, and to prevent the Company from paying principal,
premium, interest or other amounts due on any or all of the Notes until the
default is cured or all senior indebtedness is paid or satisfied in full.
Furthermore, the commitments of the lenders under the Credit Agreement to make
further extensions of credit thereunder could be terminated. If the Company were
unable to repay all amounts accelerated, the lenders could proceed against the
subsidiary guarantors and the collateral securing the Company's and the
subsidiary guarantors' obligations pursuant to the Credit Agreement. If the
indebtedness outstanding pursuant to the Credit Agreement were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay such indebtedness and the other indebtedness of the Company.
The value of the Company's common stock would be adversely affected if the
Company were unable to repay such indebtedness.
 
    RISK-BASED PRODUCTS.  Revenues under risk-based contracts are the primary
source of the Company's revenue from its behavioral managed healthcare business.
Such revenues accounted for approximately 77.6% of the Company's total revenue
and approximately 87.8% of its behavioral managed healthcare revenue in fiscal
2000. Under a risk-based contract, the Company assumes all or a portion of the
responsibility for the cost of providing a full or specified range of behavioral
healthcare treatment services to a specified beneficiary population in exchange,
generally, for a fixed fee per member per month. In order for such contracts to
be profitable, the Company must accurately estimate the rate of service
utilization by beneficiaries enrolled in programs managed by the Company and
control the unit cost of such services. If the aggregate cost of behavioral
healthcare treatment services provided to a given beneficiary population in a
given period exceeds the aggregate of the per member per month fees received by
the Company with respect to the beneficiary population in such period, the
Company will incur a loss with respect to such beneficiary population during
such period. Furthermore, the Company may be required to pay during any period
amounts with respect to behavioral healthcare treatment services provided to a
given beneficiary population that exceed per member per month fees received with
respect to such beneficiary population during the same period. There can be no
assurance that the Company's assumptions as to service utilization rates and
costs will accurately and adequately reflect actual utilization rates and costs,
nor can there be any assurance that increases in behavioral healthcare costs or
 
                                       20

<PAGE>
higher-than-anticipated utilization rates, significant aspects of which are
outside the Company's control, will not cause expenses associated with such
contracts to exceed the Company's revenue for such contracts. In addition, there
can be no assurance that adjustments will not be required to the estimates,
particularly those regarding cost of care, made in reporting historical
financial results. See Note 1 to the audited consolidated financial statements
of the Company included elsewhere herein. The Company expects to attempt to
increase membership in its risk-based products. If the Company is successful in
this regard, the Company's exposure to potential losses from its risk-based
products will also be increased. Furthermore, certain of such contracts and
certain state regulations limit the profits that may be earned by the Company on
risk-based business and may require refunds if the loss experience is more
favorable than that originally anticipated. Such contracts and regulations may
also require the Company or certain of its subsidiaries to reserve a specified
amount of cash as financial assurance that it can meet its obligations under
such contracts. As of September 30, 2000, the Company had restricted cash and
investments of $117.7 million pursuant to such contracts and regulations. Such
amounts will not be available to the Company for general corporate purposes.
Furthermore, certain state regulations restrict the ability of subsidiaries that
offer risk-based products to pay dividends to the Company. Certain state
regulations relating to the licensing of insurance companies may also adversely
affect the Company's risk-based business. See "Business Regulation." Although
experience varies on a contract-by-contract basis, historically, the Company's
risk-based contracts have been profitable. However, the degree of profitability
varies significantly from contract to contract. For example, the Company's
Medicaid contracts with governmental entities generally tend to have direct
profit margins that are lower than the Company's other contracts. The most
significant factor affecting the profitability of risk-based contracts is the
ability to control direct service costs in relation to contract pricing.
 
    RELIANCE ON CUSTOMER CONTRACTS.  Approximately 88.3% of the Company's
revenue in fiscal 2000 was derived from contracts with payors of behavioral
healthcare benefits. The Company's behavioral managed healthcare contracts
typically have terms of one to three years, and in certain cases contain renewal
provisions providing for successive terms of between one and two years (unless
terminated earlier). Substantially all of these contracts are immediately
terminable with cause and many, including some of the Company's most significant
contracts, are terminable without cause by the customer upon the provision of
requisite notice and the passage of a specified period of time (typically
between 60 and 180 days), or upon the occurrence of certain other specified
events. The Company's ten largest behavioral managed healthcare customers
accounted for approximately 56.6% of the Company's behavioral managed healthcare
revenue for fiscal 2000. Both the Company and Premier Behavioral Systems of
Tennessee, LLC ("Premier"), in which the Company has a fifty percent interest,
separately contract with the State of Tennessee to manage the behavioral
healthcare benefits for the State's TennCare program. The Company's direct
Contract (exclusive of Premier) represented approximately 13.7% of the Company's
behavioral managed healthcare revenue and approximately 12.1% of the Company's
consolidated revenue in fiscal 2000. The Company's managed behavioral contracts
with Aetna, including Nylcare and Prudential, which were acquired by Aetna in
July 1998 and August 1999, respectively, represented approximately 17.2% of the
Company's behavioral managed healthcare revenue and approximately 15.2% of the
Company's consolidated revenue in fiscal 2000. The current TennCare and Aetna
contracts extend through December 31, 2000 and December 31, 2003, respectively.
The Company is in the process of renegotiating its TennCare contract. There can
be no assurance that such contracts will be extended or successfully
renegotiated or that the terms of any new contracts will be comparable to those
of existing contracts. Loss of all of these contracts or customers would, and
loss of any one of these customers could, have a material adverse effect on the
Company. In addition, price competition in bidding for contracts can
significantly affect the financial terms of any new or renegotiated contract.
 
    DEPENDENCE ON GOVERNMENT SPENDING FOR HEALTHCARE; POSSIBLE IMPACT OF
HEALTHCARE REFORM.  A significant portion of the Company's revenue is derived,
directly or indirectly, from federal, state and local governmental agencies,
including state Medicaid programs. Reimbursement rates vary from state to state,
are subject to periodic negotiation and may limit the Company's ability to
maintain or increase rates. The
 
                                       21

<PAGE>
Company is unable to predict the impact on the Company's operations of future
regulations or legislation affecting Medicaid or Medicare programs, or the
healthcare industry in general, and there can be no assurance that future
regulations or legislation will not have a material adverse effect on the
Company. Moreover, any reduction in government spending for such programs could
also have a material adverse effect on the Company. In addition, the Company's
contracts with federal, state and local governmental agencies, under both direct
contract and subcontract arrangements, generally are conditioned upon financial
appropriations by one or more governmental agencies, especially with respect to
state Medicaid programs. These contracts generally can be terminated or modified
by the customer if such appropriations are not made. Finally, some of the
Company's contracts with federal, state and local governmental agencies, under
both direct contract and subcontract arrangements, require the Company to
perform additional services if federal, state or local laws or regulations
imposed after the contract is signed so require, in exchange for additional
compensation to be negotiated by the parties in good faith. Government and other
third-party payors are generally seeking to impose lower reimbursement rates and
to renegotiate reduced contract rates with service providers in a trend toward
cost control. See "Business--Industry--Areas of Growth" and "Business--Business
Strategy."
 
    The House of Representatives of the U.S. Congress recently passed the
Norwood-Dingell bill which would (if it or similar legislation became law),
among other things, place limits on healthcare plans, methods of operations,
limit employers' and health care plans' ability to define medical necessity and
permit employers and health care plans to be sued in state courts for coverage
determinations. It is uncertain whether the Company could recoup, through higher
premiums or other measures, the increased costs of federally mandated benefits
or other increased costs caused by such legislation or similar legislation. The
Company cannot predict the effect of this legislation, nor other legislation
that may be adopted by Congress, and no assurance can be given that such
legislation will not have an adverse effect on the Company.
 
    REGULATION.  The healthcare industry and the provision of behavioral
healthcare and human services are subject to extensive and evolving state and
federal regulation. The Company is subject to certain state laws and
regulations, including those governing: (i) the licensing of insurance
companies, HMOs, PPOs, TPAs and companies engaged in utilization review and
(ii) the licensing of healthcare professionals, including restrictions on
business corporations from practicing, controlling or exercising excessive
influence over behavioral healthcare services through the direct employment of
psychiatrists or, in a few states, psychologists and other behavioral healthcare
professionals. In addition, the Company is subject to certain federal laws as a
result of the role the Company assumes in connection with managing its
customers' employee benefit plans. The Company's managed care operations are
also indirectly affected by regulations applicable to the establishment and
operation of behavioral healthcare clinics and facilities.
 
    In many states, entities that assume risk under contracts with licensed
insurance companies or HMOs have not been considered by state regulators to be
conducting an insurance or HMO business. As a result, the Company has not sought
licensure as either an insurer or HMO in certain states. Regulators in some
states, however, have determined that risk assuming activity by entities that
are not themselves providers of care is an activity that requires some form of
licensure. There can be no assurance that other states in which the Company
operates will not adopt a similar view, thus requiring the Company to obtain
additional licenses. Such additional licensure might require the Company to
maintain minimum levels of deposits, net worth, capital, surplus or reserves, or
limit the Company's ability to pay dividends, make investments or repay
indebtedness. The imposition of these additional licensure requirements could
increase the Company's cost of doing business or delay the Company's conduct or
expansion of its business.
 
    Regulators may impose operational restrictions on entities granted licenses
to operate as insurance companies or HMOs. For example, the California
Department of Corporations ("DOC") imposed certain restrictions on the Company
in connection with its issuance of an approval of the Company's acquisitions of
HAI and Merit, including restrictions on the ability of the California
subsidiaries of HAI and Merit to
 
                                       22

<PAGE>
fund the Company's operations in other states and on the ability of the Company
to make certain operational changes with respect to HAI and Merit California
subsidiaries.
 
    In addition, utilization review and TPA activities conducted by the Company
are regulated by many states, which states impose requirements upon the Company
that increase its business costs. The Company believes that its TPA activities
performed for its self-insured employee benefit plan customers are exempt from
otherwise applicable state licensing or registration requirements based upon
federal preemption under ERISA, and has relied on this general principle in
determining not to seek licensure for certain of its activities in many states.
Existing case law is not uniform on the applicability of ERISA preemption with
respect to state regulation of utilization review or TPA activities. There can
be no assurance that additional licensure will not be required with respect to
utilization review or TPA activities in certain states. See
"Business--Regulation--Insurance, HMO, and PPO Activities" and "--Utilization
Review and Third-Party Administrator Activities."
 
    State regulatory agencies responsible for the administration and enforcement
of the laws and regulations to which the Company's operations are subject have
broad discretionary powers. A regulatory agency or a court in a state in which
the Company operates could take a position under existing or future laws or
regulations, or change its interpretation or enforcement practices with respect
thereto, that such laws or regulations apply to the Company differently than the
Company believes such laws and regulations apply or should be enforced. The
resultant compliance with, or revocation of, or failure to obtain, required
licenses and governmental approvals could result in significant alteration to
the Company's business operations, delays in the expansion of the Company's
business and lost business opportunities, any of which, under certain
circumstances, could have a material adverse effect on the Company.
 
    The laws of some states limit the ability of a business corporation to
directly provide, control or exercise excessive influence over behavioral
healthcare services through the direct employment of psychiatrists,
psychologists, or other behavioral healthcare professionals. In addition, the
laws of some states prohibit psychiatrists, psychologists, or other healthcare
professionals from splitting fees with other persons or entities. These laws and
their interpretations vary from state to state and enforcement by the courts and
regulatory authorities may vary from state to state and may change over time.
The Company believes that its operations as currently conducted are in material
compliance with the applicable laws, however there can be no assurance that the
Company's existing operations and its contractual arrangements with
psychiatrists, psychologists and other healthcare professionals will not be
successfully challenged under state laws prohibiting fee splitting or the
practice of a profession by an unlicensed entity, or that the enforceability of
such contractual arrangements will not be limited. The Company believes that it
could, if necessary, restructure its operations to comply with changes in the
interpretation or enforcement of such laws and regulations, and that such
restructuring would not have a material adverse effect on its operations.
 
    Confidentiality and patient privacy requirements are particularly strict in
the field of behavioral healthcare services, and additional legislative
initiatives relating to confidentiality and privacy are expected. HIPAA requires
the HHS to adopt standards relating to the transmission of health information by
healthcare providers and healthcare plans. HIPAA calls for HHS to create
regulations in several different areas to address security, privacy and
administrative simplification. The regulations specifically relate to electronic
transactions and code sets, security and electronic signatures, privacy,
provider and employer IDs as well as health plan and individual IDs. While only
the regulations relating to electronic transactions and code sets section are
final, other areas of the regulations are expected to be finalized in the next
few months. The regulations go into effect 26 months after they are released,
with a deadline to implement the regulations governing electronic transaction
and code sets by October 16, 2002. On November 3, 1999, the Secretary
promulgated proposed regulations to protect the privacy of such health
information that is electronically transmitted or maintained. In addition, on
August 17, 2000, HHS published a final rule establishing standard data content
and formats for the submission of electronic claims and other administrative and
health transactions. The wide reaching implications of these regulations are
beginning to be
 
                                       23

<PAGE>
addressed now to ensure the Company's compliance with the regulations by the
implementation dates. These regulations, while creating a need for some software
changes, present more business and policy issues rather than technology issues.
The regulations will require changes to the Company's provider contracts, as
well as the creation of new policies for transmitting patient information to
ensure that the new privacy and electronic security measures are satisfied. In
some cases, these changes will mean executing chain of trust agreements with
business partners and ensuring that encryption technology is used when
transmitting electronic files. In addition, the Company's systems must be
equipped to handle both the electronic transactions governed by the regulations,
as well as paper transactions, which are not affected by the regulations and to
manage different sets of data depending on whether the transaction is electronic
or paper in nature. While the Company believes it has existing systems and
policies in place in many instances that will assist in the Company's
compliance, the Company expects that significant resources will be required over
the next two years to ensure compliance.
 
    Several states in which the Company does business have adopted, or are
expected to adopt, "any willing provider" laws. Such laws typically impose upon
insurance companies, PPOs, HMOs or other types of third-party payors an
obligation to contract with, or pay for the services of, any healthcare provider
willing to meet the terms of the payor's contracts with similar providers.
Compliance with any willing provider laws could increase the Company's costs of
assembling and administering provider networks and could, therefore, have a
material adverse effect on its operations.
 
    HIGHLY COMPETITIVE INDUSTRY.  The industry in which the Company conducts its
managed care businesses is highly competitive. The Company competes with large
insurance companies, HMOs, PPOs, TPAs, provider groups and other managed care
companies. Many of the Company's competitors are significantly larger and have
greater financial, marketing and other resources than the Company, and some of
the Company's competitors provide a broader range of services. The Company may
also encounter substantial competition in the future from new market entrants.
Many of the Company's customers that are managed care companies may, in the
future, seek to provide behavioral managed healthcare services to their
employees or subscribers directly, rather than contracting with the Company for
such services. See "Business--Competition."
 
    RISKS RELATED TO AMORTIZATION OF INTANGIBLE ASSETS.  The Company's total
assets at September 30, 2000 reflect goodwill of approximately $1.1 billion,
which is amortized over 25 to 40 years, and other identifiable intangible assets
(primarily customer lists, provider networks and treatment protocols) of
approximately $152.0 million that are amortized over 4 to 30 years. At
September 30, 2000, net intangible assets were 68.0% of total assets of
$1.8 billion. The amortization periods used by the Company may differ from those
used by other entities. In addition, the Company may be required to shorten the
amortization period for intangible assets in future periods based on the
prospects of acquired companies. There can be no assurance that the value of
such assets will ever be realized by the Company. The Company evaluates, on a
regular basis, whether events and circumstances have occurred that indicate that
all or a portion of the carrying value of intangible assets may no longer be
recoverable, in which case a charge to earnings for impairment losses could
become necessary. During fiscal 2000 the Company recorded a $91.0 million
impairment charge. This charge related to the write-down of certain long-lived
assets of the Company's specialty managed healthcare segment and the Company's
Group Practice Affiliates subsidiary (GPA). See Note 3--"Discontinued
Operations" and Note 10--"Managed Care Integration Plan and Costs and Special
Charges", to the Company's audited consolidated financial statements included
elsewhere herein. Any determination requiring additional write-offs of a
significant portion of unamortized intangible assets would adversely affect the
Company's results of operations. A write-off of intangible assets could become
necessary if the anticipated undiscounted cash flows of an acquired company do
not support the carrying value of long-lived assets, including intangible
assets.
 
    PROFESSIONAL LIABILITY; INSURANCE.  The management and administration of the
delivery of behavioral and specialty managed healthcare services and human
services, like other healthcare services, entail
 
                                       24

<PAGE>
significant risks of liability. The Company is regularly subject to lawsuits
alleging malpractice and related legal theories, some of which involve
situations in which participants in the Company's behavioral programs have
committed suicide. The Company is also subject to claims of professional
liability for alleged negligence in performing utilization review activities, as
well as for acts and omissions of independent contractors participating in the
Company's third-party provider networks. The Company is subject to claims for
the costs of services for which payment was denied. There can be no assurance
that the Company's procedures for limiting liability have been or will be
effective, or that one or more lawsuits will not have a material adverse effect
on the Company in the future.
 
    Recently, certain managed healthcare companies, including the Company, have
been targeted as defendants in several national class action lawsuits regarding
their business practices. These class action complaints include (i) inadequate
disclosure of provider compensation arrangements to members,
(ii) misrepresentation and omissions in advertising and health plan materials
and (iii) concealment of information from health plan members used to determine
what claims will be paid, procedures to determine medical necessity and
procedures to determine the extent and type of coverage. The Company believes
that these national class action lawsuits are part of a trend targeting the
healthcare industry, particularly managed care companies. There can be no
assurance that such lawsuits, which are generally uninsured, won't have a
material adverse effect on the Company.
 
    The Company carries professional liability insurance, subject to certain
deductibles. There can be no assurance that such insurance will be sufficient to
cover any judgments, settlements or costs relating to present or future claims,
suits or complaints or that, upon expiration thereof, sufficient insurance will
be available on favorable terms, if at all. If the Company is unable to secure
adequate insurance in the future, or if the insurance carried by the Company is
not sufficient to cover any judgments, settlements or costs relating to any
present or future actions or claims, there can be no assurance that the Company
will not be subject to a liability that could have a material adverse effect on
the Company. See "Business--Insurance" and "Legal Proceedings."
 
    The Company has certain potential liabilities relating to the self-insurance
program it maintained with respect to its provider business prior to the
Crescent Transactions. In addition, the Company continues to be subject to
governmental investigations and inquiries, civil suits and other claims and
assessments with respect to the provider business. See "Legal Proceedings" and
Note 12--"Commitments and Contingencies", to the Company's audited consolidated
financial statements included elsewhere herein.
 
                                       25

<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
 

<TABLE>
<CAPTION>
NAME                                       AGE      POSITION
----                                     --------   --------
<S>                                      <C>        <C>
Henry T. Harbin, M.D...................     53      President, Chief Executive Officer and Director
Daniel S. Messina......................     45      Executive Vice President, Chief Operating Officer and
                                                    Director
Mark S. Demilio........................     45      Executive Vice President, Finance and Legal
Clarissa C. Marques, Ph.D..............     48      Executive Vice President and Chief Administrative
                                                    Officer
Dennis P. Moody........................     43      Executive Vice President, Business Operations
</TABLE>

 
    HENRY T. HARBIN, M.D. became President, Chief Executive Officer and a
Director of the Company on March 18, 1998. Dr. Harbin served as President and
Chief Executive Officer of Green Spring from 1994 to 1998. Dr. Harbin served as
Executive Vice President of the Company from 1995 until becoming President and
Chief Executive Officer of the Company.
 
    DANIEL S. MESSINA became Executive Vice President and Chief Operating
Officer in September 2000. Prior to joining the Company, Mr. Messina was chief
financial officer and head of business strategy for Aetna U.S. Healthcare in
Hartford, Connecticut from February 1990 to September 2000. Mr. Messina has also
served on the Board of Directors of the Company since 1998.
 
    MARK S. DEMILIO became Executive Vice President, Finance and Legal of the
Company in November 2000. Mr. Demilio served as Executive Vice President and
General Counsel from July 1999. Prior thereto, Mr. Demilio was with Youth
Services International, Inc., a publicly traded company that managed facilities
for adjudicated youth, serving as Executive Vice President Business Development
and General Counsel from March 1997 and Acting Chief Financial Officer from
June 1998. Mr. Demilio was a partner with Miles & Stockbridge, a Baltimore,
Maryland-based law firm, from 1994 to March 1997 and served as an associate with
that firm from 1989.
 
    CLARISSA C. MARQUES, PH.D. became Executive Vice President and Chief
Adminsitrative Officer in June 2000. Prior thereto, Dr. Marques served as the
Executive Vice President and Clinical and Quality Management since March 1998.
Dr. Marques serviced as the Executive Vice President and Chief Clinical Officer
of Green Spring during 1997 and 1998 and Senior Vice President of Green Spring
from 1992 to 1997.
 
    DENNIS P. MOODY became Executive Vice President of Business Operations in
October 2000. Prior thereto, Mr. Moody served as President and Chief Operating
Officer of the Health Plan Solutions Group since February 1998. Mr. Moody
previously held the following positions with Merit from 1991 through 1997:
Executive Vice President, National Business (1997), Executive Vice President,
National Services (1995 - 1996), Executive Vice President, Regional Operations
(1994 - 1995), and Regional Vice President (1991 - 1994).
 
EMPLOYEES OF THE REGISTRANT
 
    At September 30, 2000, the Company had approximately 12,800 full-time and
part-time employees. The Company believes it has satisfactory relations with its
employees.
 

I
TEM 2. PROPERTIES
 
    The Company's principal executive offices are located in Columbia, Maryland;
the lease for the Company's headquarters expires in 2003. Additionally, the
Company leases 158 offices with terms expiring between 2000 and 2008.
 
                                       26

<PAGE>

ITEM 3. LEGAL PROCEEDINGS
 
    The management and administration of the delivery of behavioral managed
healthcare services, and the direct provision of behavioral healthcare treatment
services, entail significant risks of liability. From time to time, the Company
is subject to various actions and claims arising from the acts or omissions of
its employees, network providers or other parties. In the normal course of
business, the Company receives reports relating to suicides and other serious
incidents involving patients enrolled in its programs. Such incidents
occasionally give rise to malpractice, professional negligence and other related
actions and claims against the Company or its network providers. As the number
of lives covered by the Company grows and the number of providers under contract
increases, actions and claims against the Company (and, in turn, possible legal
liability) predicated on malpractice, professional negligence or other related
legal theories can be expected to increase. See "Business Cautionary
Statements--Professional Liability; Insurance." Many of these actions and claims
received by the Company seek substantial damages and therefore require the
defendant to incur significant fees and costs related to their defense. To date,
claims and actions against the Company alleging professional negligence have not
resulted in material liabilities and the Company does not believe that any
pending action against it will have a material adverse effect on the Company.
However, there can be no assurance that pending or future actions or claims for
professional liability (including any judgments, settlements or costs associated
therewith) will not have a material adverse effect on the Company. See
"--Insurance" and "Cautionary Statements--Professional Liability; Insurance."
 
    From time to time, the Company receives notifications from and engages in
discussions with various governmental agencies concerning its respective managed
care businesses and operations. As a result of these contacts with regulators,
the Company in many instances implements changes to its operations, revises its
filings with such agencies and/or seeks additional licenses to conduct its
business. In recent years, in response to governmental agency inquiries or
discussions with regulators, the Company has determined to seek licensure as a
single service HMO, TPA or utilization review agent in one or more
jurisdictions.
 
    The healthcare industry is subject to numerous laws and regulations. The
subjects of such laws and regulations include, but are not limited to, matters
such as licensure, accreditation, government healthcare program participation
requirements, reimbursement for patient services, and Medicare and Medicaid
fraud and abuse. Recently, government activity has increased with respect to
investigations and/or allegations concerning possible violations of fraud and
abuse and false claims statutes and/or regulations by healthcare providers.
Entities that are found to have violated these laws and regulations may be
excluded from participating in government healthcare programs, subjected to
fines or penalties or required to repay amounts received from the government for
previously billed patient services. The Office of the Inspector General of the
Department of Health and Human Services and the United States Department of
Justice ("Department of Justice") and certain other governmental agencies are
currently conducting inquiries and/or investigations regarding the compliance by
the Company and certain of its subsidiaries with such laws and regulations.
Certain of the inquiries relate to the operations and business practices of the
Psychiatric Hospital Facilities prior to the consummation of the Crescent
Transactions in June 1997. The Department of Justice has indicated that its
inquiries are based on its belief that the federal government has certain civil
and administrative causes of action under the Civil False Claims Act, the Civil
Monetary Penalties Law, other federal statutes and the common law arising from
the participation in federal health benefit programs of The Psychiatric Hospital
Facilities nationwide. The Department of Justice inquiries relate to the
following matters: (i) Medicare cost reports; (ii) Medicaid cost statements;
(iii) supplemental applications to CHAMPUS (as defined) based on Medicare cost
reports; (iv) medical necessity of services to patients and admissions;
(v) failure to provide medically necessary treatment or admissions; and
(vi) submission of claims to government payors for inpatient and outpatient
psychiatric services. No amounts related to such proposed causes of action have
yet been specified. The Company cannot reasonably estimate the settlement
amount, if any, associated with the Department of Justice inquiries.
Accordingly, no reserve has been recorded related to this matter.
 
                                       27

<PAGE>
    Five affiliated outpatient clinic providers that are participating providers
in the TennCare program asserted claims against Green Spring Health
Services, Inc., a wholly-owned subsidiary of the Company ("Green Spring") and
Premier, the joint venture that contracts with the State of Tennessee to manage
services under the TennCare program and in which the Company holds a 50%
interest, alleging that Premier and Green Spring failed to pay the providers in
accordance with their contracts. The claims allege losses of in excess of
$16.0 million in the aggregate and are proceeding in five separate arbitrations.
On December 8, 2000 the Chancery Court of Davidson County, Tennessee entered a
judgment confirming an arbitration award against Premier and Green Spring in the
amount of $3.7 million in favor of one of the providers. The Court denied a
motion by Premier and Green Spring to vacate the arbitration award on grounds
that the provider procured the award by fraud and that the arbitrators exceeded
their authority. Premier and Green Spring believe that the Court's order was
erroneous and intend to pursue vigorously an appeal of this judgment. The other
arbitrations are at various stages of proceedings. The Company believes that
adequate reserves have been recorded with respect to any potential loss in these
matters.
 
    On or about August 4, 2000, the Company was served with a lawsuit filed by
Wachovia Bank, N.A. ("Wachovia") in the Court of Common Pleas of Richland
County, South Carolina seeking recovery under the indemnification provisions of
the Engagement Letter between South Carolina National Bank (now Wachovia) and
the Company and the ESOP Trust Agreement between South Carolina National Bank
(now Wachovia) and the Company for losses sustained in a settlement entered into
by Wachovia with the United States Department of Labor in connection with the
ESOP's purchase of stock of the Company while Wachovia served as ESOP Trustee.
Wachovia also alleges fraud, negligent misrepresentation and other claims and
asserts its losses exceed $30 million. While the claim is in the initial stage,
and an outcome cannot be determined, the Company believes the claims of Wachovia
are without merit and is defending them vigorously.
 
    On October 26, 2000, two class action complaints (the "Class Actions") were
filed against Magellan Health Services, Inc. and Magellan Behavioral
Health, Inc. (the "Defendants") in the United States District Court for the
Eastern District of Missouri under the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the Employment Retirement Income Security Act of
1974 ("ERISA"). The class representatives purport to bring the actions on behalf
of a nationwide class of individuals whose behavioral health benefits have been
provided, underwritten and/or arranged by the Defendants since 1996. The
complaints allege violations of RICO and ERISA arising out of the Defendants'
alleged misrepresentations with respect to and failure to disclose, its claims
practices, the extent of the benefits coverage and other matters that cause the
value of benefits to be less than the amount of premium paid. The complaints
seek unspecified compensatory damages, treble damages under RICO, and an
injunction barring the alleged improper claims practices, plus interest, costs
and attorneys' fees. These actions are similar to suits filed against a number
of other health care organizations, elements of which have already been
dismissed by various courts around the country. While the Class Actions are in
the initial stages, and an outcome cannot be determined, the Company believes
that the claims are without merit and intend to defend them vigorously.
 
    The Company also is subject to or party to other litigation, claims, and
civil suits relating to its operations and business practices. Certain of the
Company's managed care litigation matters involve class action lawsuits, which
allege (i) the Company inappropriately denied and/or failed to authorize
benefits for mental health treatment under insurance policies with a customer of
the Company and (ii) a provider at a Company facility violated privacy rights of
certain patients. In addition, the Company is subject to certain contingencies
in connection with the CBHS bankruptcy as discussed in Note 3--"Discontinued
Operations" to the Company's audited consolidated financial statements set forth
elsewhere herein. In the opinion of management, the Company has recorded
reserves that are adequate to cover litigation and claims that have been or may
be asserted against the Company, and for which the outcome is probable and
reasonably estimable, arising out of such other litigation and claims.
Furthermore, management believes that the resolution of such litigation and
claims will not have a material adverse effect on the Company's financial
position or results of operations; however, there can be no assurance in this
regard.
 
                                       28

<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    None.
 

                                    PART II
 

ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
  MATTERS
 
    The Company has one class of common stock, $0.25 par value per share, which
is listed for trading on the New York Stock Exchange (ticker symbol "MGL"). As
of December 22, 2000, there were 9,289 holders of record of the Company's common
stock. The following table sets forth the high and low sales prices of the
Company's common stock from October 1, 1998 through the fiscal year ended
September 30, 2000 as reported by the New York Stock Exchange:
 

<TABLE>
<CAPTION>
                                                                       COMMON
                                                                     STOCK SALES
                                                                       PRICES
                                                              -------------------------
CALENDAR YEAR                                                    HIGH           LOW
-------------                                                 -----------   -----------
<S>                                                           <C>           <C>
1998
    Fourth Quarter..........................................  10 3/4         6 3/8
1999
    First Quarter...........................................  11 1/8         4 3/16
    Second Quarter..........................................  10             3 9/16
    Third Quarter...........................................  10 1/2         6 7/8
    Fourth Quarter..........................................   7 1/4         5 5/16
2000
    First Quarter...........................................   7 9/16        4 5/8
    Second Quarter..........................................   4 13/16       1 15/16
    Third Quarter...........................................   4             1 1/4
</TABLE>

 
    The Company did not declare any cash dividends during fiscal 1999 or 2000.
As of December 22, 2000, the Company was prohibited from paying dividends on its
common stock under the terms of the Credit Agreement, except in very limited
circumstances.
 

ITEM 6. SELECTED FINANCIAL DATA
 
    The following table sets forth selected historical consolidated financial
information of the Company for each of the five years in the period ended
September 30, 2000. On September 2, 1999, the Company's Board of Directors
approved a formal plan to dispose of the businesses included in the Company's
healthcare provider and healthcare franchising segments and on September 10,
1999, the Company consummated such disposal. On October 4, 2000, the Company
adopted a formal plan to dispose of the business included in the Company's
specialty managed healthcare segment. Accordingly, the statement of operations
data has been restated to reflect the healthcare provider, healthcare
franchising and specialty managed healthcare segments as discontinued
operations. Selected consolidated financial information for the three years
ended September 30, 2000 and as of September 30, 1999 and 2000 presented below,
have been derived from, and should be read in conjunction with, the Company's
audited consolidated financial statements and the notes thereto included
elsewhere herein. Selected consolidated financial information for the two years
ended September 30, 1997 and as of September 30, 1996 and 1997 has been derived
from the Company's unaudited consolidated financial statements. The selected
financial data set forth below also should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
 
                                       29

<PAGE>
 

<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED SEPTEMBER 30,
                                             -----------------------------------------------------------
                                               1996        1997        1998         1999         2000
                                             ---------   --------   ----------   ----------   ----------
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>         <C>        <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................  $ 302,573   $463,872   $1,167,274   $1,674,479   $1,873,554
Salaries, cost of care and other operating
  expenses.................................    299,855    436,169    1,043,251    1,468,879    1,652,582
Equity in (earnings) loss of unconsolidated
  subsidiaries.............................      2,005      5,567      (12,795)     (20,442)      (9,792)
Depreciation and amortization..............     14,290     19,683       46,898       68,921       75,413
Interest, net..............................     48,584     46,438       76,505       93,752       97,286
Stock option expense (credit)..............        914      4,292       (5,623)          18           --
Managed care integration costs.............         --         --       16,962        6,238           --
Special charges, net.......................      1,221         --           --        4,441       25,398
Income (loss) from continuing operations
  before income taxes, minority interest
  and extraordinary items..................    (64,296)   (48,277)       2,076       52,672       32,667
Provision for (benefit from) income
  taxes....................................    (25,719)   (19,311)       5,238       28,256       15,478
Income (loss) from continuing operations
  before minority interest and
  extraordinary items......................    (38,577)   (28,966)      (3,162)      24,416       17,189
Minority interest..........................      4,531      6,856        4,094          630          114
Income (loss) from continuing operations
  before extraordinary items...............    (43,108)   (35,822)      (7,256)      23,786       17,075
Discontinued operations:
  Income (loss) from discontinued
    operations.............................     75,491     40,577       20,988       28,325      (65,221)
  Loss on disposal of discontinued
    operations.............................         --         --           --      (47,423)     (17,662)
Income (loss) before extraordinary items...     32,383      4,755       13,732        4,688      (65,808)
Extraordinary items -- losses on early
  extinguishments of debt..................         --     (5,253)     (33,015)          --           --
Net income (loss)..........................     32,383       (498)     (19,283)       4,688      (65,808)
Preferred dividend requirement and
  amortization of redeemable preferred
  stock issuance costs.....................         --         --           --           --        3,802
Income (loss) available to common
  stockholders.............................  $  32,383   $   (498)  $  (19,283)  $    4,688   $  (69,610)
 
INCOME (LOSS) PER COMMON SHARE AVAILABLE TO
  COMMON STOCKHOLDERS -- BASIC:
Income (loss) from continuing operations
  before extraordinary items...............      (1.39)     (1.24)       (0.24)        0.75         0.41
Income (loss) from discontinued
  operations...............................       2.43       1.41         0.68        (0.60)       (2.58)
Loss from extraordinary items..............         --      (0.18)       (1.07)          --           --
Net income (loss)..........................  $    1.04   $  (0.02)  $    (0.63)  $    (0.15)  $    (2.17)
 
INCOME (LOSS) PER COMMON SHARE AVAILABLE TO
  COMMON STOCKHOLDERS -- DILUTED:
Income (loss) from continuing operations
  before extraordinary items...............  $   (1.39)  $  (1.24)  $    (0.24)  $     0.75   $     0.41
Income (loss) from discontinued
  operations...............................       2.43       1.41         0.68        (0.60)       (2.56)
Loss from extraordinary items..............         --      (0.18)       (1.07)          --           --
Net income (loss)..........................  $    1.04   $  (0.02)  $    (0.63)  $    (0.15)  $    (2.15)
 
BALANCE SHEET DATA (END OF PERIOD):
Current assets.............................  $ 338,150   $507,038   $  399,724   $  374,927   $  319,653
Current liabilities........................    274,316    219,376      454,766      474,268      469,879
Property and equipment, net................    495,390    109,214      177,169      120,667      112,612
Total assets...............................  1,140,137    896,868    1,917,088    1,881,615    1,803,787
Total debt and capital lease obligations...    572,058    395,294    1,225,646    1,144,308    1,098,047
Stockholders' equity.......................    121,817    159,498      188,433      196,696      128,464
</TABLE>

 
                                       30

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
                               SEPTEMBER 30, 2000
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
OVERVIEW
 
    Prior to June 1997, the Company derived the majority of its revenue from
providing behavioral healthcare services in an inpatient setting. During the
first quarter of fiscal 1996, the Company acquired a 61% ownership interest in
Green Spring Health Services, Inc. At that time, the Company intended to become
a fully integrated behavioral healthcare provider by combining the behavorial
managed healthcare products offered by Green Spring with the direct treatment
services offered by the Company's psychiatric hospitals. During the second
quarter of fiscal 1998, the minority stockholders of Green Spring converted
their 39% ownership interest in Green Spring into an aggregate of 2,831,516
shares of Magellan common stock.
 
    Subsequent to the Company's acquisition of Green Spring, the growth of the
behavioral managed healthcare industry accelerated. The Company concluded that
the behavioral managed healthcare industry offered growth and earnings prospects
superior to those of the psychiatric hospital industry. Therefore, the Company
decided to sell its domestic psychiatric facilities to obtain capital for
expansion of its behavioral managed healthcare business.
 
    On June 17, 1997, the Company consummated the Crescent Transactions which
provided the Company with approximately $200 million of net cash proceeds, after
debt repayment, for use in implementing its business strategy to increase its
participation in the managed healthcare industry. The Company used the net cash
proceeds of approximately $200 million, after debt repayment, to finance the
acquisitions of HAI and Allied in December 1997. The Company further implemented
its business strategy through the acquisition of Merit in February 1998.
 
    On September 10, 1999, the Company consummated the CBHS Transactions. The
CBHS Transactions, together with the formal plan of disposal authorized by the
Company's Board of Directors on September 2, 1999, represented the disposal of
the Company's healthcare provider and healthcare franchising business segments.
 
    On October 4, 2000, the Company adopted a formal plan to dispose of the
business included in the Company's specialty managed healthcare segment. The
specialty managed healthcare segment includes the businesses acquired in
conjunction with the purchase of Vivra which was consummated February 29, 2000
and Allied on December 5, 1997. The initial purchase price of Vivra was
$10.25 million and additional consideration of $10.0 million may be payable
based upon future results. The Company paid approximately $54.5 million for
Allied.
 
    APB 30 requires that the results of continuing operations be reported
separately from those of discontinued operations for all periods presented and
that any gain or loss from disposal of a segment of a business be reported in
conjunction with the related results of discontinued operations. Accordingly,
the Company has restated its results of operations for all prior periods related
to the healthcare provider, healthcare franchising and specialty managed
healthcare business segments. The Company recorded an after-tax loss on disposal
of its healthcare provider and healthcare franchising business segments of
approximately $47.4 million (primarily non-cash), in fiscal 1999 and an after
tax loss of $17.7 million on the disposal of its specialty managed healthcare
segment in fiscal 2000.
 
    The Company currently operates through two principal business segments which
are engaged in:
 
    - THE BEHAVIORAL MANAGED HEALTHCARE BUSINESS. The Company's behavioral
      managed healthcare segment coordinates and manages the delivery of
      behavioral healthcare treatment services through its network of providers,
      which includes psychiatrists, psychologists and other medical
      professionals.
 
                                       31

<PAGE>
      The treatment services provided through these provider networks include
      outpatient programs (such as counseling or therapy), intermediate care
      programs (such as intensive outpatient programs and partial
      hospitalization services), inpatient treatment and alternative care
      services (such as residential treatment and home or community-based
      programs). The Company provides these services primarily through:
      (i) risk-based products, where the Company assumes all or a portion of the
      responsibility for the cost of providing treatment services in exchange
      for a fixed per member per month fee, (ii) ASO products, where the Company
      provides services such as utilization review, claims administration or
      provider network management, (iii) EAPs and (iv) products which combine
      features of some or all of the Company's risk-based, ASO, or EAP products.
 
    - THE HUMAN SERVICES BUSINESS. The Company provides various human services
      through Mentor. These human services include specialty home-based
      healthcare services provided through "mentor" homes as well as residential
      and day treatment services for individuals with acquired brain injuries
      and for individuals with mental retardation and developmental
      disabilities.
 
    At September 30, 2000, the Company's behavioral managed healthcare segment,
managed the behavioral healthcare benefits of approximately 71.0 million
individuals and Mentor, the human services segment, provided over 7,800
individuals with community-based services.
 
RESULTS OF OPERATIONS
 
    The following tables summarize, for the periods indicated, operating results
by continuing business segments (in thousands).
 

<TABLE>
<CAPTION>
                                                  BEHAVIORAL                  CORPORATE
                                                   MANAGED        HUMAN        OVERHEAD
FISCAL 1998                                       HEALTHCARE     SERVICES     AND OTHER    CONSOLIDATED
-----------                                       ----------   ------------   ----------   ------------
<S>                                               <C>          <C>            <C>          <C>
Net revenue.....................................  $1,026,243     $141,031      $     --     $1,167,274
                                                  ----------     --------      --------     ----------
Salaries, cost of care and other operating
  expenses......................................     901,846      125,539        15,866      1,043,251
Equity in earnings of unconsolidated
  subsidiaries..................................     (12,795)          --            --        (12,795)
                                                  ----------     --------      --------     ----------
                                                     889,051      125,539        15,866      1,030,456
                                                  ----------     --------      --------     ----------
Segment Profit(1)...............................  $  137,192     $ 15,492      $(15,866)    $  136,818
                                                  ==========     ========      ========     ==========
</TABLE>

 

<TABLE>
<CAPTION>
                                                  BEHAVIORAL                  CORPORATE
                                                   MANAGED        HUMAN        OVERHEAD
FISCAL 1999                                       HEALTHCARE     SERVICES     AND OTHER    CONSOLIDATED
-----------                                       ----------   ------------   ----------   ------------
<S>                                               <C>          <C>            <C>          <C>
Net revenue.....................................  $1,483,202     $191,277      $     --     $1,674,479
                                                  ----------     --------      --------     ----------
Salaries, cost of care and other operating
  expenses......................................   1,285,391      169,549        13,939      1,468,879
Equity in earnings of unconsolidated
  subsidiaries..................................     (20,442)          --            --        (20,442)
                                                  ----------     --------      --------     ----------
                                                   1,264,949      169,549        13,939      1,448,437
                                                  ----------     --------      --------     ----------
Segment Profit(1)...............................  $  218,253     $ 21,728      $(13,939)    $  226,042
                                                  ==========     ========      ========     ==========
</TABLE>

 

<TABLE>
<CAPTION>
                                                  BEHAVIORAL                  CORPORATE
                                                   MANAGED        HUMAN        OVERHEAD
FISCAL 2000                                       HEALTHCARE     SERVICES     AND OTHER    CONSOLIDATED
-----------                                       ----------   ------------   ----------   ------------
<S>                                               <C>          <C>            <C>          <C>
Net revenue.....................................  $1,655,101     $218,453            --     $1,873,554
                                                  ----------     --------      --------     ----------
Salaries, cost of care and other operating
  expenses......................................   1,442,964      196,332        13,286      1,652,582
Equity in earnings of unconsolidated
  subsidiaries..................................      (9,792)          --            --         (9,792)
                                                  ----------     --------      --------     ----------
                                                   1,433,172      196,332        13,286      1,642,790
                                                  ----------     --------      --------     ----------
Segment Profit(1)...............................  $  221,929     $ 22,121      $(13,286)    $  230,764
                                                  ==========     ========      ========     ==========
</TABLE>

 
                                       32

<PAGE>
------------------------
(1) The Company evaluates performance of its segments based upon profit or loss
    from continuing operations before depreciation, amortization, interest, net,
    stock option expense (credit), managed care integration costs, special
    charges, net, income taxes and minority interest ("Segment Profit"). See
    Note 14, "Business Segment Information", to the Company's audited
    consolidated financial statements appearing elsewhere herein.
 
FISCAL 1999 COMPARED TO FISCAL 2000
 
    BEHAVIORAL MANAGED HEALTHCARE.  Revenue increased 11.6% or $171.9 million,
to $1.66 billion for fiscal 2000, from $1.48 billion in fiscal 1999. Salaries,
cost of care and other operating expenses increased 12.3%, or $157.6 million, to
$1.44 billion for fiscal 2000, from $1.29 billion for fiscal 1999. The increases
resulted primarily from increased membership growth and new contracts. Operating
expenses increased at a greater rate than revenue primarily as a result of
losses and reduced profitability in certain public sector contracts. Total
covered lives increased 6.9% or 4.6 million to 71.0 million at September 30,
2000 from 66.4 million at September 30, 1999. Equity in earnings of
unconsolidated subsidiaries decreased 52.1% or $10.7 million to $9.8 million in
fiscal 2000 from $20.4 million in fiscal 1999. This decrease was a result of the
decreased earnings of Premier Behavioral Systems of Tennessee, LLC ("Premier"),
in which the Company maintains a 50% interest. The decrease in Premier's
profitability was primarily a result of the 1999 period benefiting from positive
contractual rate adjustments and an increase in accruals for potential losses
from certain legal actions in the 2000 period. The Company frequently records
retroactive customer settlements, which may be favorable or unfavorable, under
its commercial behavioral managed healthcare contracts. Revenue and Segment
Profit for fiscal 2000 reflect approximately $1.4 million of such favorable
settlements compared to favorable settlements of $9.8 million during fiscal
1999. The Company recorded $3.7 million and $(0.8) million of favorable
(unfavorable) retroactive customer settlements in the fourth quarter of fiscal
1999 and 2000, respectively.
 
    HUMAN SERVICES.  Revenue from the human services segment increased 14.2%, or
$27.2 million, to $218.5 million for fiscal 2000, from $191.3 million in fiscal
1999. Salaries, cost of care and other operating expenses increased 15.8%, or
$26.8 million, to $196.3 million for fiscal 2000 from $169.5 million in fiscal
1999. The increase in revenue is a result of increased placements and
acquisitions completed in fiscal 1999 and 2000. Increased operating expenses
resulted from: (i) increase in placements; (ii) decreased profitability and exit
costs incurred related to certain contracts and operations; and (iii) increased
spending on conversion of computer systems. Total placements increased 21.9% to
approximately 7,800 at September 30, 2000, compared to approximately 6,400 at
September 30, 1999.
 
    CORPORATE OVERHEAD AND OTHER.  Salaries and other operating expenses
decreased 4.9%, or $0.7 million, primarily as a result of ongoing integration of
corporate administrative functions with business unit administrative functions.
 
    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased
9.4%, or $6.5 million, to $75.4 million for fiscal 2000, from $68.9 million in
fiscal 1999. The increase was primarily attributed to depreciation related to
recent capital expenditures and amortization related to the additional purchase
price payment of $60 million with respect to the HAI acquisition made in fiscal
2000. See Note 3--"Acquisitions and Joint Ventures" to the Company's audited
consolidated financial statements set forth elsewhere herein.
 
    INTEREST, NET.  Interest expense, net, increased 3.7%, or $3.5 million, to
$97.3 million for fiscal 2000, from $93.8 million in fiscal 1999. The increase
was primarily the result of higher borrowing rates during fiscal 2000.
 
    OTHER ITEMS.  The Company recorded special charges of $25.4 million during
fiscal 2000 comprised of: (i) $4.5 million of severance and lease termination
costs and $15.8 million of impairment of certain long lived assets related to
the closure of offices in connection with the psychiatric practice management
 
                                       33

<PAGE>
business; (ii) $7.0 million of severance and lease termination costs related to
the restructuring of the corporate function and certain behavioral managed
healthcare sites and (iii) a $1.9 million non-recurring gain on the sale of the
corporate aircraft.
 
    The Company's effective tax rate was 47.4% for fiscal 2000. The effective
tax rate exceeds statutory rates due primarily to non-deductible goodwill
amortization resulting primarily from acquisitions, offset by reductions in
reserve estimates of approximately $9.1 million related to settlements with the
Internal Revenue Service during the fourth quarter of fiscal 2000.
 
    DISCONTINUED OPERATIONS.  The following tables summarize, for the periods
indicated, income (loss) from discontinued operations, net of tax:
 

<TABLE>
<CAPTION>
                                                             1999       2000
                                                           --------   --------
<S>                                                        <C>        <C>
Healthcare provider segment..............................  $32,883    $     --
Healthcare franchising segment...........................   (3,238)         --
Specialty managed healthcare segment.....................   (1,320)    (65,221)
                                                           -------    --------
                                                           $28,325    $(65,221)
                                                           =======    ========
</TABLE>

 
    Income from the healthcare provider segment decreased 100%, or
$32.8 million to $0 million for fiscal 2000 compared to $32.8 million for fiscal
1999. The decrease is primarily attributable to (i) the net effect of the
Company's sale of its European hospital operations in April 1999, which included
a gain on sale of $14.4 million, net of tax, (ii) income of $8.8 million, net of
tax, from cost report settlements related primarily to the resolution of
Medicare cost report matters in the fourth quarter of fiscal 1999 associated
with the Company's sale of the Psychiatric Hospital Facilities, and
(iii) discontinuance of all significant activities related to this segment in
fiscal 2000. The Company ceased all activities related to its healthcare
franchising segments during fiscal 1999.
 
    The loss from the specialty managed healthcare segment increased
$63.9 million, to a loss of $65.2 million, net of tax, for fiscal 2000 compared
to a loss of $1.3 million, net of tax, for fiscal 1999. During fiscal 2000 the
Company recorded: (i) a pre-tax charge of $58.2 million in the second quarter
related to the impairment of long-lived assets; (ii) pre-tax operating losses of
approximately $41.1 million prior to the discontinued operations measurement
date; and (iii) a federal tax benefit of $34.1 million. The operating losses
were attributable to: (i) performance of certain risk-based contracts;
(ii) cost to exit risk-based contracts including provision for uncollectible
receivables and additional contractual liabilities; and (iii) severance and shut
down cost incurred in conjunction with the wind down of operations.
 
    The Company recorded a loss on disposal of discontinued operations of
approximately $17.7 million, net of tax benefit of $9.2 million, at the end of
fiscal 2000. This loss represents the additional cost incurred as a result of
the plan adopted on October 4, 2000 to fully exit the specialty managed
healthcare segment. See Note 3-"Discontinued Operations" to the Company's
audited consolidated financial statements set forth elsewhere herein. The
pre-tax loss is comprised of a $17.1 million impairment of the remaining
long-lived assets and $9.8 million in lease terminations and other exit costs as
defined by APB 30.
 
FISCAL 1998 COMPARED TO FISCAL 1999
 
    BEHAVIORAL MANAGED HEALTHCARE.  Revenue increased 44.5% or $457.0 million,
to $1.48 billion for fiscal 1999, from $1.03 billion in fiscal 1998. Salaries,
cost of care and other operating expenses increased 42.5%, or $383.5 million, to
$1.29 billion for fiscal 1999, from $901.8 million in fiscal 1998. Equity in
earnings of unconsolidated subsidiaries increased $7.6 million, to
$20.4 million for fiscal 1999, from $12.8 million for fiscal 1998. The increases
resulted primarily from (i) the HAI and Merit acquisitions in fiscal 1998,
(ii) increased enrollment related to existing customers, (iii) expanded services
and lives under management with certain public sector customers, (iv) new
business development and (v) increases in retroactive customer settlements,
offset by reductions in general and administrative costs as a result of the
 
                                       34

<PAGE>
integration of Green Spring, HAI and Merit and the termination of one public
sector contract (Montana Medicaid) in fiscal 1999. Total covered lives increased
7.8% or 4.8 million to 66.4 million at September 30, 1999 from 61.6 million at
September 30, 1998. The Company frequently records retroactive customer
settlements, which may be favorable or unfavorable, under its commercial
behavioral managed healthcare contracts. Revenue and Segment Profit for fiscal
1999 reflect approximately $9.8 million of such favorable settlements compared
to favorable settlements of $1.8 million during fiscal 1998. The Company
recorded $3.7 million of favorable retroactive customer settlements in the
fourth quarter of fiscal 1999.
 
    HUMAN SERVICES.  Revenue from the human services segment increased 35.7%, or
$50.3 million, to $191.3 million for fiscal 1999, from $141.0 million in fiscal
1998. Salaries, cost of care and other operating expenses increased 35.1%, or
$44.0 million, to $169.5 million for fiscal 1999 from $125.5 million in fiscal
1998. The increases were attributable to acquisitions consummated in fiscal 1998
and fiscal 1999 and internal growth, offset by reductions in revenue and Segment
Profit at one acquired business in fiscal 1999 as a result of rate and placement
reductions from a state agency. Total placements increased 9.5% to approximately
6,400 at September 30, 1999, compared to approximately 5,900 at September 30,
1998.
 
    CORPORATE OVERHEAD AND OTHER.  Salaries and other operating expenses
decreased 12.1%, or $1.9 million, primarily as a result of ongoing integration
of corporate administrative functions with business unit administrative
functions.
 
    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased
46.9%, or $22.0 million, to $68.9 million for fiscal 1999, from $46.9 million in
fiscal 1998. The increase was primarily attributed to (i) the acquisition of HAI
and Merit in fiscal 1998, (ii) depreciation related to fiscal year 2000 capital
expenditures and (iii) amortization related to the additional purchase price
payment of $60 million to Aetna with respect to the HAI acquisition made in
fiscal 1999.
 
    INTEREST, NET.  Interest expense, net, increased 22.6%, or $17.3 million, to
$93.8 million for fiscal 1999, from $76.5 million in fiscal 1998. The increase
was primarily the result of interest expense incurred on borrowings used to fund
the Merit acquisition and related transactions in fiscal 1998.
 
    OTHER ITEMS.  Stock option expense for fiscal 1999 was not material compared
to a credit of $5.6 million in fiscal 1998 primarily due to fluctuations in the
market price of the Company's stock in fiscal 1998.
 
    The Company recorded managed care integration costs of $6.2 million for
fiscal 1999, compared to $17.0 million in fiscal 1998. For a more complete
discussion of managed care integration costs, see Note 10, "Managed Care
Integration Plan and Costs and Special Charges" to the Company's audited
consolidated financial statements set forth elsewhere herein.
 
    The Company recorded special charges of $4.4 million during fiscal 1999
related primarily to the loss on disposal of an office building, executive
severance and costs associated with moving the Company's corporate headquarters
from Atlanta, Georgia to Columbia, Maryland.
 
    The Company's effective income tax rate was 53.6% for fiscal 1999. The
effective income tax rate exceeds statutory rates due primarily to
non-deductible goodwill amortization resulting from acquisitions.
 
    Minority interest decreased $3.5 million, to $0.6 million during fiscal 1999
primarily as a result of the Green Spring minority stockholder conversion in
fiscal 1998.
 
                                       35

<PAGE>
    DISCONTINUED OPERATIONS.  The following tables summarize, for the periods
indicated, income (loss) from discontinued operations, net of tax:
 

<TABLE>
<CAPTION>
SEGMENT                                                       1998       1999
-------                                                     --------   --------
<S>                                                         <C>        <C>
Health Care Provider Segment..............................  $12,132    $32,883
Health Care Franchising Segment...........................    8,399     (3,238)
Specialty Managed Healthcare Segment......................      457     (1,320)
                                                            -------    -------
                                                            $20,988    $28,325
                                                            =======    =======
</TABLE>

 
    Income from the healthcare provider segment increased 171.1%, or
$20.8 million to $32.9 million for fiscal 1999 compared to $12.1 million for
fiscal 1998. The increase is primarily attributable to (i) the net effect of the
Company's sale of its three European Hospitals in April 1999, which included a
gain on sale of $14.4 million, net of tax, (ii) increases in income of
$8.8 million, net of tax, from cost report settlements related primarily to the
resolution of Medicare cost report matters in the fourth quarter of fiscal 1999
associated with the Company's sale of the Psychiatric Hospital Facilities, and
(iii) increases in income of $4.8 million, net of tax, related to adjustments to
accounts receivable collection fee reserves recorded in connection with the
Crescent Transactions, offset by reductions in adjustments to income of
$2.5 million, net of tax, related to updated actuarial estimates of malpractice
claims.
 
    Income from the healthcare franchising segment decreased $11.6 million, net
of tax, to a loss of $3.2 million, net of tax, for fiscal 1999 compared to
income of $8.4 million, net of tax, for the same period in 1998. The decrease
was primarily attributable to the declining operating performance of CBHS, which
resulted in the Company recording and collecting no franchise fees from CBHS in
fiscal 1999.
 
    Income from the specialty managed healthcare segment decreased
$1.8 million, to a loss of $1.3 million, net of tax, for fiscal 1999 compared to
an income of $0.5 million, net of tax, for the same period in 1998. The decrease
is primarily a result of a loss of a significant customer at the end of 1998 and
increased administrative spending during 1999.
 
    The Company recorded a loss on disposal of discontinued operations of
approximately $47.4 million during fiscal 1999 as a result of the CBHS
Transactions. See Note 3, "Discontinued Operations" to the Company's audited
consolidated financial statements set forth elsewhere herein.
 
    EXTRAORDINARY ITEM.  The Company recorded an extraordinary loss on early
extinguishment of debt of approximately $33.0 million, net of tax, during fiscal
1998, related primarily to refinancing the Company's long-term debt in
connection with the Merit acquisition.
 
OUTLOOK--RESULTS OF OPERATIONS
 
    BEHAVIORAL MANAGED HEALTHCARE RESULTS OF OPERATIONS.  The Company's
behavioral managed healthcare Segment Profit is subject to significant
fluctuations on a quarterly basis. These fluctuations may result from:
(i) changes in utilization levels by enrolled members of the Company's
risk-based contracts, including seasonal utilization patterns;
(ii) performance-based contractual adjustments to revenue, reflecting
utilization results or other performance measures; (iii) retroactive contractual
adjustments under commercial contracts and CHAMPUS contracts;
(iv) retrospective membership adjustments; (v) timing of implementation of new
contracts and enrollment changes; (vi) pricing adjustments upon long-term
contract renewals; and (vii) changes in estimates regarding medical costs and
incurred but not yet reported medical claims.
 
    Both the Company and Premier, in which the Company has a fifty percent
interest, separately contract with the State of Tennessee to manage the
behavioral healthcare benefits for the State's TennCare program ("TennCare
Contracts"). The Company's direct contract (exclusive of Premier) represented
approximately 13.7% of the Company's behavioral managed healthcare revenue and
approximately 12.1% of the
 
                                       36

<PAGE>
Company's consolidated revenue in fiscal 2000. The TennCare Contracts contained
provisions that limited the Company's profits, subject to the recoupment of
losses incurred in prior periods. An amendment to the contracts in July 2000
eliminated the ability to recoup prior period losses. The Company's profit under
the TennCare Contracts benefited during fiscal 1999 and, to a lesser extent,
during fiscal 2000 from the ability to recoup prior period losses. The Company's
Segment Profit under the TennCare Contracts was lower in fiscal 2000 than fiscal
1999 as result of these contract provisions and accruals for potential losses
related to litigation involving Premier in which the Company has a 50% interest.
See Item 3--"Legal Proceedings". The Company anticipates segment profit in
fiscal 2001 to be comparable to fiscal 2000.
 
    INTEREST RATE RISK.  The Company had $466.6 million of total debt
outstanding under the Credit Agreement at September 30, 2000. Debt under the
Credit Agreement bears interest at variable rates. Historically, the Company has
elected the interest rate option under the Credit Agreement that is an adjusted
London inter-bank offer rate ("LIBOR") plus a borrowing margin. See Note 5,
"Long-Term Debt, Capital Lease Obligations and Operating Leases", to the
Company's audited consolidated financial statements appearing elsewhere herein.
Based on September 30, 2000 borrowing levels, a 25 basis point increase in
interest rates would cost the Company approximately $1.2 million per year in
additional interest expense. LIBOR-based Eurodollar borrowing rates have
increased during fiscal 2000. One month and six month LIBOR-based Eurodollar
rates increased by approximately 120 basis points and 80 basis points,
respectively, between September 1999 and September 2000 and may continue to
increase during fiscal 2001. The Company's earnings could be adversely affected
by further increases in interest rates.
 
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES--FISCAL 1998-2000
 
    OPERATING ACTIVITIES.  The Company's net cash provided by (used in)
operating activities was $(4.2) million, $41.9 million and $86.7 million for
fiscal 1998, 1999 and 2000, respectively. The increase in cash provided by
operating activities in fiscal 2000 compared to fiscal 1999 was primarily
effected by: (i) $22.6 million reduction of liability related to the unpaid
claims portfolio transfer consummated during fiscal 1999; (ii) improved
collection of accounts receivable in fiscal 2000 including amounts in connection
with Medicare cost reports related to the psychiatric hospital business;
(iii) increases in medical claims payables and (iv) offset by non-recurring cash
payments totaling $38.1 million related to CHAMPUS adjustments incurred in
fiscal 2000. The increase in cash provided by operating activities in fiscal
1999 compared to fiscal 1998 was primarily the result of reduction in income
taxes paid, net of refunds received, of $10.8 million, and increases in cash
flows from operations as a result of the HAI and Merit acquisitions, offset by
reductions in franchise fees collected from CBHS of $40.6 million, changes in
reserve for unpaid claims of $11.0 million and increases in interest paid of
$6.9 million.
 
    INVESTING ACTIVITIES.  The Company utilized $44.2 million, $48.1 million and
$36.9 million in funds during fiscal 1998, 1999 and 2000, respectively, for
capital expenditures. The increase in fiscal 1999 was the result of the
Company's transition to the managed care business from the provider business.
 
    The Company used $1.05 billion, $69.5 million and $68.6 million in funds
during fiscal 1998, 1999 and 2000, respectively, net of cash acquired, for
acquisitions and investments in businesses. This included primarily managed care
acquisitions and human services acquisitions in fiscal 1998 and additional
purchase price consideration of $60.0 million paid to Aetna in connection with
the HAI acquisition in fiscal 1999 and 2000.
 
    The Company received distributions from unconsolidated subsidiaries of
$11.4 million, $22.0 million and $14.3 million in fiscal 1998, 1999 and 2000,
respectively. Distributions received from Choice (as defined) were
$11.4 million, $13.0 million and $14.1 million in fiscal 1998, 1999 and 2000
respectively, with the remaining distributions being received from the Provider
JVs in fiscal 1999 and 2000.
 
    The Company received proceeds from the sale of assets of $11.9 million,
$54.2 million and $3.3 million in fiscal 1998, 1999 and 2000, respectively. The
sales proceeds were generated primarily from (i) the sale of hospital real
estate related to closed hospitals retained by the Company in fiscal 1998,
(ii) the sale
 
                                       37

<PAGE>
of the European psychiatric provider operations in fiscal 1999, and (iii) sale
of the corporate aircraft in fiscal 2000.
 
    FINANCING ACTIVITIES.  The Company borrowed approximately $1.2 billion,
$76.8 million and $59.6 million during fiscal 1998, 1999 and 2000, respectively.
The fiscal 1998 borrowings primarily funded the Merit acquisition and related
long-term debt refinancing with the remaining amounts representing borrowings
under the Revolving Facility for short-term capital needs. The fiscal 1999 and
2000 borrowings were primarily draws under the Revolving Facility for short-term
capital needs.
 
    The Company repaid approximately $438.6 million, $156.0 million and
$110.3 million of debt and capital lease obligations during fiscal 1998, 1999
and 2000, respectively. The fiscal 1998 repayments related primarily to the
extinguishment of the Magellan Outstanding Notes as part of the Merit
acquisition. The fiscal 1999 and 2000 payments were for Term Loan Facility
principal amortization and required Term Loan Facility principal payments
primarily related to the sale of the European Hospitals and the TPG investment.
 
    The Company completed the sale of 59,063 shares of Series A Redeemable
Preferred Stock to TPG during the quarter ended December 31, 1999, for a total
price of approximately $54.0 million, net of issuance costs. Approximately 50%
of the net proceeds were used to reduce debt outstanding under the Term Loan
Facility with the remaining 50% being used for general corporate purposes. See
Note 7--"Redeemable Preferred Stock" to the Company's audited historical
consolidated financial statements set forth elsewhere herein.
 
    On November 1, 1996, the Company announced that its board of directors had
approved the repurchase of an additional 3.0 million shares of common stock from
time to time subject to the terms of the Company's then current credit
agreements. During fiscal 1998, the Company repurchased approximately
0.7 million shares of its common stock for approximately $14.4 million.
 
    As of September 30, 2000, the Company had approximately $90.4 million of
availability under the Revolving Facility, excluding approximately
$29.6 million of availability reserved for certain letters of credit. The
Company believes it was in compliance with all debt covenants as of
September 30, 2000.
 
OUTLOOK--LIQUIDITY AND CAPITAL RESOURCES
 
    DEBT SERVICE OBLIGATIONS.  The interest payments on the Company's
$625.0 million 9% Series A Senior Subordinated Notes due 2008 and interest and
principal payments on indebtedness outstanding pursuant to the Company's
$700.0 million Credit Agreement represent significant liquidity requirements for
the Company. Borrowings under the Credit Agreement bear interest at floating
rates and require interest payments on varying dates depending on the interest
rate option selected by the Company. As of September 30, 2000, borrowings
pursuant to the Credit Agreement included $436.6 million under the Term Loan
Facility and up to $150.0 million under the Revolving Facility. The Company had
$30.0 million of borrowings and $29.6 million of letters of credit outstanding
under the Revolving Facility at September 30, 2000. As of September 30, 2000,
the Company is required to repay the principal amount of borrowings
 
                                       38

<PAGE>
outstanding under the Term Loan Facility and the principal amount of the Notes
in the years and amounts set forth in the following table (in millions):
 

<TABLE>
<CAPTION>
                                                                 REMAINING
FISCAL YEAR                                                   PRINCIPAL AMOUNT
-----------                                                   ----------------
<S>                                                           <C>
2001........................................................       $ 34.1
2002........................................................         43.3
2003........................................................         80.7
2004........................................................        167.3
2005........................................................        115.6
2006........................................................         25.6
2007........................................................           --
2008........................................................       $625.0
</TABLE>

 
    In addition, any amounts outstanding under the Revolving Facility mature in
February 2004.
 
    POTENTIAL PURCHASE PRICE ADJUSTMENTS.  In December 1997, the Company
purchased HAI from Aetna for approximately $122.1 million, excluding transaction
costs. In addition, the Company incurred the obligation to make contingent
payments to Aetna which may total up to $60.0 million annually over the
five-year period subsequent to closing. The Company may be obligated to make
contingent payments under two separate calculations, which are primarily based
upon membership levels during the contract year (as defined) and are calculated
at the end of the contractual year. "Contract Year" means each of the
twelve-month periods ending on the last day of December in 1998, 1999, 2000,
2001, and 2002.
 
    The Company paid $60.0 million to Aetna for both the Contract Years ended
December 31, 1998 and 1999. Also, based upon the most recent membership
enrollment data related to the Contract Year to end December 31, 2000 ("Contract
Year 3"), the Company believes beyond a reasonable doubt that it will be
required to make the full $60.0 million payment related to Contract Year 3 and,
therefore, the amount is included in goodwill and other intangible assets at
September 30, 2000. The Company recorded $120.0 million of goodwill and other
intangible assets related to the purchase of HAI during fiscal 1999 related to
Contract Years 1 and 2. The Contract Year 3 liability of $60.0 million is
included in "Deferred credits and other long-term liabilities" in the Company's
consolidated balance sheet as of September 30, 2000. The Company intends to
borrow under the Revolving Facility, if necessary, to meet this obligation,
which is expected to be paid during the second quarter of fiscal 2001.
 
    By virtue of acquiring Merit, the Company may be required to make certain
payments to the former shareholders of CMG Health, Inc. ("CMG"), a managed
behavioral healthcare company that was acquired by Merit, in September, 1997.
Such contingent payments are subject to an aggregate maximum of $23.5 million.
The Company has initiated legal proceedings against certain former owners of CMG
with respect to representations made by such former owners in conjunction with
Merit's acquisition of CMG. Whether any contingent payments will be made to the
former shareholders of CMG and the amount and timing of contingent payments, if
any, may be subject to the outcome of these proceedings.
 
    REVOLVING FACILITY AND LIQUIDITY.  The Revolving Facility provides the
Company with revolving loans and letters of credit in an aggregate principal
amount at any time not to exceed $150.0 million. At September 30, 2000, the
Company had approximately $90.4 million of availability under the Revolving
Facility. The Company estimates that it will spend approximately $34.0 million
for capital expenditures in fiscal 2001. The majority of the Company's
anticipated capital expenditures relate to management information systems and
related equipment. The Company believes that the cash flows generated from its
operations, together with amounts available for borrowing under the Revolving
Facility, will be sufficient to fund its debt service requirements, anticipated
capital expenditures, contingent payments, if any, with respect to HAI and CMG,
and other investing and financing activities over the next year. The Company
expects to have significant liquidity needs during the second fiscal quarter of
fiscal 2001 including, but not
 
                                       39

<PAGE>
limited to, (i) semi-annual interest payments on the Notes of $28.1 million and
(ii) contingent consideration payable to Aetna of $60.0 million. The Company
expects its borrowing capacity under the Revolving Facility to decline to
approximately $25.0 million to $35.0 million by March 31, 2001 subject to, among
other things: (i) the timing and amount of contingent consideration paid related
to HAI and CMG (if any), (ii) operating and cash flow performance of the Company
in fiscal 2001 and (iii) capital resources needed to pursue certain new
risk-based managed care business. If the Company's estimate of its borrowing
capacity under the Revolving Facility is projected to fall below the levels
described above, management intends to delay or forego certain investing
activities, including capital expenditures and acquisitions, and possibly forego
certain new business opportunities. The Company's future operating performance
and ability to service or refinance the Notes or to extend or refinance the
indebtedness outstanding pursuant to the Credit Agreement will be subject to
future economic conditions and to financial, business, legal, regulatory and
other factors, many of which are beyond the Company's control.
 
    RESTRICTIVE FINANCING COVENANTS.  The Credit Agreement imposes restrictions
on the Company's ability to make capital expenditures, and both the Credit
Agreement and the Indenture limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged financial
condition of the Company, may limit the Company's ability to respond to market
opportunities. The covenants contained in the Credit Agreement also, among other
things, restrict the ability of the Company to: dispose of assets; repay other
indebtedness; amend other debt instruments (including the Indenture); pay
dividends; create liens on assets; enter into sale and leaseback transactions;
make investments, loans or advances; redeem or repurchase common stock; and make
acquisitions.
 
    STRATEGIC ALTERNATIVES TO REDUCE LONG-TERM DEBT AND IMPROVE LIQUIDITY.  The
Company's sale of the European Hospitals in April 1999 was one of the steps in
the Company's exit from the healthcare provider and healthcare franchising
businesses in order to reduce long-term debt and improve liquidity. The Company
is currently involved in discussions with various parties to divest certain
other non-core businesses. This may include the sale of Mentor, if the Company
can negotiate terms that it deems to be acceptable. There can be no assurance
that the Company will be able to divest any businesses or that the divestiture
of such businesses would result in significant reductions of long-term debt or
improvements in liquidity.
 
    On December 15, 1999, the Company received approximately $54.0 million of
net proceeds (after transaction costs) upon issuance of Series A Preferred Stock
to TPG. Approximately 50% of the net proceeds received from the issuance of the
Series A Preferred Stock was used to reduce debt outstanding under the Term Loan
Facility with the remaining 50% of the proceeds being used for general corporate
purposes. The Company is also reviewing additional strategic alternatives to
improve its capital structure and liquidity. There can be no assurance that the
Company will be able to consummate any transaction that will improve its capital
structure and/or liquidity.
 
    NET OPERATING LOSS CARRYFORWARDS.  During fiscal 2000, the Company reached
an agreement (the "Agreement") with the Internal Revenue Service ("IRS") related
to its federal income tax returns for the fiscal years ended September 30, 1992
and 1993. The IRS had originally proposed to disallow approximately
$162 million of deductions related primarily to interest expense in fiscal 1992.
Under the Agreement, the Company will pay approximately $1 million in taxes and
interest to the IRS to resolve the assessment relating to taxes due for these
open years, although no concession was made by either party as to the Company's
ability to utilize these deductions through net operating loss carryforwards. As
a result of the Agreement the Company recorded a reduction in deferred tax
reserves of approximately $9.1 million as a change in estimate in the current
year. While any IRS assessment related to these deductions is not expected to
result in a material cash payment for income taxes related to prior years the
Company's federal income tax net operating loss carryforwards could be reduced
if the IRS later successfully challenges these deductions.
 
                                       40

<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
 
    In June 1998, FAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," (FAS No. 133) was issued. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variability in cash flows attributable to a
particular risk, or (c) a hedge of the foreign currency exposure of a net
investment on a foreign operation, an unrecognized firm commitment, an available
for sale security and a forecasted transaction. FAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133" was issued in June 1999 and deferred the effective date
of FAS No. 133 to fiscal years beginning after June 15, 2000. FAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
was issued on June 2000 and also amends FAS No. 133. FAS No. 138 addresses a
limited number of issues causing implementation difficulties. Consequently, the
Company will be required to implement FAS No. 133 for all fiscal quarters for
the fiscal year beginning October 1, 2000. The Company expects the adoption of
this pronouncement will not have a material effect on the Company's financial
statements.
 
    Emerging Issues Task Force Issue 96-16, "Investor's Accounting for an
Investee When the Investor Has a Majority of the Voting Interest but a Minority
Shareholder or Shareholders Have Certain Approval or Veto Rights" ("EITF 96-16")
supplements the guidance contained in AICPA Accounting Research Bulletin 51,
"Consolidated Financial Statements", and in Statement of Financial Accounting
Standards No. 94, "Consolidation of All Majority-Owned Subsidiaries" ("ARB
51/FAS 94"), about the conditions under which the Company's consolidated
financial statements should include the financial position, results of
operations and cash flows of subsidiaries which are less than wholly-owned along
with those of the Company and its subsidiaries.
 
    In general, ARB 51/FAS 94 requires consolidation of all majority-owned
subsidiaries except those for which control is temporary or does not rest with
the majority owner. Under the ARB 51/FAS 94 approach, instances of control not
resting with the majority owner were generally regarded to arise from such
events as the legal reorganization or bankruptcy of the majority-owned
subsidiary. EITF 96-16 expands the definition of instances in which control does
not rest with the majority owner to include those where significant approval or
veto rights, other than those which are merely protective of the minority
shareholder's interest, are held by the minority shareholder or shareholders
("Substantive Participating Rights"). Substantive Participating Rights include,
but are not limited to: (i) selecting, terminating and setting the compensation
of management responsible for implementing the majority-owned subsidiary's
policies and procedures; and (ii) establishing operating and capital decisions
of the majority-owned subsidiary, including budgets, in the ordinary course of
business.
 
    The provisions of EITF 96-16 apply to new investment agreements made after
July 24, 1997, and to existing agreements which are modified after such date.
The Company has made no new investments, and has modified no existing
investments, to which the provisions of EITF 96-16 would have applied.
 
    In addition, the transition provisions of EITF 96-16 must be applied to
majority-owned subsidiaries previously consolidated under ARB 51/FAS 94 for
which the underlying agreements have not been modified in financial statements
issued for years ending after December 15, 1998 (fiscal 1999 for the
 
                                       41

<PAGE>
Company). The adoption of the transition provisions of EITF 96-16 on October 1,
1998 had the following effect on the Company's consolidated financial position:
 

<TABLE>
<CAPTION>
                                                              OCTOBER 1,
                                                                 1998
                                                              ----------
<S>                                                           <C>
Increase (decrease) in:
    Cash and cash equivalents...............................   $(21,092)
    Other current assets....................................     (9,538)
    Long-term assets........................................    (30,049)
    Investment in unconsolidated subsidiaries...............     26,498
                                                               --------
        Total Assets........................................   $(34,181)
                                                               ========
    Current liabilities.....................................   $(10,381)
    Minority interest.......................................    (23,800)
                                                               --------
        Total Liablities....................................   $(34,181)
                                                               ========
</TABLE>

 

I
TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
    The Company has significant interest rate risk related to its variable rate
debt outstanding under the Credit Agreement. See "Cautionary
Statements--Leverage and Debt Service Obligations," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Outlook--Results of
Operations" and "Outlook--Liquidity and Capital Resources" and
Note 5-"Long-Term Debt, Capital Lease Obligations and Operating Leases" to the
Company's audited consolidated financial statements set forth elsewhere herein.
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
    Information with respect to this item is contained in the Company's audited
consolidated financial statements and financial statement schedule indicated in
the Index on Page F-1 of this Annual Report on Form 10-K and is incorporated
herein by reference.
 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE
 
    None.
 
                                       42

<PAGE>

                                    PART III
 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    Information with respect to the Company's executive officers is contained
under "Item 1. Business--Executive Officers of the Registrant." Pursuant to
General Instruction G(3) to Form 10-K, the information required by this item
with respect to directors and compliance with Section 16(a) of the Exchange Act
has been omitted inasmuch as the Company files with the Securities and Exchange
Commission a definitive proxy statement not later than 120 days subsequent to
the end of its fiscal year. Such information is incorporated herein by
reference.
 

ITEM 11. EXECUTIVE COMPENSATION
 
    Pursuant to General Instruction G(3) to Form 10-K, the information required
with respect to this item has been omitted inasmuch as the Company files with
the Securities and Exchange Commission a definitive proxy statement not later
than 120 days subsequent to the end of its fiscal year. Such information is
incorporated herein by reference.
 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    Pursuant to General Instruction G(3) to Form 10-K, the information required
with respect to this item has been omitted inasmuch as the Company files with
the Securities and Exchange Commission a definitive proxy statement not later
than 120 days subsequent to the end of its fiscal year. Such information is
incorporated herein by reference.
 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    Pursuant to General Instruction G(3) to Form 10-K, the information required
with respect to this item has been omitted inasmuch as the Company files with
the Securities and Exchange Commission a definitive proxy statement not later
than 120 days subsequent to the end of its fiscal year. Such information is
incorporated herein by reference.
 

                                    PART IV
 

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(A) DOCUMENTS FILED AS PART OF THE REPORT:
 
1. FINANCIAL STATEMENTS
 
    Information with respect to this item is contained on Pages F-1 to F-44 of
this Annual Report on Form 10-K.
 
2. FINANCIAL STATEMENT SCHEDULE
 
    Information with respect to this item is contained on page S-1 of this
Annual Report on Form 10-K.
 
                                       43

<PAGE>
3. EXHIBITS
 

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
---------------------                      ----------------------
<C>                     <S>
           2(a)         Master Service Agreement, dated August 5, 1997, between the
                        Company, Aetna U.S. Healthcare, Inc. and Human Affairs
                        International, Incorporated, which was filed as Exhibit 2(b)
                        to the Company's current report on Form 8-K, which was filed
                        on December 17, 1997, and is incorporated herein by
                        reference.
 
           2(b)         First Amendment to Master Services Agreement, dated December
                        4, 1997, between the Company, Aetna U.S. Healthcare, Inc.
                        and Human Affairs International, Incorporated, which was
                        filed as Exhibit 2(d) to the Company's current report on
                        Form 8-K, which was filed on December 17, 1997, and is
                        incorporated herein by reference.
 
           2(c)         Asset Purchase Agreement, dated October 16, 1997, among the
                        Company; Allied Health Group, Inc.; Gut Management, Inc.;
                        Sky Management Co,; Florida Specialty Network, LTD; Surgical
                        Associates of South Florida, Inc.; Surginet, Inc.; Jacob
                        Nudel, M.D.; David Russin, M.D. and Lawrence Schimmel, M.D.,
                        which was filed as Exhibit 2(e) to the Company's Quarterly
                        Report on Form 10-Q for the quarterly period ended December
                        31, 1997, and is incorporated herein by reference.
 
           2(d)         First Amendment to Asset Purchase Agreement, dated December
                        5, 1997, among the Company; Allied Health Group, Inc.; Gut
                        Management, Inc.; Sky Management Co.; Florida Specialty
                        Network, LTD; Surgical Associates of South Florida, Inc.;
                        Surginet, Inc.; Jacob Nudel, M.D.; David Russin M.D.; and
                        Lawrence Schimmel, M.D., which was filed as Exhibit 2(f) to
                        the Company's Quarterly Report on Form 10-Q for the
                        quarterly period ended December 31, 1997, and is
                        incorporated herein by reference.
 
           2(e)         Second Amendment to Asset Purchase Agreement, dated November
                        18, 1998, among the Company; Allied Health Group, Inc.; Gut
                        Management, Inc.; Sky Management Co.; Florida Specialty
                        Network, LTD; Surgical Associates of South Florida, Inc.;
                        Surginet, Inc.; Jacob Nudel, M.D.; David Russin M.D.; and
                        Lawrence Schimmel, M.D., which was filed as Exhibit 2(m) to
                        the Company's Annual Report on Form 10-K for the fiscal year
                        ended September 30, 1998 and is incorporated herein by
                        reference.
 
           2(f)         Third Amendment to Asset Purchase agreement, dated December
                        31, 1998, among the Company; Allied Health Group, Inc.; Gut
                        Management, Inc.; Sky Management Co.; Florida Specialty
                        Network, LTD; Surgical Associates of South Florida, Inc.;
                        Surginet, Inc.; Jacob Nudel, M.D.; David Russin, M.D.; and
                        Lawrence Schimmel, M.D., which was filed as Exhibit 2(b) to
                        the Company's Quarterly on Form 10-Q for the quarterly
                        period ended December 31, 1998 and is incorporated herein by
                        reference.
 
           2(g)         Agreement and Plan of Merger, dated October 24, 1997, among
                        the Company, Merit Behavioral Care Corporation and MBC
                        Merger Corporation which was filed as Exhibit 2(g) to the
                        Company's Quarterly Report on Form 10-Q for the quarterly
                        period ended December 31, 1997, and is incorporated herein
                        by reference.
 
           2(h)         Share Purchase Agreement, dated April 2, 1999, by and among
                        the Company, Charter Medical International, S.A., Inc. (a
                        wholly owned subsidiary of the Company), Investment AB Bure,
                        and CMEL Holding Limited (a wholly owned subsidiary of
                        Investment AB Bure), filed as Exhibit 2(a) to the Company's
                        current report on Form 8-K, which was filed on April 12,
                        1999, and is incorporated herein by reference.
</TABLE>

 
                                       44

<PAGE>
 

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
---------------------                      ----------------------
<C>                     <S>
           2(i)         Stock Purchase Agreement, dated April 2, 1999, by and among
                        the Company, Charter Medical International S.A., Inc. (a
                        wholly owned subsidiary of the Company), Investment AB Bure
                        and Grodrunden 515 AB (a wholly owned subsidiary of
                        Investment AB Bure), filed as Exhibit 2(b) to the Company's
                        current report on Form 8-K, which was filed on April 12,
                        1999, and is incorporated herein by reference.
 
           2(j)         First Amendment to Share Purchase Agreement, dated April 8,
                        1999, by and among the Company, Charter Medical
                        International S.A., Inc. (a wholly owned subsidiary of the
                        Company), Investment AB Bure, and CMEL Holding Limited (a
                        wholly owned subsidiary of Investment AB Bure), filed as
                        Exhibit 2(c) to the Company's current report on Form 8-K,
                        which was filed on April 12, 1999, and is incorporated
                        herein by reference.
 
           2(k)         First Amendment to Stock Purchase Agreement, dated April 8,
                        1999, among the Company, Charter Medical International S.A.,
                        Inc. (a wholly owned subsidiary of the Company), Investment
                        AB Bure, and CMEL Holding Limited (a wholly owned subsidiary
                        of Investment AB Bure), filed as Exhibit 2(d) to the
                        Company's current report on Form 8-K, which was filed on
                        April 12, 1999, and is incorporated herein by reference.
 
           2(l)         Letter Agreement dated August 10, 1999 by and among the
                        Company, Charter Behavioral Health Systems, LLC, Crescent
                        Real Estate Equities Limited Partnership and Crescent
                        Operating, Inc., which was filed as Exhibit 2(a) to the
                        Company's current report on Form 8-K, which was filed on
                        September 24, 1999 and is incorporated herein by reference.
 
           3(a)         Restated Certificate of Incorporation of the Company, as
                        filed in Delaware on October 16, 1992, which was filed as
                        Exhibit 3(a) to the Company's Annual Report on Form 10-K for
                        the year ended September 30, 1992, and is incorporated
                        herein by reference.
 
           3(b)         Bylaws of the Company, which were filed as Exhibit 3(b) to
                        the Corporation's Annual Report on Form 10-K for the year
                        ended September 30, 1999 and are incorporated herein by
                        reference.
 
           3(c)         Certificate of Ownership and Merger merging Magellan Health
                        Services, Inc. (a Delaware corporation) into Charter Medical
                        Corporation (a Delaware corporation), as filed in Delaware
                        on December 21, 1995, which was filed as Exhibit 3(c) to the
                        Company's Annual Report on Form 10-K for the year ended
                        September 30, 1995, and is incorporated herein by reference.
 
           4(a)         Stock and Warrant Purchase Agreement, dated December 22,
                        1995, between the Company and Richard E. Rainwater, which
                        was filed as Exhibit 4(f) to the Company's Quarterly Report
                        on Form 10-Q for the quarterly period ended December 31,
                        1995, and is incorporated herein by reference.
 
           4(b)         Amendment No. 1 to Stock and Warrant Purchase Agreement,
                        dated January 25, 1996, between the Company and
                        Rainwater-Magellan Holdings, L.P., which was filed as
                        Exhibit 4.7 to the Company's Registration Statement on Form
                        S-3 dated February 26, 1996, and is incorporated herein by
                        reference.
 
           4(c)         Warrant Purchase Agreement, dated January 29, 1997, between
                        the Company and Crescent Real Estate Equities Limited
                        Partnership which was filed as Exhibit 4(a) to the Company's
                        current report on Form 8-K, which was filed on April 23,
                        1997, and is incorporated herein by reference.
</TABLE>

 
                                       45

<PAGE>
 

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
---------------------                      ----------------------
<C>                     <S>
           4(d)         Amendment No. 1, dated June 17, 1997, to the Warrant
                        Purchase Agreement, dated January 29, 1997, between the
                        Company and Crescent Real Estate Equities Limited
                        Partnership, which was filed as Exhibit 4(b) to the
                        Company's current report on Form 8-K, which was filed on
                        June 30, 1997, and is incorporated herein by reference.
 
           4(e)         Indenture, dated as of February 12, 1998, between the
                        Company and Marine Midland Bank, as trustee, relating to the
                        9% Senior Subordinated Notes due February 15, 2008 of the
                        Company, which was filed as Exhibit 4(a) to the Company's
                        Current Report on Form 8-K, which was filed April 3, 1998,
                        and is incorporated herein by reference.
 
           4(f)         Purchase Agreement, dated February 5, 1998, between the
                        Company and Chase Securities Inc., which was filed as
                        Exhibit 4(b) to the Company's Current Report on Form 8-K,
                        which was filed April 3, 1998, and is incorporated herein by
                        reference.
 
           4(g)         Exchange and Registration Rights Agreement, dated February
                        12, 1998, between the Company and Chase Securities Inc.,
                        which was filed as Exhibit 4(c) to the Company's Current
                        Report on Form 8-K, which was filed on April 3, 1998, and is
                        incorporated herein by reference.
 
           4(h)         Credit Agreement, dated February 12, 1998, among the
                        Company, certain of the Company's subsidiaries listed
                        therein and The Chase Manhattan Bank, as administrative
                        agent, which was filed as Exhibit 4(d) to the Company's
                        Current Report on Form 8-K, which was filed April 3, 1998,
                        and is incorporated herein by reference.
 
           4(i)         Amendment No. 1, dated as of September 30, 1998, to the
                        Credit Agreement, dated as of February 12, 1998, among the
                        Company, certain of the Company's subsidiaries listed
                        therein and The Chase Manhattan Bank, as administrative
                        agent, which was filed as Exhibit 4(e) to the Company's
                        Registration Statement Form S-4 (no. 333-49335), which was
                        filed on October 5, 1998, and is incorporated herein by
                        reference.
 
           4(j)         Amendment No. 2, dated as of April 30, 1999, to the Credit
                        Agreement dated as of February 12, 1998, among the Company
                        certain of the Company's subsidiaries listed therein and the
                        Chase Manhattan Bank, as administrative agent which was
                        filed as Exhibit 4(a) to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended June 30, 1999 and
                        is incorporated herein by reference.
 
           4(k)         Amendment No. 3, dated as of July 29, 1999, to the Credit
                        Agreement dated as of February 12, 1998, among the Company's
                        subsidiaries listed therein and the Chase Manhattan Bank, as
                        administrative agent, which was filed as Exhibit 4(n) to the
                        Company's Annual Report on Form 10-K for the year ended
                        September 30, 1999 and is incorporated herein by reference.
 
           4(l)         Amendment No. 4, dated as of September 8, 1999, to the
                        Credit Agreement dated as of February 12, 1998, among the
                        Company's subsidiaries listed therein and the Chase
                        Manhattan Bank, as administrative agent, which was filed as
                        Exhibit 4(o) to the Company's Annual Report on Form 10-K for
                        the year ended September 30, 1999 and is incorporated herein
                        by reference..
 
           4(m)         Amendment No. 5, dated as of January 12, 2000, to the Credit
                        Agreement dated as of February 12, 1998, among the Company,
                        certain of the Company's subsidiaries listed therein and the
                        Chase Manhattan Bank, as adminitrative agent, which was
                        filed as Exhibit 4(a) to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended December 31, 1999
                        and is incorporated herein by reference.
</TABLE>

 
                                       46

<PAGE>
 

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
---------------------                      ----------------------
<C>                     <S>
           4(n)         Registration Rights Agreement, dated as of July 19, 1999,
                        between the Company and TPG Magellan LLC, filed as Exhibit
                        4.2 to the Company's current report on Form 8-K, which was
                        filed on July 21, 1999, and is incorporated herein by
                        reference.
 
           4(o)         Amended and Restated Investment Agreement, dated December
                        14, 1999, between the Company and TPG Magellan LLC together
                        with the following exhibits: (i) form of Certificate of
                        Designations of Series A Cumulative Convertible Preferred
                        Stock; (ii) form of Certificate of Designation of Series B
                        Cumulative Convertible Preferred Stock; (iii) form of
                        Certificate of Designations of Series C Junior Participating
                        Preferred Stock, which was filed as Exhibit 4(r) to the
                        Company's Annual Report on Form 10-K for the year ended
                        September 30, 1999 and is incorporated herein by reference.
 
           4(p)         Amendment Number One to Registration Rights Agreement, dated
                        as of October 15, 1999, between the Company and TPG Magellan
                        LLC, which was filed as Exhibit 4(d) to the Company's
                        Quarterly Report on Form 10-Q for the quarterly period ended
                        December 31, 1999 and is incorporated herein by reference.
 
           4(q)         Amendment No. 6, dated as of August 10, 2000, to the Credit
                        Agreement dated as of February 12, 1998, among the Company,
                        certain of the Company's subsidiaries listed therein and the
                        Chase Manhattan Bank, as administrative agent, which was
                        filed as Exhibit 4(a) to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended June 30, 2000 and
                        is incorporated herein by reference.
 
          +4(r)         Amendment No. 7, dated as of September 19, 2000, to the
                        Credit Agreement dated as of February 12, 1998, among the
                        Company, certain of the Company's subsidiaries listed
                        therein and the Chase Manhattan Bank, as administrative
                        agent.
 
          +4(s)         Amendment No. 8, dated as of November 21, 2000, to the
                        Credit Agreement dated as of February 12, 1998, among the
                        Company, certain of the Company's subsidiaries listed
                        therein and the Chase Manhattan Bank, as administrative
                        agent.
 
         *10(a)         1992 Stock Option Plan of the Company, as amended, which was
                        filed as Exhibit 10(c) to the Company's Annual Report on
                        Form 10-K for the year ended September 30, 1994, and is
                        incorporated herein by reference.
 
         *10(b)         1992 Directors' Stock Option Plan of the Company, as
                        amended, which was filed as Exhibit 10(d) to the Company's
                        Annual Report on Form 10-K for the year ended September 30,
                        1994, and is incorporated herein by reference.
 
         *10(c)         1994 Stock Option Plan of the Company, as amended, which was
                        filed as Exhibit 10(e) to the Company's Annual Report on
                        Form 10-K for the year ended September 30, 1994, and is
                        incorporated herein by reference.
 
         *10(d)         Directors' Unit Award Plan of the Company, which was filed
                        as Exhibit 10(i) to the Company's Registration Statement on
                        Form S-4 (No. 33-53701) filed May 18, 1994, and is
                        incorporated herein by reference.
 
         *10(e)         1996 Stock Option Plan of the Company, which was filed as
                        Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
                        for the quarterly period ended March 31, 1996 and is
                        incorporated herein by reference.
 
         *10(f)         1996 Directors' Stock Option Plan of the Company, which was
                        filed as Exhibit 10(b) to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended March 31, 1996 and
                        is incorporated herein by reference.
</TABLE>

 
                                       47

<PAGE>
 

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
---------------------                      ----------------------
<C>                     <S>
         *10(g)         1997 Stock Option Plan of the Company, which was filed as
                        Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q
                        for the quarterly period ended June 30, 1997, and is
                        incorporated herein by reference.
 
         *10(h)         Amendment to the Company's 1992 Directors' Stock Option
                        Plan, which was filed as Exhibit 10(d) to the Company's
                        Quarterly Report on Form 10-Q for the quarterly period ended
                        March 31, 1999 and is incorporated herein by reference.
 
         *10(i)         Amendment to the Company's Directors' 1996 Directors Stock
                        Option Plan, which was filed as Exhibit 10(e) to the
                        Company's Quarterly Report on Form 10-Q for the quarterly
                        period ended March 31, 1999 and is incorporated herein by
                        reference.
 
         *10(j)         Amendment to the Company's 1994 Stock Option Plan, which was
                        filed as Exhibit 10(f) to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended March 31, 1999 and
                        is incorporated herein by reference.
 
         *10(k)         Amendment to the Company's 1996 Stock Option Plan, which was
                        filed as Exhibit 10(g) to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended March 31, 1999 and
                        is incorporated herein by reference.
 
         *10(l)         Amendment to the Company's 1997 Stock Option Plan, which was
                        filed as Exhibit 10(h) to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended March 31, 1999 and
                        is incorporated herein by reference.
 
         *10(m)         Amended 1998 Stock Option Plan of the Company, which was
                        filed as Exhibit 10(i) to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended March 31, 1999 and
                        is incorporated herein by reference.
 
         *10(n)         Third Amendment to the Company's 1998 Stock Option Plan,
                        which was filed as Exhibit 10(j) to the Company's Quarterly
                        Report on Form 10-Q for the quarterly period ended March 31,
                        1999 and is incorporated herein by reference.
 
         *10(o)         Written description of the Green Spring Health Services,
                        Inc. Annual Incentive Plan for the period ended September
                        30, 1998, which was filed as Exhibit 10(s) to the Company's
                        Annual Report on Form 10-K for the year ended September 30,
                        1998 and is incorporated herein by reference.
 
         *10(p)         Magellan Corporate Short-Term Incentive Plan for the fiscal
                        year ended September 30, 1999, which was filed as Exhibit
                        10(a) to the Company's Quarterly Report on Form 10-Q for the
                        quarterly period ended March 31, 1999 and is incorporated
                        herein by reference.
 
         *10(q)         Magellan Behavioral Health Short-Term Incentive Plan for the
                        fiscal year ended September 30, 1999, which was filed as
                        Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q
                        for the quarterly period ended March 31, 1999 and is
                        incorporated herein by reference.
 
         *10(r)         Letter Agreement, dated March 2, 1999, between the Company
                        and Clifford W. Donnelly, Executive Vice President of the
                        Company, which was filed as Exhibit 4(a) to the Company's
                        Quarterly Report on Form 10-Q for the quarterly period ended
                        December 31, 1999 and is incorporated herein by reference.
 
         *10(s)         Letter Agreement, dated June 4, 1999, between the Company
                        and Mark S. Demilio, Executive Vice President of the
                        Company, which was filed as Exhibit 4(a) to the Company's
                        Quarterly Report on Form 10-Q for the quarterly period ended
                        December 31, 1999 and is incorporated herein by reference.
</TABLE>

 
                                       48

<PAGE>
 

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
---------------------                      ----------------------
<C>                     <S>
          10(t)         Warrant Purchase Agreement, dated June 16, 1997, between the
                        Company and Crescent Operating, Inc., which was filed as
                        Exhibit 99(g) to the Company's current report on Form 8-K,
                        which was filed on June 30, 1997, and is incorporated herein
                        by reference.
 
         *10(u)         1998 Stock Option Plan of the Company which was filed as
                        Exhibit (ay) to the Company's Registration Statement on Form
                        S-4, which was filed on April 3, 1998, and is incorporated
                        herein by reference.
 
         *10(v)         Employment Agreement, dated December 9, 1998, between
                        Magellan Behavioral Health, Inc. and John Wider, President
                        and Chief Operating Officer of Magellan Behavioral Health,
                        Inc., which was filed as Exhibit 10 to the Company's Form
                        10-Q for the quarterly period ended December 31, 1998 and is
                        incorporated herein by reference.
 
         *10(w)         Employment Agreement, dated February 11, 1999, between the
                        Company and Clarissa C. Marques, Ph.D., Executive Vice
                        President of the Company, which was filed as Exhibit 10(c)
                        to the Company's Quarterly Report on Form 10-Q for the
                        quarterly period ended March 31, 1999 and is incorporated
                        herein by reference.
 
         *10(x)         Employment Agreement, dated June 25, 1998, between the
                        Company and Henry T. Harbin, M.D., President, Chief
                        Executive Officer of the Company, which was filed as exhibit
                        10(a) to the Company's quarterly report on Form 10-Q for the
                        quarterly period ended June 30, 1998 and is incorporated
                        herein by reference.
 
          10(y)         Offer to Purchase and Consent Solicitation Statement, dated
                        January 12, 1998, by the Company for all of its 11 1/4%
                        Series A Senior Subordinated Notes due 2008, which was filed
                        as Exhibit 10(ad) to the Company's Registration Statement on
                        Form S-4, which was filed on April 3, 1998, and is
                        incorporated herein by reference.
 
          10(z)         Offer to Purchase and Consent Solicitation Statement, dated
                        January 12, 1998, by Merit Behavioral Care Corporation for
                        all of its 11 1/2% Senior Subordinated Notes due 2005, which
                        was filed as Exhibit 10(ad) to the Company's Registration
                        Statement on Form S-4, which was filed on April 3, 1998, and
                        is incorporated herein by reference.
 
         10(aa)         Agreement and Plan of Merger by and among Merit Behavioral
                        Care Corporation, Merit Merger Corp., and CMG Health, Inc.
                        dated as of July 14, 1997, which was filed as Exhibit 10(ah)
                        to the Company's Annual Report on Form 10-K for the year
                        ended September 30, 1998 and is incorporated herein by
                        reference.
 
         10(ab)         Stock purchase Agreement, dated as of Januiary 28, 2000, by
                        and among Magellan Health Services, Inc.; Allied Specialty
                        Care Services, Inc. and Vivra Holdings, Inc., which was
                        filed as Exhibit 2 to the Company's Quarterly Report on Form
                        10-Q for the quarterly period ended March 31, 2000 and is
                        incorporated herein by reference.
 
         10(ac)         Magellan Corporate Short-Term Incentive Plan for the fiscal
                        year ended September 30, 2000, which was filed as Exhibit
                        10(a) to the Company's Quarterly Report on Form 10-Q for the
                        quarterly period ended March 31, 2000 and is incorporated
                        herein by reference.
 
         10(ad)         Magellan Behavioral Health Short-Term Incentive Plan for the
                        fiscal year ended September 30, 2000, which was filed as
                        Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q
                        for the quarterly period ended March 31, 2000 and is
                        incorporated herein by reference.
 
        +10(ae)         Magellan Health Services, Inc.--2000 Employee Stock Purchase
                        Plan.
 
        +10(af)         Magellan Health Services, Inc.--2000 Long-Term Incentive
                        Compensation Plan.
 
           +21          List of subsidiaries of the Company.
</TABLE>

 
                                       49

<PAGE>
 

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
---------------------                      ----------------------
<C>                     <S>
           +23          Consent of Arthur Andersen LLP.
 
           +27          Financial Data Schedule
</TABLE>

 
------------------------
 
*   Constitutes a management contract or compensatory plan arrangement.
 
+   Filed herewith.
 
(B) REPORTS ON FORM 8-K:
 
    None
 
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K:
 
    Exhibits required to be filed by the Company pursuant to Item 601 of
Regulation S-K are contained in a separate volume.
 
(D) FINANCIAL STATEMENTS AND SCHEDULES REQUIRED BY REGULATION S-X ITEM 14(D):
 
    (1) The audited consolidated financial statements of Choice Behavioral
       Health Partnership ("Choice"), which has a fiscal year end of
       December 31, 2000, will be filed in an amendment to this Form 10-K no
       later than March 31, 2001.
 
    (2) Not applicable.
 
    (3) Information with respect to this item is contained on page S-1 of this
       Annual Report on Form 10-K.
 
                                       50

<PAGE>

                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
 

<TABLE>
<S>                                              <C>
                                                 MAGELLAN HEALTH SERVICES, INC.
                                                 (Registrant)
 
Date: December 26, 2000
                                                 ----------------------------------------------------
                                                                    Mark S. Demilio
                                                      Executive Vice President, Finance and Legal
 
Date: December 26, 2000
                                                 ----------------------------------------------------
                                                                 Thomas C. Hofmeister
                                                  Senior Vice President and Chief Accounting Officer
</TABLE>

 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 

<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                   DATE
                      ---------                                   -----                   ----
<C>                                                    <S>                          <C>
     -------------------------------------------       President, Chief Executive   December 26, 2000
                   Henry T. Harbin                       Officer And Director
 
     -------------------------------------------       Director                     December 26, 2000
                   David Bonderman
 
     -------------------------------------------       Director                     December 26, 2000
                 Jonathan J. Coslet
 
     -------------------------------------------       Director                     December 26, 2000
                 G. Fred DiBona, Jr.
 
     -------------------------------------------       Director                     December 26, 2000
                Andre C. Dimitriadis
 
     -------------------------------------------       Director                     December 26, 2000
                  A.D. Frazier, Jr.
 
     -------------------------------------------       Director                     December 26, 2000
                  Gerald L. McManis
</TABLE>

 
                                       51

<PAGE>
 

<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                   DATE
                      ---------                                   -----                   ----
<C>                                                    <S>                          <C>
     -------------------------------------------       Chief Operating Officer and  December 26, 2000
                  Daniel S. Messina                      Director
 
     -------------------------------------------       Chairman of the Board of     December 26, 2000
                  Robert W. Miller                       Directors
 
     -------------------------------------------       Director                     December 26, 2000
                   Darla D. Moore
 
     -------------------------------------------       Director                     December 26, 2000
                Jeffrey A. Sonnenfeld
 
     -------------------------------------------       Director                     December 26, 2000
                  James B. Williams
</TABLE>

 
                                       52

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

                         INDEX TO FINANCIAL STATEMENTS
 
    The following consolidated financial statements of the registrant and its
subsidiaries are submitted herewith in response to Item 8 and Item 14(a)1:
 

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
MAGELLAN HEALTH SERVICES, INC.
  Audited Consolidated Financial Statements
    Report of independent public accountants................    F-2
    Consolidated balance sheets as of September 30, 1999 and
     2000...................................................    F-3
    Consolidated statements of operations for the fiscal
     years ended September 30, 1998, 1999 and 2000..........    F-4
    Consolidated statements of changes in stockholders'
     equity for the fiscal years ended September 30, 1998,
     1999 and 2000..........................................    F-5
    Consolidated statements of cash flows for the fiscal
     years ended September 30, 1998, 1999 and 2000..........    F-6
    Notes to consolidated financial statements..............    F-7

</TABLE>

 
    The following financial statement schedule of the registrant and its
subsidiaries is submitted herewith in response to Item 14(a)2:
 

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
    Schedule II -- Valuation and qualifying accounts........    S-1
</TABLE>

 
    Financial statements in response to Item 14(d)(1):
 
CHOICE BEHAVIORAL HEALTH PARTNERSHIP
 
    The audited consolidated financial statements of Choice Behavioral Health
Partnership ("Choice"), which has a fiscal year end of December 31, 2000, will
be filed in an amendment to this Form 10-K no later than March 31, 2001.
 
                                      F-1

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors of Magellan Health Services, Inc:
 
    We have audited the accompanying consolidated balance sheets of Magellan
Health Services, Inc. (a Delaware corporation) and subsidiaries as of
September 30, 1999 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended September 30, 2000. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
 
    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Magellan Health
Services, Inc. and subsidiaries as of September 30, 1999 and 2000 and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States.
 
    Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states, in all material respects, the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
 
                                          Arthur Andersen LLP
 
Baltimore, Maryland
December 11, 2000

 
                                      F-2

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30,
                                                              -------------------------
                                                                  1999          2000
                                                              ------------   ----------
<S>                                                           <C>            <C>
                                        ASSETS
Current Assets:
  Cash and cash equivalents.................................   $   37,440    $   41,628
  Accounts receivable, less allowance for doubtful accounts
    of $28,437 at September 30, 1999 and $11,592 at
    September 30, 2000......................................      198,646       137,224
  Restricted cash and investments...........................      116,824       117,723
  Refundable income taxes...................................        3,452         4,416
  Other current assets......................................       18,565        18,662
                                                               ----------    ----------
      Total Current Assets..................................      374,927       319,653
Property and equipment, net.................................      120,667       112,612
Deferred income taxes.......................................       91,657       121,782
Investments in unconsolidated subsidiaries..................       18,396        12,746
Other long-term assets......................................        9,599        10,235
Goodwill, net of accumulated amortization of $60,869 at
  September 30, 1999 and $81,286 at September 30, 2000......    1,108,086     1,074,753
Other intangible assets, net of accumulated amortization of
  $26,457 at September 30, 1999 and $40,789 at September 30,
  2000......................................................      158,283       152,006
                                                               ----------    ----------
                                                               $1,881,615    $1,803,787
                                                               ==========    ==========
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable..........................................   $   44,425    $   40,687
  Accrued liabilities.......................................      209,796       175,698
  Medical claims payable....................................      189,928       219,375
  Current maturities of long-term debt and capital lease
    obligations.............................................       30,119        34,119
                                                               ----------    ----------
      Total Current Liabilities.............................      474,268       469,879
                                                               ----------    ----------
Long-term debt and capital lease obligations................    1,114,189     1,063,928
                                                               ----------    ----------
Deferred credits and other long-term liabilities............       92,948        83,226
                                                               ----------    ----------
Minority interest...........................................        3,514           456
                                                               ----------    ----------
 
Commitments and Contingencies
 
Redeemable Preferred Stock..................................           --        57,834
                                                               ----------    ----------
Stockholders' Equity:
  Preferred stock, without par value
    Authorized -- 10,000 shares at September 30, 1999 and
     9,793 shares at September 30, 2000
    Issued and outstanding -- none..........................           --            --
  Common stock, par value $.25 per share
    Authorized -- 80,000 shares
    Issued and outstanding -- 34,268 shares at September 30,
     1999 and 34,936 shares at September 30, 2000...........        8,566         8,733
  Other Stockholders' Equity:
    Additional paid-in capital..............................      352,030       349,541
    Accumulated deficit.....................................     (144,550)     (210,358)
    Warrants outstanding....................................       25,050        25,050
    Common stock in treasury, 2,289 shares at September 30,
     1999 and September 30, 2000............................      (44,309)      (44,309)
    Cumulative foreign currency adjustments included in
     other comprehensive income.............................          (91)         (193)
                                                               ----------    ----------
      Total Stockholders' Equity............................      196,696       128,464
                                                               ----------    ----------
                                                               $1,881,615    $1,803,787
                                                               ==========    ==========
</TABLE>

 
          The accompanying Notes to Consolidated Financial Statements
           are an integral part of these consolidated balance sheets.
 
                                      F-3

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                                                FISCAL YEAR ENDED SEPTEMBER 30,
                                                              ------------------------------------
                                                                 1998         1999         2000
                                                              ----------   ----------   ----------
<S>                                                           <C>          <C>          <C>
Net revenue.................................................  $1,167,274   $1,674,479   $1,873,554
                                                              ----------   ----------   ----------
Costs and expenses:
  Salaries, cost of care and other operating expenses.......   1,043,251    1,468,879    1,652,582
  Equity in earnings of unconsolidated subsidiaries.........     (12,795)     (20,442)      (9,792)
  Depreciation and amortization.............................      46,898       68,921       75,413
  Interest, net.............................................      76,505       93,752       97,286
  Stock option expense (credit).............................      (5,623)          18           --
  Managed care integration costs............................      16,962        6,238           --
  Special charges...........................................          --        4,441       25,398
                                                              ----------   ----------   ----------
                                                               1,165,198    1,621,807    1,840,887
                                                              ----------   ----------   ----------
Income from continuing operations before income taxes,
  minority interest and extraordinary items.................       2,076       52,672       32,667
Provision for income taxes..................................       5,238       28,256       15,478
                                                              ----------   ----------   ----------
Income (loss) from continuing operations before minority
  interest and extraordinary items..........................      (3,162)      24,416       17,189
Minority interest...........................................       4,094          630          114
                                                              ----------   ----------   ----------
Income (loss) from continuing operations before
  extraordinary items.......................................      (7,256)      23,786       17,075
                                                              ----------   ----------   ----------
Discontinued operations:
  Income (loss) from discontinued operations (1)............      20,988       28,325      (65,221)
  Loss on disposal of discontinued operations, net of income
    tax benefit of $31,616 in 1999 and $9,224 in 2000.......          --      (47,423)     (17,662)
                                                              ----------   ----------   ----------
                                                                  20,988      (19,098)     (82,883)
                                                              ----------   ----------   ----------
Income (loss) before extraordinary items....................      13,732        4,688      (65,808)
Extraordinary items -- net losses on early extinguishments
  of debt (net of income tax benefit of $22,010 in 1998)....     (33,015)          --           --
                                                              ----------   ----------   ----------
Net income (loss)...........................................     (19,283)       4,688      (65,808)
Preferred dividend requirement and amortization of
  redeemable preferred stock issuance costs.................          --           --        3,802
                                                              ----------   ----------   ----------
Income (loss) available to common stockholders..............     (19,283)       4,688      (69,610)
Other comprehensive income (loss)...........................         675        1,106         (102)
                                                              ----------   ----------   ----------
Comprehensive income (loss).................................  $  (18,608)  $    5,794   $  (69,712)
                                                              ==========   ==========   ==========
Weighted average number of common shares outstanding --
  basic.....................................................      30,784       31,758       32,144
                                                              ==========   ==========   ==========
Weighted average number of common shares outstanding --
  diluted...................................................      30,784       31,916       32,386
                                                              ==========   ==========   ==========
Income (loss) per common share available to common
  stockholders -- basic:
  Income (loss) from continuing operations before
    extraordinary items.....................................  $    (0.24)  $     0.75   $     0.41
                                                              ==========   ==========   ==========
  Income (loss) from discontinued operations................  $     0.68   $    (0.60)  $    (2.58)
                                                              ==========   ==========   ==========
  Extraordinary losses on early extinguishments of debt.....  $    (1.07)  $       --   $       --
                                                              ==========   ==========   ==========
Net income (loss)...........................................  $    (0.63)  $     0.15   $    (2.17)
                                                              ==========   ==========   ==========
Income (loss) per common share available to common
  stockholders -- diluted:
  Income (loss) from continuing operations before
    extraordinary items.....................................  $    (0.24)  $     0.75   $     0.41
                                                              ==========   ==========   ==========
  Income (loss) from discontinued operations................  $     0.68   $    (0.60)  $    (2.56)
                                                              ==========   ==========   ==========
  Extraordinary losses on early extinguishments of debt.....  $    (1.07)  $       --   $       --
                                                              ==========   ==========   ==========
Net income (loss)...........................................  $    (0.63)  $     0.15   $    (2.15)
                                                              ==========   ==========   ==========
</TABLE>

 
------------------------------
(1) Net of income tax provision (benefit) of $13,687, $19,763 and (34,059) for
    fiscal 1998, 1999 and 2000, respectively.
 
          The accompanying Notes to Consolidated Financial Statements
             are an integral part of these consolidated statements.
 
                                      F-4

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                                              ---------------------------------
                                                                1998        1999        2000
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
Common Stock:
  Balance, beginning of period..............................  $   8,361   $   8,476   $   8,566
  Exercise of options.......................................        115          90         167
                                                              ---------   ---------   ---------
  Balance, end of period....................................      8,476       8,566       8,733
                                                              ---------   ---------   ---------
Additional paid-in capital:
  Balance, beginning of period..............................    340,645     349,651     352,030
  Stock option expense (credit).............................     (5,623)         18          --
  Exercise of options and warrants..........................      3,867       2,542       1,313
  Preferred dividend requirement and amortization of
    redeemable preferred stock issuance cost................         --          --      (3,802)
  Green Spring Minority Stockholder Conversion..............     10,722          --          --
  Other.....................................................         40        (181)         --
                                                              ---------   ---------   ---------
  Balance, end of period....................................    349,651     352,030     349,541
                                                              ---------   ---------   ---------
Accumulated deficit:
  Balance, beginning of period..............................   (129,955)   (149,238)   (144,550)
  Net income (loss).........................................    (19,283)      4,688     (65,808)
                                                              ---------   ---------   ---------
  Balance, end of period....................................   (149,238)   (144,550)   (210,358)
                                                              ---------   ---------   ---------
Warrants outstanding:
  Balance, beginning and end of period......................     25,050      25,050      25,050
                                                              ---------   ---------   ---------
Common stock in treasury:
  Balance, beginning of period..............................    (82,731)    (44,309)    (44,309)
  Purchases of treasury stock...............................    (14,352)         --          --
  Green Spring Minority Stockholder Conversion..............     52,774          --          --
                                                              ---------   ---------   ---------
  Balance, end of period....................................    (44,309)    (44,309)    (44,309)
                                                              ---------   ---------   ---------
Cumulative foreign currency adjustments included in other
  comprehensive income:
  Balance, beginning of period..............................     (1,872)     (1,197)        (91)
Components of other comprehensive income (loss):
  Unrealized foreign currency translation gain (loss) (net
    of reclassification adjustment related to sale of
    European Hospitals of $1,678 in 1999)...................      1,125        (230)       (171)
  Sale of European Hospitals................................         --       2,074          --
                                                              ---------   ---------   ---------
                                                                  1,125       1,844        (171)
  Provision for (benefit from) income taxes.................        450         738         (69)
                                                              ---------   ---------   ---------
  Other comprehensive income (loss).........................        675       1,106        (102)
                                                              ---------   ---------   ---------
  Balance, end of period....................................     (1,197)        (91)       (193)
                                                              ---------   ---------   ---------
Total Stockholders' Equity..................................  $ 188,433   $ 196,696   $ 128,464
                                                              =========   =========   =========
</TABLE>

 
          The accompanying Notes to Consolidated Financial Statements
             are an integral part of these consolidated statements.
 
                                      F-5

<PAGE>
                  MAGELLAN HEALTH SERVICES, INC. SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                              FISCAL YEAR ENDED SEPTEMBER 30,
                                                              --------------------------------
                                                                 1998        1999       2000
                                                              ----------   --------   --------
<S>                                                           <C>          <C>        <C>
Cash Flows From Operating Activities
Net income (loss)...........................................  $  (19,283)  $  4,688   $(65,808)
                                                              ----------   --------   --------
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
    Gain on sale of assets..................................      (3,001)   (23,623)    (2,442)
    Loss on CBHS Transactions...............................          --     79,039         --
    Depreciation and amortization...........................      49,264     73,531     79,244
    Impairment of long-lived assets.........................       2,507         --     91,015
    Other non-cash portion of special charges and
     discontinued operations................................      37,499       (422)
    Equity in earnings of unconsolidated subsidiaries.......     (12,795)   (20,442)    (9,792)
    Stock option expense (credit)...........................      (5,623)        18         --
    Non-cash interest expense...............................       2,935      3,843      4,376
    Extraordinary losses on early extinguishments of debt...      55,025         --         --
Cash flows from changes in assets and liabilities, net of
  effects from sales and acquisitions of businesses:
    Accounts receivable, net................................      (1,585)   (21,321)    63,057
    Restricted cash and investments.........................     (21,782)   (22,130)      (899)
    Other assets............................................       1,945      8,759     (8,246)
    Accounts payable and accrued liabilities................     (50,082)   (20,842)   (42,960)
    Medical claims payable..................................       6,358    (22,202)    19,767
    Income taxes payable and deferred income taxes..........     (14,489)    14,143    (31,089)
    Reserve for unpaid claims...............................     (19,177)   (30,196)       (78)
    Other liabilities.......................................      (9,290)    17,224     (8,361)
    Minority interest, net of dividends paid................        (929)     3,142     (1,010)
    Other...................................................      (1,701)    (1,333)      (102)
                                                              ----------   --------   --------
    Total adjustments.......................................      15,079     37,188    152,480
                                                              ----------   --------   --------
      Net cash provided by (used in) operating activities...      (4,204)    41,876     86,672
                                                              ----------   --------   --------
Cash Flows From Investing Activities:
    Capital expenditures....................................     (44,213)   (48,119)   (36,924)
    Acquisitions and investments in businesses, net of cash
     acquired...............................................  (1,046,436)   (69,457)   (68,597)
    Conversion of joint ventures from consolidation to
     equity method..........................................          --    (21,092)        --
    Distributions received from unconsolidated
     subsidiaries...........................................      11,441     21,970     14,324
    Decrease in assets restricted for settlement of unpaid
     claims and other long-term liabilities.................      51,006     42,570       (214)
    Proceeds from sale of assets............................      11,875     54,196      3,300
                                                              ----------   --------   --------
      Net cash used in investing activities.................  (1,016,327)   (19,932)   (88,111)
                                                              ----------   --------   --------
Cash Flows From Financing Activities:
    Payments on debt and capital lease obligations..........    (438,633)  (156,004)  (110,260)
    Proceeds from issuance of debt, net of issuance costs...   1,188,706     76,818     59,642
    Proceeds from issuance of redeemable preferred stock,
     net of issuance costs..................................          --         --     54,765
    Proceeds from exercise of stock options and warrants....       3,982      2,632      1,480
    Purchases of treasury stock.............................     (14,352)        --         --
                                                              ----------   --------   --------
      Net cash provided by (used in) financing activities...     739,703    (76,554)     5,627
                                                              ----------   --------   --------
Net increase (decrease) in cash and cash equivalents........    (280,828)   (54,610)     4,188
Cash and cash equivalents at beginning of period............     372,878     92,050     37,440
                                                              ----------   --------   --------
Cash and cash equivalents at end of period..................  $   92,050   $ 37,440   $ 41,628
                                                              ==========   ========   ========
</TABLE>

 
          The accompanying Notes to Consolidated Financial Statements
             are an integral part of these consolidated statements
 
                                      F-6

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               SEPTEMBER 30, 2000
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    BASIS OF PRESENTATION
 
    The consolidated financial statements of Magellan Health Services, Inc., a
Delaware corporation, ("Magellan" or the "Company") include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
 
    The Company conducts business in two business segments, the behavioral
managed healthcare business segment and the human services business segment.
These segments are described in further detail in Note 14, "Business Segment
Information."
 
    On September 2, 1999, the Company's Board of Directors approved a formal
plan to dispose of the businesses and interests that comprise the Company's
healthcare provider and healthcare franchising business segments (the "Disposal
Plan"). On October 4, 2000, the Company adopted a formal plan to dispose of the
business and interest that comprised the Company's specialty managed healthcare
business segment. The results of operations of the healthcare provider,
healthcare franchising and specialty managed healthcare business segments have
been reported in the accompanying financial statements as discontinued
operations for all periods presented. In reporting the specialty managed
healthcare segment as discontinued operations, the Company has followed the
provisions of Emerging Issues Task Force No. 95-18 ("EITF 95-18"), "Accounting
and Reporting for a Discontinued Business Segment When the Measurement Date
Occurs after the Balance Sheet Date but before the Issuance of Financial
Statements."
 
    USE OF ESTIMATES
 
    The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
 
    MANAGED CARE REVENUE
 
    Managed care revenue is recognized over the applicable coverage period on a
per member basis for covered members and as earned and estimable for
performance-based revenues. Deferred revenue is recorded when premium payments
are received in advance of the applicable coverage period.
 
    ADVERTISING COSTS
 
    The production costs of advertising are expensed as incurred. The Company
does not consider any of its advertising costs to be direct-response and,
accordingly, does not capitalize such costs. Advertising costs consist primarily
of radio and television air time, which are expensed as incurred, and printed
media services. Advertising expense for continuing operations was approximately
$2.4 million, $2.1 million and $2.9 million for the fiscal years ended
September 30, 1998, 1999 and 2000, respectively. Advertising expense for
discontinued operations was approximately $2.5 million, $0.5 million and
$0.1 million for the years ended September 30, 1998, 1999, and 2000,
respectively.
 
                                      F-7

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    INTEREST, NET
 
    The Company records interest expense net of interest income. Interest income
for the fiscal years ended September 30, 1998, 1999, and 2000 was approximately
$10.8 million, $10.4 million and $9.4 million, respectively.
 
    CASH AND CASH EQUIVALENTS
 
    Cash equivalents are short-term, highly liquid interest-bearing investments
with a maturity of three months or less when purchased, consisting primarily of
money market instruments.
 
    RESTRICTED CASH AND INVESTMENTS
 
    Restricted cash and investments at September 30, 1999 and 2000 include
approximately $116.8 million and $117.7 million, respectively that is held for
the payment of claims under the terms of certain behavioral managed care
contracts and for regulatory purposes related to the payment of claims in
certain jurisdictions.
 
    CONCENTRATION OF CREDIT RISK
 
    Accounts receivable subject the Company to a concentration of credit risk
with third party payors that include health insurance companies, managed
healthcare organizations, healthcare providers and governmental entities. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information. Management believes the allowance for doubtful accounts is adequate
to provide for normal credit losses.
 
    PROPERTY AND EQUIPMENT
 
    Property and equipment are stated at cost, except for assets that have been
impaired, for which the carrying amount is reduced to estimated fair value.
Expenditures for renewals and improvements are charged to the property accounts.
Replacements and maintenance and repairs that do not improve or extend the life
of the respective assets are expensed as incurred. Internal-use software is
capitalized in accordance with AICPA Statement of Position 98-1, "Accounting for
Cost of Computer Software Developed or Obtained for Internal Use." Amortization
of capital lease assets is included in depreciation expense. Depreciation is
provided on a straight-line basis over the estimated useful lives of the assets,
which is generally two to ten years for buildings and improvements, three to ten
years for equipment and three to five years for capitalized internal-use
software. Depreciation expense for continuing operations was $18.6 million,
$28.0 million and $34.2 million for the fiscal years ended September 30, 1998,
1999 and 2000, respectively. Depreciation expense for discontinued operations
was $5.4 million, $4.3 million and $2.5 million for the fiscal years ended
September 30, 1998, 1999 and 2000, respectively.
 
                                      F-8

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    Property and equipment, net, consisted of the following at September 30,
1999 and 2000 (in thousands):
 

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                          -------------------
                                                            1999       2000
                                                          --------   --------
<S>                                                       <C>        <C>
Land....................................................  $    114   $    114
Buildings and improvements..............................    12,079     13,146
Equipment...............................................   119,518    130,953
Capitalized internal-use software.......................    55,648     63,500
                                                          --------   --------
                                                           187,359    207,713
Accumulated depreciation................................   (66,692)   (95,101)
                                                          --------   --------
Property and equipment, net.............................  $120,667   $112,612
                                                          ========   ========
</TABLE>

 
    INTANGIBLE ASSETS
 
    Intangible assets are composed principally of (i) goodwill, (ii) customer
lists and relationships and (iii) deferred financing costs. Goodwill represents
the excess of the cost of businesses acquired over the fair value of the net
identifiable assets at the date of acquisition and is amortized using the
straight-line method over 25 to 40 years. Customer lists and relationships and
other intangible assets are amortized using the straight-line method over their
estimated useful lives of 4 to 30 years. Deferred financing costs are amortized
over the terms of the underlying agreements.
 
    The Company continually monitors events and changes in circumstances which
could indicate that carrying amounts of intangible assets may not be
recoverable. When events or changes in circumstances are present that indicate
the carrying amount of intangible assets may not be recoverable, the Company
assesses the recoverability of intangible assets by determining whether the
carrying value of such intangible assets will be recovered through the future
cash flows expected from the use of the asset and its eventual disposition. In
fiscal 2000, the Company recorded impairment losses on intangible assets and
other long-lived assets of $15.8 million for continuing operations and
$75.3 million for discontinued operations. See Note 3--"Discontinued Operations"
and Note 10--"Managed Care Integration Costs and Special Charges".
 
    MEDICAL CLAIMS PAYABLE
 
    Medical claims payable represent the liability for healthcare claims
reported but not yet paid and claims incurred but not yet reported ("IBNR")
related to the Company's managed healthcare businesses. The IBNR portion of
medical claims payable is estimated based upon authorized healthcare services,
past claim payment experience for member groups, adjudication decisions,
enrollment data, utilization statistics and other factors. Although considerable
variability is inherent in such estimates, management believes the liability for
medical claims payable is adequate. Medical claims payable balances are
continually monitored and reviewed. Changes in assumptions for care costs caused
by changes in actual experience could cause these estimates to change in the
near term.
 
                                      F-9

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    FOREIGN CURRENCY
 
    Changes in the cumulative translation of foreign currency assets and
liabilities are presented as a separate component of stockholders' equity. Gains
and losses resulting from foreign currency transactions, which were not
material, are included in operations as incurred.
 
    NET INCOME (LOSS) PER COMMON SHARE
 
    Net income (loss) per common share is computed based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. See Note 6.
 
    STOCK-BASED COMPENSATION
 
    In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("FAS 123") which became effective for fiscal years beginning
after December 15, 1995 (fiscal 1997 for the Company). FAS 123 established new
financial accounting and reporting standards for stock-based compensation plans.
Entities are allowed to measure compensation cost for stock-based compensation
under FAS 123 or APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Entities electing to remain with the accounting in APB 25 are
required to make pro forma disclosures of net income and income per common share
as if the provisions of FAS 123 had been applied. The Company has adopted
FAS 123 on a pro forma disclosure basis. The Company continues to account for
stock-based compensation under APB 25. See Note 6, "Stockholders' Equity".
 
    RECENT ACCOUNTING PRONOUNCEMENTS
 
    In June 1998, FAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," (FAS No. 133) was issued. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variability in cash flows attributable to a
particular risk, or (c) a hedge of the foreign currency exposure of a net
investment on a foreign operation, an unrecognized firm commitment, an available
for sale security and a forecasted transaction. FAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133" was issued in June 1999 and deferred the effective date
of FAS No. 133 to fiscal years beginning after June 15, 2000. FAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
was issued on June 2000 and also amends FAS No. 133. FAS No. 138 addresses a
limited number of issues causing implementation difficulties. Consequently, the
Company will be required to implement FAS No. 133 for all fiscal quarters for
the fiscal year beginning October 1, 2000. The Company expects the adoption of
this pronouncement will not have a material effect on the Company's financial
statements.
 
    Emerging Issues Task Force Issue 96-16, "Investor's Accounting for an
Investee When the Investor Has a Majority of the Voting Interest but the
Minority Shareholder or Shareholders Have Certain
 
                                      F-10

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Approval or Veto Rights" ("EITF 96-16") supplements the guidance contained in
AICPA Accounting Research Bulletin 51, "Consolidated Financial Statements", and
in Statement of Financial Accounting Standards No. 94, "Consolidation of All
Majority-Owned Subsidiaries" ("ARB 51/FAS 94"), about the conditions under which
the Company's consolidated financial statements should include the financial
position, results of operations and cash flows of subsidiaries which are less
than wholly-owned along with those of the Company's wholly-owned subsidiaries.
 
    In general, ARB 51/FAS 94 requires consolidation of all majority-owned
subsidiaries except those for which control is temporary or does not rest with
the majority owner. Under the ARB 51/FAS 94 approach, instances of control not
resting with the majority owner were generally regarded to arise from such
events as the legal reorganization or bankruptcy of the majority-owned
subsidiary. EITF 96-16 expands the definition of instances in which control does
not rest with the majority owner to include those where significant approval or
veto rights, other than those which are merely protective of the minority
shareholder's interest, are held by the minority shareholder or shareholders
("Substantive Participating Rights"). Substantive Participating Rights include,
but are not limited to: i) selecting, terminating and setting the compensation
of management responsible for implementing the majority-owned subsidiary's
policies and procedures, and ii) establishing operating and capital decisions of
the majority-owned subsidiary, including budgets, in the ordinary course of
business.
 
    The provisions of EITF 96-16 apply to new investment agreements made after
July 24, 1997, and to existing investment agreements which are modified after
this date. The Company has made no new investments, and has modified no existing
investments, to which the provisions of EITF 96-16 would have applied.
 
    In addition, the provisions of EITF 96-16 must be applied to majority-owned
subsidiaries previously consolidated under ARB 51/FAS 94 for which the
underlying agreements have not been modified in financial statements issued for
years ending after December 15, 1998 (fiscal 1999 for the Company). The adoption
of the provisions of EITF 96-16 on October 1, 1998, had the following effects on
the Company's consolidated financial position (in thousands):
 

<TABLE>
<CAPTION>
                                                              OCTOBER 1,
                                                                 1998
                                                              ----------
<S>                                                           <C>
Increase (decrease) in:
  Cash and cash equivalents.................................   $(21,092)
  Other current assets......................................     (9,538)
  Long-term assets..........................................    (30,049)
  Investment in unconsolidated subsidiaries.................     26,498
                                                               --------
    Total Assets............................................   $(34,181)
                                                               ========
  Current liabilities.......................................   $(10,381)
  Minority interest.........................................    (23,800)
                                                               --------
    Total Liabilities.......................................   $(34,181)
                                                               ========
</TABLE>

 
                                      F-11

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    RECLASSIFICATIONS
 
    Certain reclassifications have been made to fiscal 1998 and 1999 amounts to
conform to fiscal 2000 presentation.
 
2. ACQUISITIONS AND JOINT VENTURES
 
    ACQUISITIONS
 
    MERIT ACQUISITION.  On February 12, 1998, the Company consummated the
acquisition of Merit Behavioral Care Corporation ("Merit") for cash
consideration of approximately $448.9 million plus the repayment of Merit's
debt. Merit managed behavioral healthcare programs across all segments of the
healthcare industry, including HMOs, Blue Cross/Blue Shield organizations and
other insurance companies, corporations and labor unions, federal, state and
local governmental agencies and various state Medicaid programs. The Company
accounted for the Merit acquisition using the purchase method of accounting. By
virtue of acquiring Merit, the Company may be required to make certain payments
to the former shareholders of CMG Health, Inc. ("CMG") a managed behavioral
healthcare company that was acquired by Merit in September 1997. Such contingent
payments are subject to an aggregate maximum of $23.5 million. The Company has
initiated legal proceedings against certain former owners of CMG with respect to
representations made by such former owners in conjunction with Merit's
acquisition of CMG. Whether any contingent payments will be made to the former
shareholders of CMG and the amount and timing of contingent payments, if any,
may be subject to the outcome of these proceedings.
 
    In connection with the acquisition of Merit, the Company (i) terminated its
existing credit agreement; (ii) repaid all loans outstanding pursuant to Merit's
existing credit agreement; (iii) completed a tender offer for its 11.25%
Series A Senior Subordinated Notes due 2004 (the "Old Notes"); (iv) completed a
tender offer for Merit's 11.50% Senior Subordinated notes due 2005 (the "Merit
Outstanding Notes"); (v) entered into a new senior secured bank credit agreement
(the "Credit Agreement") providing for a revolving credit facility (the
"Revolving Facility") and a term loan facility (the "Term Loan Facility") of up
to $700 million; and (vi) issued $625 million in 9.0% Senior Subordinated Notes
due 2008 (the "Notes").
 
                                      F-12

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
2. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
    The following table sets forth the sources and uses of funds for the Merit
acquisition and related transactions (the "Transactions") at closing (in
thousands):
 

<TABLE>
<S>                                                           <C>
SOURCES:
Cash and cash equivalents...................................  $   59,290
Credit Agreement:
  Revolving Facility (1)....................................      20,000
  Term Loan Facility........................................     550,000
The Notes...................................................     625,000
                                                              ----------
    Total sources...........................................  $1,254,290
                                                              ==========
USES:
Cash paid to Merit Shareholders.............................  $  448,867
Repayment of Merit existing credit agreement (2)............     196,357
Purchase of the Old Notes (3)...............................     432,102
Purchase of Merit Outstanding Notes (4).....................     121,651
Transaction costs (5).......................................      55,313
                                                              ----------
    Total uses..............................................  $1,254,290
                                                              ==========
</TABLE>

 
------------------------
 
(1) The Revolving Facility provides for borrowings of up to $150.0 million.
 
(2) Includes principal amount of $193.7 million and accrued interest of
    $2.8 million.
 
(3) Includes principal amount of $375.0 million, tender premium of
    $43.4 million and accrued interest of $13.7 million.
 
(4) Includes principal amount of $100.0 million, tender premium of
    $18.8 million and accrued interest of $2.9 million.
 
(5) Transaction costs include, among other things, expenses associated with the
    debt tender offers, the Notes offering, the Merit acquisition and the Credit
    Agreement.
 
    HAI ACQUISITION.  On December 4, 1997, the Company consummated the purchase
of Human Affairs International, Incorporated ("HAI"), formerly a unit of
Aetna, Inc. ("Aetna"), for approximately $122.1 million, which the Company
funded from cash on hand. HAI managed behavioral healthcare programs, primarily
through Employee Assistance Programs ("EAPs") and other behavioral managed
healthcare plans. The Company may be obligated to make contingent payments
totaling $60 million annually, under two separate calculations, which are
primarily based upon membership levels during the contract year (as defined) and
are calculated at the end of the contract year. "Contract Year" means each of
the twelve-month periods ending on the last day of December in 1998, 1999, 2000,
2001 and 2002. The Company accounted for the HAI acquisition using the purchase
method of accounting.
 
    The Company paid $60.0 million to Aetna for both the Contract Years ended
December 31, 1998 and 1999. Also, based upon the most recent membership
enrollment data related to the Contract Year to end December 31, 2000 ("Contract
Year 3"), the Company believes beyond a reasonable doubt that it will be
required to make the full $60 million payment related to Contract Year 3 and has
included this amount in
 
                                      F-13

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
2. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
goodwill. The Company recorded $120.0 million of goodwill and other intangible
assets related to the purchase of HAI during fiscal 1999, related to Contract
Years 1 and 2. The Contract Year 3 liability of $60.0 million is included in
"Deferred credits and other long-term liabilities" in the Company's consolidated
balance sheet as of September 30, 2000. The Company intends to borrow under the
Revolving Facility to meet this obligation, which is expected to be paid during
the second quarter of fiscal 2001.
 
    The Company would record additional contingent consideration payable, if
any, as goodwill and identifiable intangible assets.
 
    GREEN SPRING ACQUISITION.  On December 13, 1995, the Company acquired a 51%
ownership interest in Green Spring Health Services, Inc. ("Green Spring") for
approximately $68.9 million in cash, the issuance of 215,458 shares of common
stock valued at approximately $4.3 million and the contribution of Group
Practice Affiliates, Inc. ("GPA"), a wholly-owned subsidiary of the Company,
which became a wholly-owned subsidiary of Green Spring. In addition, the
minority stockholders of Green Spring were issued an option agreement whereby
they could exchange their interests in Green Spring for an equivalent of the
Company's common stock or subordinated notes (the "Exchange Option"). 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 exercise
by a minority stockholder of its Exchange Option. In January 1998, the minority
stockholders of Green Spring converted their collective 39% interest in Green
Spring into an aggregate of 2,831,516 shares of the Company's common stock
through exercise of the Exchange Option (the "Green Spring Minority Stockholder
Conversion"). As a result of the Green Spring Minority Stockholder Conversion,
the Company owns 100% of Green Spring. The Company issued shares from treasury
to effect the Green Spring Minority Stockholder Conversion and accounted for it
as a purchase of minority interest at a fair value of consideration paid of
approximately $63.5 million.
 
    The Company accounted for the Green Spring acquisition using the purchase
method of accounting. Green Spring's results of operations have been included in
the Company's consolidated financial statements since the acquisition date, less
minority interest through January, 1998, at which time the Company became the
sole owner of Green Spring.
 
    The following unaudited pro forma information for the fiscal year ended
September 30, 1998 has been prepared assuming the HAI acquisition, Merit
acquisition and the Green Spring Minority Stockholder Conversion (as defined)
were consummated on October 1, 1997. The unaudited pro forma information does
not purport to be indicative of the results that would have actually been
obtained had such
 
                                      F-14

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
2. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
transactions been consummated on October 1, 1997 or which may be attained in
future periods (in thousands, except per share data):
 

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                                  1998
                                                              -------------
<S>                                                           <C>
Net revenue.................................................   $1,437,572
Loss from continuing operations before extraordinary
  item(1)(2)................................................       (1,700)
Loss per common share -- basic:
  Loss from continuing operations before extraordinary
    item....................................................        (0.06)
Loss per common share -- diluted:
  Loss from continuing operations before extraordinary
    item....................................................        (0.06)
</TABLE>

 
------------------------
 
(1) Excludes expected unrealized cost savings related to the Integration Plan
    (as defined) and managed care integration costs (See Note 10).
 
(2) Excludes the extraordinary losses on early extinguishment of debt for the
    year ended September 30, 1998.
 
    JOINT VENTURES
 
    Through its acquisition of Merit, the Company became a 50% partner with
Value Options, Inc. in Choice Behavioral Health Partnership ("Choice"), a
managed behavioral healthcare company. Choice derives all of its revenues from a
contract with the Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS"), and with TriCare, the successor to CHAMPUS. The Company accounts
for its investment in Choice using the equity method.
 
                                      F-15

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
2. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
    A summary of unaudited financial information for the Company's investment in
Choice is as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,   SEPTEMBER 30,
                                                                  1999            2000
                                                              -------------   -------------
<S>                                                           <C>             <C>
Current assets..............................................     $19,572         $19,144
Property and equipment, net.................................         228             132
                                                                 -------         -------
    Total assets............................................     $19,800         $19,276
                                                                 =======         =======
Current liabilities.........................................     $12,673         $16,212
Partners' capital...........................................       7,127           3,064
                                                                 -------         -------
    Total liabilities and partners' capital.................     $19,800         $19,276
                                                                 =======         =======
Magellan investment in Choice...............................     $ 3,563         $ 1,532
                                                                 =======         =======
</TABLE>

 

<TABLE>
<CAPTION>
                                                FOR THE 231 DAYS
                                                     ENDED         FISCAL YEAR ENDED   FISCAL YEAR ENDED
                                                 SEPTEMBER 30,       SEPTEMBER 30,       SEPTEMBER 30,
                                                      1998               1999                2000
                                                ----------------   -----------------   -----------------
<S>                                             <C>                <C>                 <C>
Net revenue...................................      $38,676             $54,880             $56,349
Operating expenses............................       22,914              28,124              32,141
                                                    -------             -------             -------
  Net income..................................      $15,762             $26,756             $24,208
                                                    =======             =======             =======
Magellan equity income........................      $ 7,881             $13,378             $12,104
                                                    =======             =======             =======
Cash distributions from Choice................      $13,039             $13,047             $14,137
                                                    =======             =======             =======
</TABLE>

 
    The Company owns a 50% interest in Premier Behavioral Systems of Tennessee,
LLC ("Premier"). Premier was formed to manage behavioral healthcare benefits for
the State of Tennessee's TennCare program. The Company accounts for its
investment in Premier using the equity method. The Company's investment in
Premier at September 30, 1998, 1999 and 2000 was $5.8 million, $12.1 million and
$8.1 million, respectively. The Company's equity in income (loss) of Premier for
fiscal 1998, 1999 and 2000 was $(4.7) million, $6.3 million and $(4.0) million,
respectively. The Company has not received a partnership distribution from
Premier during fiscal year 1998, 1999 and 2000.
 
3. DISCONTINUED OPERATIONS
 
HEALTHCARE PROVIDER AND FRANCHISING SEGMENTS
 
    During fiscal 1997, the Company sold substantially all of its domestic
acute-care psychiatric hospitals and residential treatment facilities
(collectively, the "Psychiatric Hospital Facilities") to Crescent Real Estate
Equities ("Crescent") for $417.2 million in cash (before costs of approximately
$16.0 million) and certain other consideration (the "Crescent Transactions").
Simultaneously with the sale of the Psychiatric Hospital Facilities, the Company
and Crescent Operating, Inc. ("COI"), an affiliate of Crescent, formed Charter
Behavioral Health Systems, LLC ("CBHS") to conduct the operations of the
Psychiatric Hospital Facilities and certain other facilities transferred to CBHS
by the Company. The Company retained a 50% ownership of CBHS; the other 50% of
the ownership interest of CBHS was owned by COI.
 
                                      F-16

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
3. DISCONTINUED OPERATIONS (CONTINUED)
 
    The Company initially used approximately $200 million of the proceeds from
the Crescent Transactions to reduce its long-term debt, including borrowings
under its then existing credit agreement. In December 1997, the Company used the
remaining proceeds from the Crescent Transactions to acquire additional managed
healthcare businesses. See Note 2, "Acquisitions and Joint Ventures."
 
    On September 10, 1999, the Company consummated the transfer of assets and
other interests pursuant to a Letter Agreement dated August 10, 1999 with
Crescent, COI and CBHS that effects the Company's exit from its healthcare
provider and healthcare franchising businesses (the "CBHS Transactions"). The
terms of the CBHS Transactions are summarized as follows:
 
HEALTHCARE PROVIDER INTERESTS
 
    - The Company redeemed 80% of its CBHS common interest and all of its CBHS
      preferred interest, leaving it with a 10% non-voting common interest in
      CBHS.
 
    - The Company agreed to transfer to CBHS its interests in five of its six
      hospital-based joint ventures ("Provider JVs") and related real estate as
      soon as practicable.
 
    - The Company transferred to CBHS the right to receive approximately
      $7.1 million from Crescent for the sale of two psychiatric hospitals that
      were acquired by the Company (and leased to CBHS) in connection with CBHS'
      acquisition of certain businesses from Ramsay Healthcare, Inc. in fiscal
      1998.
 
    - The Company forgave receivables due from CBHS of approximately
      $3.3 million for payments received by CBHS for patient services prior to
      the formation of CBHS on June 17, 1997. The receivables related primarily
      to patient stays that "straddled" the formation date of CBHS.
 
    - The Company became obligated to pay $2.0 million to CBHS in 12 equal
      monthly installments beginning on the first anniversary of the closing
      date.
 
    - CBHS became obligated to indemnify the Company for 20% of up to the first
      $50 million (i.e., $10 million) for expenses, liabilities and settlements,
      if any, related to government investigations for events that occurred
      prior to June 17, 1997 (the "CBHS Indemnification"). CBHS would be
      required to pay the Company a maximum of $500,000 per year under the CBHS
      Indemnification.
 
    - Crescent, COI, CBHS and Magellan have provided each other with mutual
      releases of claims among all of the parties with respect to the original
      transactions that effected the formation of CBHS and the operation of CBHS
      since June 17, 1997 with certain specified exceptions.
 
    - The Company transfered certain other real estate and interests related to
      the healthcare provider business to CBHS.
 
HEALTHCARE FRANCHISING INTERESTS
 
    - The Company transferred its healthcare franchising interests to CBHS,
      which included Charter Advantage, LLC, the Charter call center operation,
      the Charter name and related intellectual property. The Company was
      released from performing any further franchise services or incurring
      future franchising expenses.
 
                                      F-17

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
3. DISCONTINUED OPERATIONS (CONTINUED)
    - The Company forgave prepaid call center management fees of approximately
      $2.7 million.
 
    - The Company forgave unpaid franchise fees of approximately $115 million.
 
    The CBHS Transactions, together with the formal plan of disposal authorized
by the Company's Board of Directors on September 2, 1999, represented the
disposal of the Company's healthcare provider and healthcare franchising
business segments.
 
    The Company's original plan of disposal contemplated that the disposition of
all provider joint venture interests would take place within twelve months of
the measurement date. The Company, with the cooperation of its joint venture
partners and CBHS, has closed two of the five hospital-based joint ventures and
is currently negotiating to sell its interest in the remaining three joint
ventures. The proceeds from these sales will be transferred to CBHS subject to
all rights of offset the Company has for certain amounts due from CBHS and
certain other matters related to CBHS's bankruptcy proceedings (see discussion
below). The Company is attempting to resolve with CBHS the amounts due to and
from CBHS, which resolution, if any, will be subject to approvals required by
CBHS's bankruptcy proceedings. Accordingly, these sales and transfers are not
entirely within the control of the Company. The Company anticipates resolving
these matters in fiscal 2001.
 
    On February 16, 2000, CBHS filed a voluntary petition for relief of
indebtedness under Chapter 11 of the United States Bankruptcy Code. The Company
has no material receivables from CBHS apart from any amount which may be owed in
the future for indemnification claims under the previously described provisions
of the CBHS Transactions. In connection with the bankruptcy proceedings, CBHS
has indicated it believes it has claims against the Company regarding certain
previous transactions. The Company believes such claims are without merit; and
in the event any such claims are made, the Company will vigorously defend such
claims. The Company does not believe that CBHS' bankruptcy will have a material
impact on its financial position.
 
    SPECIALTY MANAGED HEALTHCARE SEGMENT
 
    On December 5, 1997, the Company purchased the assets of Allied Health
Group, Inc. and certain affiliates ("Allied"). Allied provided specialty managed
care services, including risk-based products and administrative services to a
variety of insurance companies and other customers. Allied's products included,
among other things, claims authorization, analysis, adjudication and payment,
comprising multiple clinical specialities. The Company paid approximately
$50.0 million for Allied, with cash on hand. During the quarter ended
December 31, 1998, the Company and the former owners of Allied amended the
Allied purchase agreement (the "Allied Amendments"). The Allied Amendments
resulted in the Company paying the former owners of Allied $4.5 million
additional consideration, which was recorded as goodwill. On February 29, 2000,
the Company consummated the purchase of the outstanding stock of Vivra, Inc.
("Vivra"), which also provided specialty managed care services. The initial
purchase price of Vivra was $10.25 million, excluding transaction costs. Allied
and Vivra, as well as certain other related assets comprised the Company's
specialty managed healthcare segment. The Company accounted for the Allied and
Vivra acquisitions using the purchase method of accounting.
 
    On October 4, 2000, the Company adopted a formal plan to dispose of the
business and interest that comprise the company's specialty managed healthcare
segment. The Company intends to exit the Specialty business via sale and/or
abandonment of businesses and related assets, certain of which activities had
 
                                      F-18

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
3. DISCONTINUED OPERATIONS (CONTINUED)
already occurred in the normal course prior to October 4, 2000. The Company does
not expect to receive significant proceeds from the sale of assets. Further, the
Company is actively exiting all significant contracts entered into by Allied and
Vivra. This effort is expected to be completed by September 30, 2001.
 
ACCOUNTING FOR DISCONTINUED OPERATIONS
 
    The Company has accounted for the disposal of the segments under Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" ("APB 30"). APB 30 requires
that the results of continuing operations be reported separately from those of
discontinued operations for all periods presented and that any gain or loss from
disposal of a segment of a business be reported in conjunction with the related
results of discontinued operations. Further, although the company adopted its
formal plan on October 4, 2000, EITF 95-18 provides that the estimated loss from
disposal and segment operating results should be presented as discontinued
operations in the yet to be issued financial statements, if those statement are
filed subsequent to the measurement date. Accordingly, the Company has restated
its results of operations for all prior periods. The Company recorded an
after-tax loss on disposal of its healthcare provider and healthcare franchising
business segments of approximately $47.4 million, (primarily non-cash) in the
fourth quarter of fiscal 1999 and an after-tax loss of $17.7 million related to
the disposal of the specialty managed healthcare segment in the fourth quarter
of fiscal 2000.
 
    The summarized results of the discontinued operations segments are as
follows (in thousands):
 

<TABLE>
<CAPTION>
                                                               FISCAL YEARS ENDED SEPTEMBER 30
                                                              ---------------------------------
                                                                1998        1999        2000
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
HEALTHCARE PROVIDER
Net revenue (1).............................................  $133,256    $ 74,860    $     --
                                                              --------    --------    --------
Salaries, cost of care and other operating expenses.........   106,760      53,952          --
Equity in earnings of unconsolidated subsidiaries...........        --      (2,901)         --
Depreciation and amortization...............................     5,266       2,141          --
Interest income (2).........................................    (1,130)        (76)         --
Special charges (income), net...............................       135     (33,046)         --
Other expenses (3)..........................................    10,093      21,907          --
                                                              --------    --------    --------
Income (loss) from discontinued operations..................  $ 12,132    $ 32,883    $     --
                                                              ========    ========    ========
HEALTHCARE FRANCHISING
Net revenue.................................................  $ 55,625    $    563    $     --
                                                              --------    --------    --------
Salaries, cost of care and other operating expenses.........     9,072       5,623          --
Equity in earnings of unconsolidated subsidiaries...........    31,878          --          --
Depreciation and amortization...............................       355         337          --
Special charges.............................................       323          --          --
Other expenses (3)..........................................     5,598      (2,159)         --
                                                              --------    --------    --------
Income (loss) from discontinued operations..................  $  8,399    $ (3,238)   $     --
                                                              ========    ========    ========
</TABLE>

 
                                      F-19

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
3. DISCONTINUED OPERATIONS (CONTINUED)
 

<TABLE>
<CAPTION>
                                                               FISCAL YEARS ENDED SEPTEMBER 30
                                                              ---------------------------------
                                                                1998        1999        2000
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
SPECIALTY MANAGED HEALTHCARE
Net revenue.................................................  $143,504    $197,157    $128,229
                                                              --------    --------    --------
Salaries, cost of care and other operating expenses.........   140,375     194,747     165,505
Depreciation and amortization...............................     2,366       4,610       3,831
Special charges.............................................        --          --      58,173
Other expenses (3)..........................................       306        (880)    (34,059)
                                                              --------    --------    --------
Income (loss) from discontinued operations..................  $    457    $ (1,320)   $(65,221)
                                                              ========    ========    ========
DISCONTINUED OPERATIONS -- COMBINED
Net revenue (1).............................................  $332,385    $272,580    $128,229
                                                              --------    --------    --------
Salaries, cost of care and other operating expenses.........   256,207     254,322     165,505
Equity in (earnings) losses of unconsolidated
  subsidiaries..............................................    31,878      (2,901)         --
Depreciation and amortization...............................     7,987       7,088       3,831
Interest income (2).........................................    (1,130)        (76)         --
Special charges (income), net...............................       458     (33,046)     58,173
Other expenses (3)..........................................    15,997      18,868     (34,059)
                                                              --------    --------    --------
Income (loss) from discontinued operations..................  $ 20,988    $ 28,325    $(65,221)
                                                              ========    ========    ========
</TABLE>

 
------------------------
 
(1) Includes $7.0 million and $21.6 million in fiscal 1998 and 1999,
    respectively, related to the settlement and adjustment of reimbursement
    issues related to prior periods ("Cost Report Settlements").
 
(2) Interest expense has not been allocated to discontinued operations.
 
(3) Includes income taxes and minority interest.
 
LOSS ON DISPOSAL OF HEALTHCARE PROVIDER AND FRANCHISING SEGMENTS
 
    The summary of the loss on disposal recorded in fiscal 1999 related to the
healthcare provider and healthcare franchising segments is as follows (in
thousands):
 

<TABLE>
<S>                                                           <C>
Basis in Provider JV's......................................  $44,598
Basis in Real Estate transferred to CBHS....................   13,969
Basis in Franchise and other operations.....................    7,285
Working capital forgiveness.................................    5,565
Transaction costs and legal fees............................    7,622
                                                              -------
Loss before income taxes....................................   79,039
Income tax benefit..........................................  (31,616)
                                                              -------
                                                              $47,423
                                                              =======
</TABLE>

 
    Remaining assets and liabilities of the provider business at September 30,
2000 include, among other things, (i) hospital-based real estate of
$6.0 million, (ii) long-term debt of $6.4 million related to the hospital-based
real estate; (iii) reserve for discontinued operations of $5.8 million and
(iv) accrued
 
                                      F-20

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
3. DISCONTINUED OPERATIONS (CONTINUED)
liabilities of $12 million. The Company is also subject to inquiries and
investigations from governmental agencies related to its operating and business
practices prior to June 17, 1997. See Note 12 -- "Commitments and
Contingencies".
 
    The following table provides a rollforward of liabilities resulting from the
CBHS Transactions (in thousands):
 

<TABLE>
<CAPTION>
                                              BALANCE                                             BALANCE
                                           SEPTEMBER 30,                RECEIPTS               SEPTEMBER 30,
TYPE OF COST                                   1998        ADDITIONS   (PAYMENTS)    OTHER         1999
------------                               -------------   ---------   ----------   --------   -------------
<S>                                        <C>             <C>         <C>          <C>        <C>
Transaction costs and legal fees.........     $    --       $ 7,622      $   (69)     $ --        $ 7,553
Provider JV working capital..............          --         2,931           --       185          3,116
Other....................................          --           755           --        --            755
                                              -------       -------      -------      ----        -------
                                              $    --       $11,308      $   (69)     $185        $11,424
                                              =======       =======      =======      ====        =======
</TABLE>

 

<TABLE>
<CAPTION>
                                              BALANCE                                             BALANCE
                                           SEPTEMBER 30,                RECEIPTS               SEPTEMBER 30,
TYPE OF COST                                   1999        ADDITIONS   (PAYMENTS)    OTHER         1999
------------                               -------------   ---------   ----------   --------   -------------
<S>                                        <C>             <C>         <C>          <C>        <C>
Transaction costs and legal fees.........     $ 7,553       $    --     $(5,804)      $ --        $ 1,749
Provider JV working capital..............       3,116            --          --         --          3,116
Other....................................         755            --         150         --            905
                                              -------       -------     -------       ----        -------
                                              $11,424       $    --     $(5,654)      $ --        $ 5,770
                                              =======       =======     =======       ====        =======
</TABLE>

 
LOSS ON DISPOSAL OF SPECIALTY MANAGED HEALTHCARE SEGMENTS
 
    The summary of the loss on disposal recorded during fiscal 2000 related to
the disposal of the Company's specialty managed healthcare segment is as follows
(in thousands):
 

<TABLE>
<S>                                                           <C>
Estimated leasehold obligations.............................  $ 5,051
Impairment of long-lived assets.............................   17,058
Other Cost of Disposal......................................    4,777
                                                              -------
    Loss Before Income Taxes................................   26,886
Income Tax Benefit..........................................   (9,224)
                                                              -------
                                                              $17,662
                                                              =======
</TABLE>

 
    The remaining assets and liabilities of the specialty managed healthcare
segment at September 30, 2000 include, among other things, (i) cash and accounts
receivable of $9.5 million, (ii) property and equipment of $2.0 million,
(iii) medical claims payable of $9.3 million, (iv) reserve for discontinued
operations of $8.6 million and (v) accounts payable and accrued liabilities of
$27.1 million. The reserve for discontinued operations is comprised of
$5.1 million of estimated leasehold termination costs and $3.5 million of
estimated operating losses from the measurement date to the date of disposal.
 
                                      F-21

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
3. DISCONTINUED OPERATIONS (CONTINUED)
SPECIAL CHARGES (INCOME) RECORDED IN DISCONTINUED OPERATIONS
 
    GENERAL
 
    The following table summarizes special charges (income) recorded during the
three years in the period ended September 30, 2000 in the Company's healthcare
provider, healthcare franchising and specialty managed healthcare segments (in
thousands):
 

<TABLE>
<CAPTION>
                                                   FISCAL YEAR ENDED SEPTEMBER 30,
                                                  ---------------------------------
                                                    1998        1999        2000
                                                  ---------   ---------   ---------
<S>                                               <C>         <C>         <C>
Gains on the sale of psychiatric hospitals,
  net...........................................   $(3,000)   $(24,974)    $    --
Collection fee reserves.........................        --      (8,072)         --
Termination of CBHS sale transaction............     3,458          --          --
Impairment of long-lived assets--Allied.........        --          --      58,173
                                                   -------    --------     -------
                                                   $   458    $(33,046)    $58,173
                                                   =======    ========     =======
</TABLE>

 
    GAINS ON SALE OF PSYCHIATRIC FACILITIES, NET
 
    During fiscal 1998 and 1999, the Company recorded gains of approximately
$3.0 million and $1.1 million, respectively, related to the sales of psychiatric
hospitals and other real estate.
 
    On April 9, 1999, the Company sold its European psychiatric provider
operations to Investment AB Bure of Sweden for approximately $57.0 million
(before transaction costs of approximately $2.5 million) (the "Europe Sale").
The Europe Sale resulted in a non-recurring gain of approximately $23.9 million
before provision for income taxes which is included in gain of sale of
psychiatric hospitals.
 
    The Company used approximately $38.2 million of the net proceeds from the
Europe Sale to make mandatory unscheduled principal payments on indebtedness
outstanding under the Term Loan Facility (as defined). The remaining proceeds
were used to reduce borrowings outstanding under the Revolving Facility (as
defined).
 
    COLLECTION FEE RESERVES
 
    The Company reduced certain accounts receivable collection fee reserves by
$8.1 million during the fourth quarter of fiscal 1999 as substantially all
hospital-based receivables subject to the collection fees had been collected at
September 30, 1999.
 
    TERMINATION OF CBHS SALE TRANSACTION
 
    On March 3, 1998, the Company and certain of its wholly owned subsidiaries
entered into definitive agreements with COI and CBHS pursuant to which the
Company would have, among other things, sold the Company's franchise operations,
certain domestic provider operations and certain other assets and operations. On
August 19, 1998, the Company announced that it had terminated discussions with
COI for the sale of its interest in CBHS.
 
                                      F-22

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
3. DISCONTINUED OPERATIONS (CONTINUED)
    In connection with the termination of the CBHS sale transaction, the Company
recorded a charge of approximately $3.5 million as follows (in thousands):
 

<TABLE>
<S>                                                           <C>
Severance(1)................................................   $  488
Lease termination(1)........................................    1,067
Impairment of long-lived assets.............................      153
Transaction costs and other.................................    1,750
                                                               ------
                                                               $3,458
                                                               ======
</TABLE>

 
------------------------
 
(1) Relates to staffing reductions and lease terminations incurred in the
    Company's franchising and outcomes monitoring subsidiaries.
 
    IMPAIRMENT OF LONG-LIVED ASSETS--ALLIED
 
    The Company recorded a charge of approximately $58.2 million in the quarter
ended March 31, 2000, related to the impairment of certain of Allied's
long-lived assets in accordance with Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("FAS 121"). This amount included certain goodwill,
certain property and equipment and identifiable intangible assets of Allied
which, prior to the Vivra acquisition, was the principal component of the
Company's specialty managed healthcare business segment. During the six months
ended March 31, 2000, Allied recorded significant losses associated primarily
with the termination or restructuring of various customer contracts. These
events and the resulting expectation of lower future earnings and cash flows
from Allied represented a change in circumstances with respect to the business
of Allied. At that time the Company estimated that the future undiscounted cash
flows expected to be generated by Allied were insufficient to fully recover the
recorded cost of the long-lived assets. The Company recorded the impairment
charge to write these assets down to their estimated fair value.
 
4. BENEFIT PLANS
 
    The Company currently has a defined contribution retirement plan (the
"401(k) Plan"), which is in the form of an amendment and restatement of the
Green Spring 401(k) Plan. Certain other 401(k) plans and assets, including the
Magellan 401(k) Plan, were merged into the Green Spring Plan effective
January 1, 1999. Employee participants can elect to voluntarily contribute up to
15% of their compensation to the 401(k) Plan. The Company makes contributions to
the 401(k) Plan based on employee compensation and contributions. Additionally,
the Company can make a discretionary contribution of up to 2% of each eligible
employee's compensation. The Company matches 50% of each employee's contribution
up to 3% of their compensation. The Company recognized $3.0 million and
$7.4 million of expense for the years ended September 30, 1999 and 2000,
respectively, for the matching contribution to the 401(k) Plan.
 
    Prior to January 1, 1999, the Company maintained a separate defined
contribution plan (the "Magellan 401-K Plan"). Participants could contribute up
to 15% of their compensation to the Magellan 401-K Plan. The Company made
discretionary contributions of 2% of each employee's compensation and matched
50% of each employee's contribution up to 3% of their compensation. During the
fiscal years
 
                                      F-23

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
4. BENEFIT PLANS (CONTINUED)
ended September 30, 1998 and 1999 the Company expensed approximately
$3.2 million and $1.2 million, respectively, to the Magellan 401-K Plan.
 
    Prior to January 1, 1999, Green Spring maintained a separate defined
contribution plan (the "Green Spring 401-K Plan"). Employee participants could
elect to voluntarily contribute up to 6% or 12% of their compensation, depending
upon each employee's compensation level, to the Green Spring 401-K Plan. Green
Spring matched up to 3% of each employee's compensation. Employees vested in
employer contributions over five years. During the fiscal years ended
September 30, 1998 and 1999 the Company expensed approximately $1.2 million and
$2.9 million, respectively, to the Green Spring 401-K Plan.
 
5. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OPERATING LEASES
 
    Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1999 and 2000 is as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,   SEPTEMBER 30,
                                                                  1999            2000
                                                              -------------   -------------
<S>                                                           <C>             <C>
Credit Agreement:
  Revolving Facility (10.125% at September 30, 2000) due
    through 2004............................................   $   20,000      $   30,000
  Term Loan Facility (10.31% to 10.81% at September 30,
    2000) due through 2006..................................      492,873         436,612
  9.0% Senior Subordinated Notes due 2008...................      625,000         625,000
  11.5% other notes payable through 2005....................           35              35
  5.65% capital lease obligations due through 2014..........        6,400           6,400
                                                               ----------      ----------
                                                                1,144,308       1,098,047
    Less amounts due within one year........................       30,119          34,119
                                                               ----------      ----------
                                                               $1,114,189      $1,063,928
                                                               ==========      ==========
</TABLE>

 
    The aggregate scheduled maturities of long-term debt and capital lease
obligations during the five fiscal years and beyond subsequent to September 30,
2000 are as follows (in thousands): 2001--$34,119; 2002--$43,328; 2003--$80,692,
2004--$167,336, 2005--$115,585 and 2006 and beyond--$656,987.
 
    The Notes, which are carried at cost, had a fair value of approximately
$534 million and $421 million at September 30, 1999 and 2000, respectively,
based on market quotes. The Company's remaining debt is also carried at cost,
which approximates fair market value.
 
    The Company recognized a net extraordinary loss from the early
extinguishment of debt of approximately $33.0 million, net of income tax
benefit, during fiscal 1998, to write off unamortized deferred financing costs
related to terminating the previous credit agreement and extinguishing the Old
Notes, to record the tender premium and related costs of extinguishing the Old
Notes and to record the gain on extinguishment of the Company's 7.5% Swiss
bonds. The Credit Agreement provides for a Term Loan Facility in an original
aggregate principal amount of $550 million, consisting of an approximately
$183.3 million Tranche A Term Loan (the "Tranche A Term Loan"), an approximately
$183.3 million Tranche B Term Loan (the "Tranche B Term Loan") and an
approximately $183.4 million Tranche C Term Loan (the "Tranche C Term Loan"),
and a Revolving Facility providing for revolving loans to the Company
 
                                      F-24

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
5. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OPERATING LEASES (CONTINUED)
and the "Subsidiary Borrowers" (as defined therein) and the issuance of letters
of credit for the account of the Company and the Subsidiary Borrowers in an
aggregate principal amount (including the aggregate stated amount of letters of
credit) of $150.0 million. Letters of credit outstanding were $29.6 million at
September 30, 2000.
 
    The Tranche A Term Loan and the Revolving Facility mature on February 12,
2004. The Tranche B Term Loan matures on February 12, 2005 and the Tranche C
Term Loan matures on February 12, 2006. The Tranche A Term Loan amortizes in
installments in each fiscal year in amounts equal to $30.3 million in 2001,
$39.5 million in 2002, $42.1 million in 2003 and $9.9 million in 2004. The
Tranche B Term Loan amortizes in installments in amounts equal to $1.9 million
in each of 2001 and 2002, $36.7 million in 2003, $90.7 million in 2004 and
$26.2 million in 2005. The Tranche C Term Loan amortizes in installments in each
fiscal year in amounts equal to $1.9 million in each of 2001 through 2003,
$36.7 million in 2004, $89.4 million in 2005 and $25.6 million in 2006. In
addition, the Revolving Facility and Term Loan Facility are subject to mandatory
prepayment and reductions (to be applied first to the Term Loan Facility) in an
amount equal to (a) 75% of the net proceeds of certain offerings of equity
securities by the Company or any of its subsidiaries, (b) 50% for the sale of
National Mentor, Inc. ("Mentor") and certain identified non-core assets and 100%
of the net proceeds of certain debt issues of the Company or any of its
subsidiaries, (c) 75% of the Company's excess cash flow beginning September 30,
2001, upon the sale of Mentor, otherwise September 30, 2002, as defined, and
(d) 100% of the net proceeds of certain other asset sales or other dispositions
of property of the Company and its subsidiaries, in each case subject to certain
limited exceptions.
 
    The Credit Agreement contains a number of covenants that, among other things
restrict the ability of the Company and its subsidiaries to dispose of assets,
incur additional indebtedness, incur or guarantee obligations, prepay other
indebtedness or amend other debt instruments (including the indenture for the
Notes (the "Indenture")), pay dividends, create liens on assets, make
investments, make loans or advances, redeem or repurchase common stock, make
acquisitions, engage in mergers or consolidations, change the business conducted
by the Company and its subsidiaries and make capital expenditures. In addition,
the Credit Agreement requires the Company to comply with specified financial
ratios and tests, including minimum coverage ratios, maximum leverage ratios,
maximum senior debt ratios and minimum "EBITDA" (as defined in the Credit
Agreement) and minimum net worth tests. As of September 30, 2000, the Company
was in compliance with its debt covenants.
 
    At the Company's election, the interest rates per annum applicable to the
loans under the Credit Agreement are a fluctuating rate of interest measured by
reference to either (a) an adjusted London inter-bank offer rate ("LIBOR") plus
a borrowing margin or (b) an alternate base rate ("ABR") (equal to the higher of
the Chase Manhattan Bank's published prime rate or the Federal Funds effective
rate plus 1/2 of 1%) plus a borrowing margin. The borrowing margins applicable
to the Tranche A Term Loan and loans under the Revolving Facility are currently
2.50% for ABR loans and 3.50% for LIBOR loans, and are subject to reduction
after December 2001 if the Company's financial results satisfy certain leverage
tests. The borrowing margins applicable to the Tranche B Term Loan and the
Tranche C Term Loan are currently 2.75% and 3.0%, respectively, for ABR loans
and 3.75% and 4.0%, respectively, for LIBOR loans, and are not subject to
reduction. Amounts outstanding under the credit facilities not paid when due
bear interest at a default rate equal to 2.00% above the rates otherwise
applicable to each of the loans under the Term Loan Facility and the Revolving
Facility.
 
                                      F-25

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
5. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OPERATING LEASES (CONTINUED)
    The obligations of the Company and the Subsidiary Borrowers under the Credit
Agreement are unconditionally and irrevocably guaranteed by, subject to certain
exceptions, each wholly owned subsidiary of the Company. In addition, the
Revolving Facility, the Term Loan Facility and the guarantees are secured by
security interests in and pledges of or liens on substantially all the material
tangible and intangible assets of the guarantors, subject to certain exceptions.
 
    The Notes are general unsecured senior subordinated obligations of the
Company. The Notes are limited in aggregate principal amount to $625.0 million
and will mature on February 15, 2008. Interest on the Notes accrues at the rate
of 9.0% per annum and is payable semi-annually on each February 15 and
August 15. The Notes were originally issued as unregistered securities and later
exchanged for securities which were registered with the Securities and Exchange
Commission. Due to a delay in the registration of the Notes to be exchanged, the
Company was required to increase the interest rate on the Notes by 100 basis
points per annum for the period from July 13, 1998 through November 9, 1998, the
date of issuance of the Notes to be exchanged.
 
    The Notes are redeemable at the option of the Company. The Notes may be
redeemed at the option of the Company, in whole or in part, at the redemption
prices (expressed as a percentage of the principal amount) set forth below, plus
accrued and unpaid interest, during the twelve-month period beginning on
February 15 of the years indicated below:
 

<TABLE>
<CAPTION>
                                                              REDEMPTION
YEAR                                                            PRICES
----                                                          ----------
<S>                                                           <C>
2003........................................................    104.5%
2004........................................................    103.0%
2005........................................................    101.5%
2006 and thereafter.........................................    100.0%
</TABLE>

 
    In addition, at any time and from time to time prior to February 15, 2001,
the Company may, at its option, redeem up to 35% of the original aggregate
principal amount of the Notes at a redemption price (expressed as a percentage
of the principal amount) of 109%, plus accrued and unpaid interest with the net
cash proceeds of one or more equity offerings; provided that at least 65% of the
original aggregate principal amount of Notes remains outstanding immediately
after the occurrence of such redemption and that such redemption occurs within
60 days of the date of the closing of any such equity offering.
 
    The Indenture limits, among other things: (i) the incurrence of additional
indebtedness by the Company and its restricted subsidiaries; (ii) the payment of
dividends on, and redemption or repurchase of, capital stock of the Company and
its restricted subsidiaries and the redemption of certain subordinated
obligations of the Company; (iii) certain other restricted payments, including
investments; (iv) sales of assets; (v) certain transactions with affiliates;
(vi) the creation of liens; and (vii) consolidations, mergers and transfers of
all or substantially all the Company's assets. The Indenture also prohibits
certain restrictions on distributions from restricted subsidiaries. However, all
such limitations and prohibitions are subject to certain qualifications and
exceptions.
 
    The Company leases certain of its operating facilities. The leases, which
expire at various dates through 2008, generally require the Company to pay all
maintenance, property and tax insurance costs.
 
                                      F-26

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
5. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OPERATING LEASES (CONTINUED)
    At September 30, 2000, aggregate amounts of future minimum payments under
operating leases for continuing operations were as follows:
2001--$36.5 million; 2002--$31.5 million; 2003--$20.0 million;
2004--$11.3 million; 2005--$7.3 million; 2006 and beyond--$7.9 million.
 
    Rent expense for continuing operations was $26.8 million, $39.5 million and
$42.2 million, respectively, for the fiscal years ended September 30, 1998, 1999
and 2000. Rent expense for discontinued operations was $3.8 million,
$2.1 million and $1.0 million, respectively, for the fiscal years ended
September 30, 1998, 1999 and 2000.
 
6. STOCKHOLDERS' EQUITY
 
    COMMON STOCK
 
    The Company is prohibited from paying dividends on its common stock under
the terms of the Indenture and the Credit Agreement except under very limited
circumstances.
 
    STOCK OPTION PLANS
 
    The Company has stock option plans under which employees and non-employee
directors may be granted options to purchase shares of Company common stock at
the fair market value at the time of grant. Options generally vest over a period
of three to four years and expire 10 years from the date of grant. The Company's
stock option plan for employees also provides for the granting of performance
based stock awards.
 
    Summarized information relative to the Company's stock option plans is as
follows:
 

<TABLE>
<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30,
                                                ---------------------------------------------------------------------
                                                        1998                    1999                    2000
                                                ---------------------   ---------------------   ---------------------
                                                             WEIGHTED                WEIGHTED                WEIGHTED
                                                             AVERAGE                 AVERAGE                 AVERAGE
                                                             EXERCISE                EXERCISE                EXERCISE
                                                 OPTIONS      PRICE      OPTIONS      PRICE      OPTIONS      PRICE
                                                ----------   --------   ----------   --------   ----------   --------
<S>                                             <C>          <C>        <C>          <C>        <C>          <C>
Balance, beginning of period..................   4,122,109    $20.13     3,835,912    $22.23     4,406,882    $10.15
Granted.......................................   1,386,500     24.22     1,669,303      5.73     2,309,742      3.77
Canceled......................................  (1,082,331)    23.66    (1,050,067)    19.97    (1,336,719)    16.32
Exercised.....................................    (590,366)     9.90       (48,266)     7.99          (800)     4.19
                                                ----------    ------    ----------    ------    ----------    ------
Balance, end of period........................   3,835,912    $22.23     4,406,882    $10.15     5,379,105    $ 5.57
                                                ----------    ------    ----------    ------    ----------    ------
Exercisable, end of period....................   2,375,919    $20.89     2,190,538    $13.74     2,020,049    $ 7.37
                                                ==========    ======    ==========    ======    ==========    ======
</TABLE>

 
    At September 30, 2000, 1,159,150 shares were available for future grants
under the terms of these plans.
 
    STOCK OPTION REPRICING
 
    On November 17, 1998, the Company's Board of Directors approved the
repricing of stock options outstanding under the Company's existing stock option
plans (the "Stock Option Repricing"). Each holder
 
                                      F-27

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
6. STOCKHOLDERS' EQUITY (CONTINUED)
of 10,000 or more stock options that was eligible to participate in the Stock
Option Repricing was required to forfeit a percentage of outstanding stock
options as follows:
 

<TABLE>
<S>                                                           <C>
- Directors, including the Chief Executive Officer..........    40%
- Named Executive Officers..................................    30%
- Other holders of 50,000 or more stock options.............    25%
- Other holders of 10,000-49,999 stock options..............    15%
</TABLE>

 
    The Stock Option Repricing was consummated on December 8, 1998 based on the
fair value of the Company's common stock on such date. Approximately
2.0 million outstanding stock options were repriced to $8.406 and approximately
0.7 million outstanding stock options were cancelled as a result of the Stock
Option Repricing. Each participant in the Stock Option Repricing was precluded
from exercising vested repriced stock options until June 8, 1999.
 
STOCK OPTIONS OUTSTANDING
 
    Summarized information relative to the Company's stock options outstanding
on September 30, 2000 is as follows:
 

<TABLE>
<CAPTION>
                     OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
-------------------------------------------------------------   --------------------
                                        WEIGHTED
                                        AVERAGE      WEIGHTED               WEIGHTED
       RANGE OF                        REMAINING     AVERAGE                AVERAGE
       EXERCISE                       CONTRACTUAL    EXERCISE               EXERCISE
         PRICE             OPTIONS    LIFE (YEARS)    PRICE      OPTIONS     PRICE
-----------------------   ---------   ------------   --------   ---------   --------
<S>                       <C>         <C>            <C>        <C>         <C>
    $1.310 - $8.188       3,816,376        7.17       $4.40       741,524    $5.57
        $8.406            1,517,729        6.29        8.41     1,263,524     8.41
    $9.210 - $9.719          45,000        6.47        9.66        15,001     9.66
                          ---------        ----       -----     ---------    -----
                          5,379,105        6.92       $5.57     2,020,049    $7.37
                          =========        ====       =====     =========    =====
</TABLE>

 
    EMPLOYEE STOCK PURCHASE PLANS
 
    The 1997 Employee Stock Purchase Plan (the "1997 ESPP") covered shares of
common stock that could be purchased by eligible employees of the Company. The
1997 ESPP offering periods had a term not less than three months and not more
than 12 months. The first offering period under the 1997 ESPP began January 1,
1997 and the last offering period ended on or before December 31, 1999. The
option price of each offering period was the lesser of (i) 85% of the fair value
of a share of common stock on the first day of the offering period or (ii) 85%
of the fair value of a share of common stock on the last day of the offering
period.
 
                                      F-28

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
6. STOCKHOLDERS' EQUITY (CONTINUED)
    A summary of the 1997 ESPP is as follows:
 

<TABLE>
<CAPTION>
      OFFERING                                                 SHARES     PURCHASE
       PERIOD                BEGAN              ENDED         PURCHASED    PRICE
---------------------   ---------------   -----------------   ---------   --------
<C>                     <S>               <C>                 <C>         <C>
          1             January 2, 1997   June 30, 1997         73,410    $ 19.125
          2             August 1, 1997    December 31, 1997     26,774    $ 19.125
          3             January 1, 1998   June 30, 1998         43,800    $18.4875
          4             July 1, 1998      December 31, 1998    163,234    $ 7.0125
          5             January 1, 1999   June 30, 1999        152,570    $ 7.0125
          6             July 1, 1999      December 31, 1999    185,079    $ 5.1531
</TABLE>

 
    The 2000 Employee Stock Purchase Plan (the "2000 ESPP") covers 1.2 million
shares of common stock that can be purchased by eligible employees of the
Company. The 2000 ESPP offering periods will have a term not less than three
months and not more than 12 months. The first offering period under the 2000
ESPP began January 1, 2000 and the last offering period will end on or before
December 31, 2003. The option price of each offering period will be the lesser
of (i) 85% of the fair value of a share of common stock on the first day of the
offering period or (ii) 85% of the fair value of a share of common stock on the
last day of the offering period.
 
    A summary of the 2000 ESPP is as follows:
 

<TABLE>
<CAPTION>
      OFFERING                                                 SHARES     PURCHASE
       PERIOD                BEGAN              ENDED         PURCHASED    PRICE
---------------------   ---------------   -----------------   ---------   --------
<C>                     <S>               <C>                 <C>         <C>
          1             January 1, 2000   June 30, 2000        481,922    $1.0625
          2             July 1, 2000      December 31, 2000         --         --
</TABLE>

 
    The number of options granted and the option price for the most recent
offering period will be determined on December 31, 2000 when the option price is
known.
 
    RIGHTS PLAN
 
    The Company adopted a share purchase rights plan in fiscal 1992 (the "Rights
Plan"). Pursuant to the Rights Plan, each share of common stock also represents
one share purchase right (collectively, the "Rights"). The Rights trade
automatically with the underlying shares of common stock. Upon becoming
exercisable, but prior to the occurrence of certain events, each Right initially
entitles its holder to buy one share of common stock from the Company at an
exercise price of $60.00. The Rights will be distributed and become exercisable
only if a person or group acquires, or announces its intention to acquire,
common stock exceeding certain levels, as specified in the Rights Plan. Upon the
occurrence of such events, the exercise price of each Right reduces to one-half
of the then current market price. The Rights also give the holder certain rights
in an acquiring company's common stock. The Company is entitled to redeem the
Rights at a price of $.01 per Right at any time prior to the distribution of the
Rights. The Rights have no voting power until exercised.
 
    COMMON STOCK WARRANTS
 
    The Company issued 114,690 warrants in fiscal 1992 which expire on June 30,
2002 (the "2002 Warrants") to purchase one share each of the Company's common
stock. The 2002 Warrants have an exercise price of $5.24 per share. During
fiscal 1998, 1,553 shares were issued upon the exercise of 2002 Warrants. At
September 30, 2000, 18,920 of the 2002 Warrants were outstanding.
 
    The Company also has 146,791 warrants outstanding with an exercise price of
$38.70 per share which expire on September 1, 2006.
 
                                      F-29

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
6. STOCKHOLDERS' EQUITY (CONTINUED)
 
    Crescent and COI each have the right to purchase 1,283,311 shares of common
stock 2,566,622 shares in aggregate; collectively the "Crescent Warrants") at a
warrant exercise price of $30.00 per share (subject to adjustment pursuant to
antidilution provisions). The Crescent Warrants are exercisable at the following
times and in the following amounts:
 

<TABLE>
<CAPTION>
     DATE FIRST            NUMBER OF SHARES OF          END OF
     EXERCISABLE          COMMON STOCK ISSUABLE     EXERCISE PERIOD
      JUNE 17,          UPON EXERCISE OF WARRANTS      JUNE 17,
---------------------   -------------------------   ---------------
<S>                     <C>                         <C>
        1998                      30,000                  2001
        1999                      62,325                  2002
        2000                      97,114                  2003
        2001                     134,513                  2004
        2002                     174,678                  2005
        2003                     217,770                  2006
        2004                     263,961                  2007
        2005                     313,433                  2008
        2006                     366,376                  2009
        2007                     422,961                  2009
        2008                     483,491                  2009
</TABLE>

 
    Crescent's and COI's rights with respect to the Crescent Warrants are not
contingent on or subject to the satisfaction or completion of any obligation
that Crescent or COI may have to CBHS, or that CBHS may have to the Company, or
by any subordination of fees otherwise payable to the Company by CBHS.
 
    The Crescent Warrants contain provisions relating to adjustments in the
number of shares covered by the Crescent Warrants and the warrant exercise price
in the event of stock splits, stock dividends, mergers, reorganizations and
similar transactions.
 
    The Crescent Warrants were recorded at $25.0 million upon issuance, which
was their approximate fair value upon execution of the Warrant Purchase
Agreement in January 1997.
 
    TREASURY STOCK TRANSACTIONS
 
    During fiscal 1998, the Company repurchased an aggregate of 696,600 shares
of its common stock in the open market for approximately $14.4 million. Those
transactions were funded with cash on hand.
 
    In January 1998, the Company issued an aggregate of 2,831,516 shares of
treasury stock to the then existing minority stockholders of Green Spring to
effect the Green Spring Minority Stockholder Conversion. See Note 2,
"Acquisitions and Joint Ventures."
 
                                      F-30

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
6. STOCKHOLDERS' EQUITY (CONTINUED)
INCOME (LOSS) PER COMMON SHARE
 
    The following table presents the components of weighted average common
shares outstanding and income (loss) per share from continuing operations (in
thousands, except per share data):
 

<TABLE>
<CAPTION>
                                                                 YEAR ENDED SEPTEMBER 30,
                                                              ------------------------------
                                                                1998       1999       2000
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Numerator:
Income (loss) from continuing operations before
  extraordinary items.......................................  $(7,256)   $23,786    $17,075
  Less: preferred dividend requirement and amortization of
    redeemable preferred stock issuance costs...............       --         --      3,802
                                                              -------    -------    -------
Income (loss) from continuing operations available to common
  stockholders--basic.......................................   (7,256)    23,786     13,273
  Add: presumed conversion of redeemable preferred stock....       --         --         --
                                                              -------    -------    -------
Income (loss) from continuing operations available to common
  stockholders--diluted.....................................  $(7,256)   $23,786    $13,273
                                                              =======    =======    =======
Denominator:
Weighted average common shares outstanding -- basic.........   30,784     31,758     32,144
Common stock equivalents -- stock options...................       --        151        242
Common stock equivalents -- warrants........................       --          7         --
Common stock equivalents -- redeemable Preferred Stock......       --         --         --
                                                              -------    -------    -------
Weighted average common shares outstanding -- diluted.......   30,784     31,916     32,386
                                                              =======    =======    =======
Income (loss) from continuing operations available to common
  stockholders per common share:
Basic (basic numerator/basic denominator)...................  $ (0.24)   $  0.75    $  0.41
                                                              =======    =======    =======
Diluted (diluted numerator/diluted denominator).............  $ (0.24)   $  0.75    $  0.41
                                                              =======    =======    =======
</TABLE>

 
Conversion of redeemable preferred stock, and the redemption of the TPG series
"A" option (see Note 7--"Redeemable Preferred Stock") were not presumed
outstanding for fiscal 2000 due to their anti-dilutive effect.
 
    Certain options and warrants to purchase shares of common stock which were
outstanding during fiscal 2000 were not included in the computation of diluted
EPS because of their anti-dilutive effect.
 
    STOCK-BASED COMPENSATION
 
    The Company discloses stock-based compensation under the requirements of
FAS 123. FAS 123 requires disclosure of pro forma net income and pro forma net
income per share as if the fair value-based method of accounting for stock
options had been applied in measuring compensation cost for stock-based awards.
 
                                      F-31

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
6. STOCKHOLDERS' EQUITY (CONTINUED)
    Reported and pro forma net income and net income per share amounts are set
forth below (in thousands, except per share data):
 

<TABLE>
<CAPTION>
                                                                    FISCAL YEAR ENDED
                                                                      SEPTEMBER 30,
                                                              ------------------------------
                                                                1998       1999       2000
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Reported:
  Income (loss) from continuing operations before
    extraordinary items.....................................  $ (7,256)  $23,786    $17,075
  Net income (loss).........................................   (19,283)    4,688    (65,808)
Income (loss) per common share -- basic:
  Income (loss) from continuing operations before
    extraordinary items.....................................     (0.24)     0.75       0.41
  Net income (loss).........................................     (0.63)     0.15      (2.17)
Income (loss) per common share -- diluted:
  Income (loss) from continuing operations before
    extraordinary items.....................................     (0.24)     0.75       0.41
  Net income (loss).........................................     (0.63)     0.15      (2.15)
Pro Forma:
  Income (loss) from continuing operations before
    extraordinary items.....................................  $(11,201)  $16,763    $13,664
  Net loss..................................................   (23,228)   (2,335)   (69,219)
Income (loss) per common share -- basic:
  Income (loss) from continuing operations before
    extraordinary items.....................................     (0.36)     0.53       0.31
  Net loss..................................................     (0.75)    (0.07)     (2.15)
Income (loss) per common share -- diluted:
  Income (loss) from continuing operations before
    extraordinary items.....................................     (0.36)     0.53       0.31
  Net loss..................................................     (0.75)    (0.07)     (2.14)
</TABLE>

 
    The fair values of the stock options and ESPP options granted were estimated
on the date of their grant using the Black-Scholes option pricing model based on
the following weighted average assumptions:
 

<TABLE>
<CAPTION>
                                                     1998       1999        2000
                                                   --------   ---------   --------
<S>                                                <C>        <C>         <C>
Risk-free interest rate..........................     4.5%         5.8%       6.3%
Expected life....................................  4 years    3.8 years    3 years
Expected volatility..............................      50%          50%        85%
Expected dividend yield..........................       0%           0%         0%
</TABLE>

 
    The weighted average fair value of options granted during fiscal 1998, 1999
and 2000 was $9.53, $2.21 and $1.83, respectively.
 
7. REDEEMABLE PREFERRED STOCK
 
    TPG INVESTMENT.  On December 5, 1999, the Company entered into a definitive
agreement to issue approximately $59.1 million of cumulative convertible
preferred stock to TPG Magellan, LLC, an affiliate of the investment firm Texas
Pacific Group ("TPG") (the "TPG Investment").
 
    Pursuant to the agreement, TPG purchased approximately $59.1 million of the
Company's Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") and an Option (the "Option") to purchase an additional
approximately $21.0 million of Series A Preferred Stock. Net proceeds from
 
                                      F-32

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
7. REDEEMABLE PREFERRED STOCK (CONTINUED)
issuance of the Series A Preferred Stock were $54.0 million. Approximately 50%
of the net proceeds received from the issuance of the Series A Preferred Stock
was used to reduce debt outstanding under the Term Loan Facility (as defined)
with the remaining 50% of the proceeds being used for general corporate
purposes. The Series A Preferred Stock carries a dividend of 6.5% per annum,
payable in quarterly installments in cash or common stock, subject to certain
conditions. Dividends not paid in cash or common stock will accumulate. The
Series A Preferred Stock is convertible at any time into the Company's common
stock at a conversion price of $9.375 per share (which would result in
approximately 6.3 million shares of common stock if all of the currently issued
Series A Preferred Stock were to convert) and carries "as converted" voting
rights. The Company may, under certain circumstances, require the holders of the
Series A Preferred Stock to convert such stock into common stock. The Series A
Preferred Stock, plus accrued and unpaid dividends thereon, must be redeemed by
the Company on December 15, 2009. The Option may be exercised in whole or in
part at any time on or prior to June 15, 2002. The Company may, under certain
circumstances, require TPG to exercise the Option. The terms of the shares of
Series A Preferred Stock issuable pursuant to the Options are identical to the
terms of the shares of Series A Preferred Stock issued to TPG at the closing of
the TPG Investment.
 
    TPG has three representatives on the Company's twelve-member Board of
Directors.
 
    The TPG Investment is reflected under the caption "Redeemable preferred
stock" in the Company's condensed consolidated balance sheet as follows (in
thousands):
 

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                                  2000
                                                              -------------
<S>                                                           <C>
Redeemable convertible preferred stock:
  Series A -- stated value $1, 87 shares authorized, 59
    shares issued and outstanding...........................     $59,063
  Series B -- stated value $1, 60 shares authorized, none
    issued and outstanding..................................          --
  Series C -- stated value $1, 60 shares authorized, none
    issued and outstanding..................................          --
                                                                 -------
                                                                  59,063
 
Less: Fair value of Series A Option.........................      (3,366)
                                                                 -------
Total redeemable convertible preferred stock................      55,697
Accretion and accumulated unpaid dividends on Series A
  Preferred Stock...........................................       3,401
Fair value of Series A Option...............................       3,366
Issuance costs, net of amortization of $401.................      (4,630)
                                                                 -------
                                                                 $57,834
                                                                 =======
</TABLE>

 
                                      F-33

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
8. INCOME TAXES
 
    The provision for income taxes related to continuing operations consisted of
the following (in thousands):
 

<TABLE>
<CAPTION>
                                                     FISCAL YEAR ENDED SEPTEMBER 30,
                                                    ---------------------------------
                                                      1998        1999        2000
                                                    ---------   ---------   ---------
<S>                                                 <C>         <C>         <C>
Income taxes currently payable:
  Federal.........................................   $3,462      $   555     $ 1,000
  State...........................................      589        2,800       1,300
  Foreign.........................................       --          500         500
Deferred income taxes:
  Federal.........................................    1,611       23,294       9,068
  State...........................................     (424)       1,107       3,610
  Foreign.........................................       --           --          --
                                                     ------      -------     -------
                                                     $5,238      $28,256     $15,478
                                                     ======      =======     =======
</TABLE>

 
    A reconciliation of the Company's income tax provision (benefit) to that
computed by applying the statutory federal income tax rate is as follows (in
thousands):
 

<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                                              ---------------------------------
                                                                1998        1999        2000
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
Income tax provision at federal statutory income tax rate...   $   727     $18,435     $11,433
State income taxes, net of federal income tax benefit.......       107       2,540       1,828
Non-deductable goodwill amortization........................     5,680       9,383       8,883
IRS settlement-change in estimate...........................        --          --      (9,091)
Other--net..................................................    (1,276)     (2,102)      2,425
                                                               -------     -------     -------
Income tax provision........................................   $ 5,238     $28,256     $15,478
                                                               =======     =======     =======
</TABLE>

 
    As of September 30, 2000, the Company has estimated tax net operating loss
("NOL") carryforwards of approximately $537 million available to reduce future
federal taxable income. These NOL carryforwards expire in 2006 through 2020 and
are subject to examination by the Internal Revenue Service. In addition, the
Company also has estimated tax NOL carryforwards of approximately $125 million
available to reduce the federal taxable income of Merit and its subsidiaries.
These NOL carryforwards expire in 2009 through 2018 and are subject to
examination by the Internal Revenue Service. Further, these NOL carryforwards
are subject to limitations on the taxable income of Merit and its subsidiaries.
The Company has recorded a valuation allowance against the portion of the total
NOL deferred tax asset and certain other deferred tax assets, that in
management's opinion, are not likely to be recovered.
 
                                      F-34

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
8. INCOME TAXES (CONTINUED)
    Components of the net deferred income tax (assets) liabilities at
September 30, 1999 and 2000 are as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                            SEPTEMBER 30,
                                                        ---------------------
                                                          1999        2000
                                                        ---------   ---------
<S>                                                     <C>         <C>
Deferred tax liabilities:
  Property and depreciation...........................  $  (2,060)  $ (18,081)
  Long-term debt and interest.........................    (19,735)     (8,476)
  ESOP................................................    (12,968)    (15,005)
  Intangible assets...................................    (11,332)         --
  Other...............................................    (15,209)    (17,069)
                                                        ---------   ---------
    Total deferred tax liabilities....................    (61,304)    (58,631)
                                                        ---------   ---------
Deferred tax assets:
  Intangible assets...................................         --      19,764
  Operating loss carryforwards........................    254,696     264,627
  Self-insurance reserves.............................      2,220          --
  Discontinued operations liabilities.................      9,552      21,985
  Other...............................................     51,953      18,995
                                                        ---------   ---------
  Total deferred tax assets...........................    318,421     325,371
                                                        ---------   ---------
  Valuation allowance.................................   (165,460)   (144,958)
                                                        ---------   ---------
  Deferred tax assets after valuation allowance.......    152,961     180,413
                                                        ---------   ---------
  Net deferred tax assets.............................  $  91,657   $ 121,782
                                                        =========   =========
</TABLE>

 
    During fiscal 2000, the Company reached an agreement (the "Agreement") with
the Internal Revenue Service ("IRS") related to its federal income tax returns
for the fiscal years ended September 30, 1992 and 1993. The IRS had originally
proposed to disallow approximately $162 million of deductions related primarily
to interest expense in fiscal 1992. Under the Agreement, the Company will pay
approximately $1 million in taxes and interest to the IRS to resolve the
assessment relating to taxes due for these open years, although no concession
was made by either party as to the Company's ability to utilize these deductions
through NOL carryforwards. As a result of the Agreement, the Company recorded a
reduction in related reserves of approximately reversed $9.1 million, as a
change in estimate in the current year.
 
    The Internal Revenue Service is currently examining Merit's income tax
returns for pre-acquisition periods. In management's opinion, adequate
provisions have been made for any adjustments which may result from these
examinations, including a potential reduction in the amount of NOL
carryforwards. The Company believes the examinations could result in a reduction
in NOL carryforwards available to offset future taxable income.
 
                                      F-35

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
9. ACCRUED LIABILITIES
 
    Accrued liabilities consist of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                          -------------------
                                                            1999       2000
                                                          --------   --------
<S>                                                       <C>        <C>
Salaries, wages and other benefits......................  $ 22,318   $ 21,411
CHAMPUS Adjustments.....................................    51,784     22,603
Due to Providers........................................    35,918      7,711
Other...................................................    99,776    123,973
                                                          --------   --------
                                                          $209,796   $175,698
                                                          ========   ========
</TABLE>

 
10. MANAGED CARE INTEGRATION COSTS AND SPECIAL CHARGES
 
INTEGRATION PLAN
 
    During fiscal 1998, management committed the Company to a plan to combine
and integrate the operations of its behavioral managed care organizations
(BMCOs) and specialty managed care organizations (the "Integration Plan") that
resulted in the elimination of duplicative functions and standardized business
practices and information technology platforms. The Integration Plan resulted in
the elimination of approximately 1,000 positions during fiscal 1998 and fiscal
1999. Approximately 510 employees were involuntarily terminated pursuant to the
Integration Plan.
 
    The employee groups of the BMCOs that were primarily affected include
executive management, finance, human resources, information systems and legal
personnel at the various BMCOs corporate headquarters and regional offices and
credentialing, claims processing, contracting and marketing personnel at various
operating locations.
 
    The Integration Plan resulted in the closure of approximately 20 leased
facilities during fiscal 1998 and 1999.
 
    The Company initially recorded approximately $21.3 million of liabilities
related to the Integration Plan, of which $12.4 million was recorded as part of
the Merit purchase price allocation and $8.9 million was recorded in the
statement of operations under "Managed care integration costs" in fiscal 1998.
 
    During fiscal 1999, the Company recorded adjustments of approximately $(0.3)
million, net, to such liabilities, of which $(0.8) million was recorded as part
of the Merit purchase price allocation and $0.5 million was recorded in the
statement of operations under "Managed care integration costs." The Company may
record additional adjustments to such liabilities during the future periods
depending on changes in its ability to sublease closed offices.
 
                                      F-36

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
10. MANAGED CARE INTEGRATION COSTS AND SPECIAL CHARGES (CONTINUED)
    The following table provides a rollforward of liabilities resulting from the
Integration Plan (in thousands):
 

<TABLE>
<CAPTION>
                                                    BALANCE                                  BALANCE
                                                 SEPTEMBER 30,                            SEPTEMBER 30,
TYPE OF COST                                         1998        ADJUSTMENTS   PAYMENTS       1999
------------                                     -------------   -----------   --------   -------------
<S>                                              <C>             <C>           <C>        <C>
Employee termination benefits..................     $ 6,190         $1,959     $(7,380)      $  769
Facility closing costs.........................       7,475         (2,071)     (2,310)       3,094
Other..........................................         169           (169)         --           --
                                                    -------         ------     -------       ------
                                                    $13,834         $ (281)    $(9,690)      $3,863
                                                    =======         ======     =======       ======
</TABLE>

 

<TABLE>
<CAPTION>
                                                    BALANCE                                  BALANCE
                                                 SEPTEMBER 30,                            SEPTEMBER 30,
TYPE OF COST                                         1999        ADJUSTMENTS   PAYMENTS       2000
------------                                     -------------   -----------   --------   -------------
<S>                                              <C>             <C>           <C>        <C>
Employee termination benefits..................     $  769           $151      $  (735)      $  185
Facility closing costs.........................      3,094           (151)      (1,312)       1,631
                                                    ------           ----      -------       ------
                                                    $3,863           $ --      $(2,047)      $1,816
                                                    ======           ====      =======       ======
</TABLE>

 
OTHER INTEGRATION COSTS
 
    The Integration Plan resulted in additional incremental costs that were
expensed as incurred in accordance with Emerging Issues Task Force Consensus
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)"
that are not described above and certain other charges. Other integration costs
include, but are not limited to, outside consultants, costs to relocate closed
office contents and long-lived asset impairments. Other integration costs are
reflected in the statement of operations under "Managed care integration costs".
 
    During fiscal 1998, the Company incurred approximately $8.1 million, in
other integration costs, including long-lived asset impairments of approximately
$2.4 million, and outside consulting costs of approximately $4.1 million. The
asset impairments relate primarily to identifiable intangible assets and
leasehold improvements that no longer have value and have been written off as a
result of the Integration Plan.
 
    During fiscal 1999, the Company incurred approximately $5.7 million in other
integration costs, primarily for outside consulting costs and employee and
office relocation costs.
 
    SPECIAL CHARGES.
 
    During fiscal 1999, the Company recorded special charges of approximately
$4.4 million related primarily to the loss on disposal of an office building,
executive severance and relocation of its corporate headquarters from Atlanta,
Georgia to Columbia, Maryland. In addition, during fiscal 2000 the Company
incurred special charges of $9.6 million related to: (i) the closure of certain
GPA offices, (ii) restructuring of the corporate function and certain behavioral
managed healthcare office sites, and (iii) net of the $1.9 million non-recurring
gain on the sale of the corporate aircraft. These charges resulted in
$5.9 million
 
                                      F-37

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
10. MANAGED CARE INTEGRATION COSTS AND SPECIAL CHARGES (CONTINUED)
of accrued severance; $4.7 million of accrued lease termination costs and
$0.9 million of other exit costs at September 30, 2000.
 
    The Company recorded a charge of approximately $15.8 million during fiscal
2000 related to the impairment of certain long-lived assets in accordance with
FAS 121. This amount is included in "Special charges" in the Company's
consolidated statements of operations for such periods and is related to the
goodwill, property and equipment and identifiable intangible assets of Group
Practice Affiliate ("GPA"), which is a component of the Company's behavioral
health business segment.
 
    During the quarter ended September 30, 2000, GPA recorded operating losses
of $2.0 associated primarily with the termination or restructuring of various
customer contracts. These events and the resulting expectation of lower future
earnings and cash flows from GPA represent a change in circumstances with
respect to the business of GPA. The Company estimates that the future
undiscounted cash flows expected to be generated by GPA are insufficient to
fully recover the recorded cost of the GPA assets.
 
    Accordingly, the Company adjusted the GPA assets to their estimated fair
value as of September 30, 2000. Based upon the circumstances described above,
the Company estimated that the fair value of the GPA assets was approximately
$2.1 million at September 30, 2000. This value reflects the Company's estimate
of the recoverable fair value of GPA's property and equipment through sale or
continued use.
 
11. SUPPLEMENTAL CASH FLOW INFORMATION
 
    Supplemental cash flow information is as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                                 YEAR ENDED SEPTEMBER 30,
                                                              -------------------------------
                                                                1998        1999       2000
                                                              ---------   --------   --------
<S>                                                           <C>         <C>        <C>
Income taxes paid, net of refunds received..................   $11,116    $   347    $ 3,208
Interest paid, net of amounts capitalized...................    95,153    102,094    102,236
Non-cash Transactions:
  Common Stock in Treasury issued in connection with the
    purchase of the remaining 39% interest in Green Spring
    Health Services, Inc....................................    63,496         --         --
</TABLE>

 
12. COMMITMENTS AND CONTINGENCIES
 
    The Company is self-insured for a portion of its general and professional
liability risks. The reserves for self-insured general and professional
liability losses, including loss adjustment expenses, were included in reserve
for unpaid claims in the Company's balance sheet and were based on actuarial
estimates that were discounted at an average rate of 6% to their present value
based on the Company's historical claims experience adjusted for current
industry trends. These reserves related primarily to the professional liability
risks of the Company's healthcare provider segment prior to the Crescent
Transactions. The undiscounted amount of the reserve for unpaid claims at
September 30, 1998 was approximately $34.6 million. The carrying amount of
accrued medical malpractice claims was $26.2 million at September 30, 1998. The
reserve for unpaid claims was adjusted periodically as such claims matured, to
reflect changes in actuarial estimates based on actual experience. During fiscal
1998, the Company recorded reductions in malpractice claim reserves of
approximately $4.1 million, respectively, as a result of updated actuarial
 
                                      F-38

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
estimates which is included in discontinued operations. This reduction resulted
primarily from updates to actuarial assumptions regarding the Company's expected
losses for more recent policy years. This revision was based on changes in
expected values of ultimate losses resulting from the Company's claim
experience, and increased reliance on such claim experience. On July 2, 1999,
the Company transferred its remaining medical malpractice claims portfolio (the
"Loss Portfolio Transfer") to a third-party insurer for approximately
$22.3 million. The Loss Portfolio Transfer was funded from assets restricted for
settlement of unpaid claims. The insurance limit obtained through the Loss
Portfolio Transfer for future medical malpractice claims is $26.3 million.
 
    The healthcare industry is subject to numerous laws and regulations. The
subjects of such laws and regulations include, but are not limited to, matters
such as licensure, accreditation, government healthcare program participation
requirements, reimbursement for patient services, and Medicare and Medicaid
fraud and abuse. Recently, government activity has increased with respect to
investigations and/or allegations concerning possible violations of fraud and
abuse and false claims statutes and/or regulations by healthcare providers.
Entities that are found to have violated these laws and regulations may be
excluded from participating in government healthcare programs, subjected to
fines or penalties or required to repay amounts received from the government for
previously billed patient services. The Office of the Inspector General of the
Department of Health and Human Services and the United States Department of
Justice ("Department of Justice") and certain other governmental agencies are
currently conducting inquiries and/or investigations regarding the compliance by
the Company and certain of its subsidiaries with such laws and regulations.
Certain of the inquiries relate to the operations and business practices of the
Psychiatric Hospital Facilities prior to the consummation of the Crescent
Transactions in June 1997. The Department of Justice has indicated that its
inquiries are based on its belief that the federal government has certain civil
and administrative causes of action under the Civil False Claims Act, the Civil
Monetary Penalties Law, other federal statutes and the common law arising from
the participation in federal health benefit programs of CBHS psychiatric
facilities nationwide. The Department of Justice inquiries relate to the
following matters: (i) Medicare cost reports; (ii) Medicaid cost statements;
(iii) supplemental applications to CHAMPUS/TRICARE based on Medicare cost
reports; (iv) medical necessity of services to patients and admissions;
(v) failure to provide medically necessary treatment or admissions; and
(vi) submission of claims to government payors for inpatient and outpatient
psychiatric services. No amounts related to such proposed causes of action have
yet been specified. The Company cannot reasonably estimate the settlement
amount, if any, associated with the Department of Justice inquiries.
Accordingly, no reserve has been recorded related to this matter.
 
    Five affiliated outpatient clinic providers that are participating providers
in the TennCare program asserted claims against Green Spring Health
Services, Inc., a wholly-owned subsidiary of the Company ("Green Spring") and
Premier Behavioral Systems of Tennessee, LLC, ("Premier") the joint venture that
contracts with the State of Tennessee to manage services under the TennCare
program and in which the Company holds a 50% interests alleging, that Premier
and Green Spring failed to pay the providers in accordance with their contracts.
The claims, allege losses in excess of $16 million in the aggregate and are
proceeding in five separate arbitrations. On December 8, the Chancery Court of
Davidson County, Tennessee entered a judgment confirming an arbitration award
against Premier and Green Spring in the amount of $3.7 million in favor of one
of the providers. The Court denied a motion by Premier and Green Spring to
vacate the arbitration award on grounds that the provider procured the award by
fraud and that the arbitrators exceeded their authority. Premier and Greenspring
believe that the Court's order was
 
                                      F-39

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
erroneous and intend to pursue vigorously an appeal of this judgment. The other
arbitrations are at various stages of proceedings. Management intends to
rigorously defend these claims. The Company believes that adequate reserves have
been recorded with respect to any potential loss in these matters.
 
    On or about August 4, 2000, the Company was served with a lawsuit filed by
Wachovia Bank, N.A. ("Wachovia") in the Court of Common Pleas of Richland
County, South Carolina seeking recovery under the indemnification provisions of
an Engagement Letter between South Carolina National Bank (now Wachovia) and the
Company and the ESOP Trust Agreement between South Carolina National Bank (now
Wachovia) and the Company for losses sustained in a settlement entered into by
Wachovia with the United States Department of Labor in connection with the
ESOP's purchase of stock of the Company while Wachovia served as ESOP Trustee.
Wachovia also alleges fraud, negligent misrepresentation and other claims and
asserts its losses exceed $30 million. While the claim is in its initial stage
and an outcome cannot be determined, the Company believes the claims of Wachovia
are without merit and is defending them vigorously.
 
    On October 26, 2000, two class action complaints (the "Class Actions") were
filed against Magellan Health Services, Inc. and Magellan Behavioral
Health, Inc. (the "Defendants") in the United States District Court for the
Eastern District of Missouri under the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the Employment Retirement Income Security Act of
1974 ("ERISA"). The class representatives purport to bring the actions on behalf
of a nationwide class of individuals whose behavioral health benefits have been
provided, underwritten and/or arranged by the Defendants since 1996. The
complaints allege violations of RICO and ERISA arising out of the Defendants'
alleged misrepresentations with respect to and failure to disclose, its claims
practices, the extent of the benefits coverage and other matters that cause the
value of benefits to be less than the amount of premium paid claims practices.
The complaints seek unspecified compensatory damages, treble damages under RICO,
and an injunction barring the alleged improper claims practices, plus interest,
costs and attorneys' fees. While the claim is in the initial stages and an
outcome cannot be determined, the Company believes that the claims are without
merit and intends to defend them vigorously.
 
    The Company is also subject to or party to other litigation, claims, and
civil suits, relating to its operations and business practices. Certain of the
Company's managed care litigation matters involve class action lawsuits, which
allege (i) the Company inappropriately denied and/or failed to authorize
benefits for mental health treatment under insurance policies with a customer of
the Company and (ii) a provider at a Company facility violated privacy rights of
certain patients. The Company is also subject to certain contingencies in
connection with the CBHS bankruptcy as discussed in Note 3. In the opinion of
management, the Company has recorded reserves that are adequate to cover
litigation, claims or assessments that have been or may be asserted against the
Company, and for which the outcome is probable and reasonably estimable, arising
out of such other litigation, claims and civil suits. Furthermore, management
believes that the resolution of such litigation, claims and civil suits will not
have a material adverse effect on the Company's financial position or results of
operations; however, there can be no assurance in this regard.
 
    The Company provides mental health and substance abuse services, as a
subcontractor, to beneficiaries of CHAMPUS. The fixed monthly amounts that the
Company receives for medical costs under CHAMPUS contracts are subject to
retroactive adjustment ("CHAMPUS Adjustments") based upon actual healthcare
utilization during the period known as the "data collection period". The Company
has
 
                                      F-40

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
recorded reserves of approximately $51.8 million and $22.6 million as of
September 30, 1999 and 2000, respectively, for CHAMPUS Adjustments. During the
first quarter of fiscal 2000, the Company reached a settlement agreement with a
contractor under one of its CHAMPUS contracts whereby the Company agreed to pay
approximately $38.1 million to the contractor during the quarter ended
December 31, 1999. The Company and the contractor under this CHAMPUS contract
are in the process of appealing the department of defense's retroactive
adjustment. While management believes that the present reserve for CHAMPUS
Adjustments is reasonable, ultimate settlement resulting from the adjustment and
available appeal process may vary from the amount provided.
 
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    Gerald L. McManis, a director of the Company, is the President of McManis
Associates, Inc. ("MAI"), a healthcare development and management consulting
firm. During fiscal 1998, MAI provided consulting services to the Company with
respect to the development of strategic plans and a review of the Company's
business processes. The Company incurred approximately $85,000 in fees for such
services and related expenses during fiscal 1998.
 
    G. Fred DiBona, Jr., a director of the Company, is a Director and the
President and Chief Executive Officer of Independence Blue Cross ("IBC"), a
health insurance company.
 
    IBC owned 16.67% of Green Spring prior to December 13, 1995. On
December 13, 1995, IBC sold 4.42% of its ownership interest in Green Spring to
the Company for $5,376,000 in cash. IBC had a cost basis of $3,288,000 in the
4.42% ownership interest sold to the Company. The Exchange Option described
previously gave IBC the right to exchange its ownership interest in Green Spring
for a maximum of 889,456 shares of Common Stock or $20,460,000 in subordinated
notes through December 13, 1998. IBC exercised its Exchange Option in
January 29, 1998 for Magellan Common Stock valued at approximately
$17.9 million.
 
    IBC and its affiliated entities contract with the Company for provider
network, care management and medical review services pursuant to contractual
relationships. The Company recorded revenue of approximately $54.6 million,
$59.1 million and $58.8 million from IBC during fiscal 1998, 1999 and 2000,
respectively.
 
    Darla D. Moore, a director of the Company since February 1996, is the spouse
of Richard E. Rainwater, Chairman of the Board of Crescent and one of the
largest stockholders of the Company. Because of her relationship to
Mr. Rainwater, Ms. Moore did not participate in any Board action taken with
respect to the Crescent Transactions.
 
    Approximately 30% of the voting interest in Vivra was owned by TPG at the
time of the Company's acquisition of Vivra.
 
14. BUSINESS SEGMENT INFORMATION
 
    The Company operates through two reportable business segments engaging in
the behavioral managed healthcare business and the human services business. The
behavioral managed healthcare segment provides behavioral managed care services
to health plans, insurance companies, corporations, labor unions and various
governmental agencies. The human services segment provides therapeutic foster
care
 
                                      F-41

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
14. BUSINESS SEGMENT INFORMATION (CONTINUED)
services and residential and day services to individuals with acquired brain
injuries and for individuals with mental retardation and developmental
disabilities.
 
    The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance of its segments based on profit or loss from continuing operations
before depreciation, amortization, interest, net, stock option expense (credit),
managed care integration costs, special charges, net, income taxes and minority
interest ("Segment Profit"). Intersegment sales and transfers are not
significant.
 
    The following tables summarize, for the periods indicated, operating results
and other financial information, by business segment (in thousands):
 

<TABLE>
<CAPTION>
                                             BEHAVIORAL                     CORPORATE
                                              MANAGED                      OVERHEAD AND
                                             HEALTHCARE   HUMAN SERVICES      OTHER       CONSOLIDATED
                                             ----------   --------------   ------------   ------------
<S>                                          <C>          <C>              <C>            <C>
1998
Net revenue................................  $1,026,243      $141,031        $     --      $1,167,274
Segment profit (loss)......................     137,192        15,492         (15,866)        136,818
Equity in earnings of unconsolidated
  subsidiaries.............................      12,795            --              --          12,795
Investment in unconsolidated
  subsidiaries.............................      10,125            --             941          11,066
Capital expenditures.......................      27,535         8,391           8,287          44,213
Total assets...............................  $1,356,259      $119,356        $441,473      $1,917,088
 
1999
Net revenue................................  $1,483,202      $191,277        $     --      $1,674,479
Segment Profit (loss)......................     218,253        21,728         (13,939)        226,042
Equity in earnings of unconsolidated
  subsidiaries.............................      20,442            --              --          20,442
Investment in unconsolidated
  subsidiaries.............................      18,396            --              --          18,396
Capital expenditures.......................      37,487         5,779           4,853          48,119
Total assets...............................  $1,472,539      $127,348        $281,728      $1,881,615
 
2000
Net revenue................................  $1,655,101      $218,453        $     --      $1,873,554
Segment Profit (loss)......................     221,931        22,119         (13,286)        230,764
Equity in earnings of unconsolidated
  subsidiaries.............................       9,792            --              --           9,792
Investment in unconsolidated
  subsidiaries.............................      12,746            --              --          12,746
Capital expenditures.......................      26,550         7,153           3,221          36,924
Total assets...............................  $1,471,937      $135,685        $196,165      $1,803,787
</TABLE>

 
    The following tables reconcile segment profit to consolidated income from
continuing operations before income taxes, minority interest and extraordinary
items:
 
                                      F-42

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
14. BUSINESS SEGMENT INFORMATION (CONTINUED)
 

<TABLE>
<S>                                                           <C>
1998
Segment profit..............................................  $136,818
Depreciation and amortization...............................   (46,898)
Interest, net...............................................   (76,505)
Stock option credit.........................................     5,623
Managed care integration costs..............................   (16,962)
                                                              --------
Income from continuing operations before income taxes,
  minority interest and extraordinary items.................  $  2,076
                                                              ========
1999
Segment Profit..............................................  $226,042
Depreciation and amortization...............................   (68,921)
Interest, net...............................................   (93,752)
Stock option expense........................................       (18)
Managed care integration costs..............................    (6,238)
Special charges.............................................    (4,441)
                                                              --------
Income from continuing operations before income taxes,
  minority interest and extraordinary items.................  $ 52,672
                                                              ========
2000
Segment Profit..............................................  $230,764
Depreciation and amortization...............................   (75,413)
Interest, net...............................................   (97,286)
Special charges.............................................   (25,398)
                                                              --------
Income from continuing operations before income taxes,
  minority interest and extraordinary items.................  $ 32,667
                                                              ========
</TABLE>

 
    Revenue generated and long-lived assets located in foreign countries are not
material. Revenues from two customers of the Company's behavioral managed
healthcare segment each represented approximately $284 million and $227 million
of the Company's consolidated revenues for fiscal 2000 and $235 million and
$214 million of the Company's consolidated revenues for fiscal 1999. In fiscal
1998, approximately $154 million in revenues were derived from one contract.
 
                                      F-43

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
    The following is a summary of the unaudited quarterly results of operations
for the years ended September 30, 1999 and 2000.
 

<TABLE>
<CAPTION>
                                                                  FOR THE QUARTER ENDED
                                                   ---------------------------------------------------
                                                   DECEMBER 31,   MARCH 31,   JUNE 30,   SEPTEMBER 30,
                                                       1999         2000        2000         2000
                                                   ------------   ---------   --------   -------------
                                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                <C>            <C>         <C>        <C>
FISCAL 2000
Net Revenue......................................    $436,969     $466,200    $479,174      $491,211
                                                     --------     --------    --------      --------
Cost and expenses:
  Salaries, cost of care and other operating
    expenses.....................................     383,724      413,611     422,409       432,838
  Equity in earnings of unconsolidated
    subsidiaries.................................      (3,474)      (2,908)     (2,465)         (945)
  Depreciation and amortization..................      18,268       18,509      19,171        19,465
  Interest, net..................................      23,991       24,254      23,956        25,085
  Special charges, net...........................          --           --          --        25,398
                                                     --------     --------    --------      --------
                                                      422,509      453,466     463,071       501,841
                                                     --------     --------    --------      --------
Income (loss) from continuing operations before
  income taxes and minority interest.............      14,460       12,734      16,103       (10,630)
Provision for income taxes.......................       7,240        3,244       8,653        (3,659)
                                                     --------     --------    --------      --------
Income (loss) from continuing operations before
  minority interest..............................       7,220        9,490       7,450        (6,971)
Minority interest................................         142         (111)         74             9
                                                     --------     --------    --------      --------
Income (loss) from continuing operations.........       7,078        9,601       7,376        (6,980)
Discontinued operations:
  Income (loss) from discontinued operations.....      (4,412)     (55,137)     (2,418)       (3,254)
  Loss on disposal of discontinued operations....          --           --          --       (17,662)
                                                     --------     --------    --------      --------
                                                       (4,412)     (55,137)     (2,418)      (20,916)
                                                     --------     --------    --------      --------
Net income (loss)................................       2,666      (45,536)      4,958       (27,896)
Preferred dividend requirement and amortization
  of redeemable preferred stock issuance costs...         216        1,088       1,195         1,303
                                                     --------     --------    --------      --------
Income (loss) available to common stockholders...    $  2,450     $(46,624)   $  3,763      $(29,199)
                                                     ========     ========    ========      ========
  Weighted average number of shares outstanding
    -- basic.....................................      31,980       32,058      32,166        32,368
                                                     ========     ========    ========      ========
  Weighted average number of shares outstanding
    -- diluted...................................      33,324       38,589      38,878        32,368
                                                     ========     ========    ========      ========
Income (loss) per share available to common
  stockholders -- basic
  Income from continuing operations..............    $   0.22     $   0.27    $   0.19      $  (0.26)
                                                     ========     ========    ========      ========
  Income (loss) from discontinued operations.....    $  (0.14)    $  (1.72)   $  (0.07)     $  (0.64)
                                                     ========     ========    ========      ========
Net income (loss)................................    $   0.08     $  (1.45)   $   0.12      $  (0.90)
                                                     ========     ========    ========      ========
Income (loss) per common share available to
  common stockholders -- diluted:
  Income from continuing operations..............    $   0.21     $   0.25    $   0.19      $  (0.26)
                                                     ========     ========    ========      ========
  Income (loss) from discontinued operations.....    $  (0.13)    $  (1.43)   $  (0.06)     $  (0.64)
                                                     ========     ========    ========      ========
Net income (loss)................................    $   0.08     $  (1.18)   $   0.13      $  (0.90)
                                                     ========     ========    ========      ========
</TABLE>

 
                                      F-44

<PAGE>
                MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 2000
 
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
 

<TABLE>
<CAPTION>
                                                                 FOR THE QUARTER ENDED
                                                  ---------------------------------------------------
                                                  DECEMBER 31,   MARCH 31,   JUNE 30,   SEPTEMBER 30,
                                                      1998         1999        1999         1999
                                                  ------------   ---------   --------   -------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                               <C>            <C>         <C>        <C>
FISCAL 1999
Net Revenue.....................................    $402,290     $429,342    $418,680     $424,167
                                                    --------     --------    --------     --------
Cost and expenses:
  Salaries, cost of care and other operating
    expenses....................................     351,688      380,208     368,371      368,612
  Equity in earnings of unconsolidated
    subsidiaries................................      (3,783)      (6,262)     (8,196)      (2,201)
  Depreciation and amortization.................      16,567       16,690      18,701       16,963
  Interest, net.................................      24,122       24,229      22,662       22,739
  Stock option expense..........................          12            6          --           --
  Managed care integration costs................       1,750        2,119         522        1,847
  Special charges, net..........................       1,084        2,252          --        1,105
                                                    --------     --------    --------     --------
                                                     391,440      419,242     402,060      409,065
                                                    --------     --------    --------     --------
Income from continuing operations before income
  taxes and minority interest...................      10,850       10,100      16,620       15,102
Provision for income taxes......................       6,127        5,847       8,444        7,838
                                                    --------     --------    --------     --------
Income from continuing operations before
  minority interest.............................       4,723        4,253       8,176        7,264
Minority interest...............................         410          (34)        189           65
                                                    --------     --------    --------     --------
Income from continuing operations...............       4,313        4,287       7,987        7,199
Discontinued operations:
  Income (loss) from discontinued operations....        (132)        (330)     13,512       15,275
  Loss on Disposal of discontinued operations...          --           --          --      (47,423)
                                                    --------     --------    --------     --------
                                                        (132)        (330)     13,512      (32,148)
                                                    --------     --------    --------     --------
Net income (loss)...............................       4,181        3,957      21,499      (24,949)
Preferred dividend requirement and amortization
  of redeemable preferred stock issuance
  costs.........................................          --           --          --           --
                                                    --------     --------    --------     --------
Income (loss) available to common
  stockholders..................................    $  4,181     $  3,957    $ 21,499     $(24,949)
                                                    ========     ========    ========     ========
Weighted average number of shares
  outstanding-basic.............................      31,613       31,741      31,778       31,850
                                                    ========     ========    ========     ========
Weighted average number of shares outstanding-
  diluted.......................................      31,660       31,751      32,041       32,200
                                                    ========     ========    ========     ========
Income (loss) per common share available to
  common stockholders -- basic:
  Income from continuing operations.............    $   0.14     $   0.13    $   0.25     $   0.23
                                                    ========     ========    ========     ========
  Income (loss) from discontinued operations....    $  (0.01)    $  (0.01)   $   0.43     $  (1.01)
                                                    ========     ========    ========     ========
Net income (loss)...............................    $   0.13     $   0.12    $   0.68     $  (0.78)
                                                    ========     ========    ========     ========
Income (loss) per common share available to
  common stockholders -- diluted:
  Income from continuing operations.............    $   0.14     $   0.13    $   0.25     $   0.22
                                                    ========     ========    ========     ========
  Income (loss) from discontinued operations....    $  (0.01)    $  (0.01)   $   0.42     $  (1.00)
                                                    ========     ========    ========     ========
Net income (loss)...............................    $   0.13     $   0.12    $   0.67     $  (0.78)
                                                    ========     ========    ========     ========
</TABLE>

 
                                      F-45

<PAGE>
                         MAGELLAN HEALTH SERVICES, INC.
 
                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                          CHARGED TO
                             BALANCE AT    CHARGED TO       OTHER
                            BEGINNING OF   COSTS AND      ACCOUNTS--     DEDUCTIONS--      BALANCE AT
CLASSIFICATION                 PERIOD       EXPENSES       DESCRIBE        DESCRIBE       END OF PERIOD
--------------              ------------   ----------     ----------     ------------     -------------
<S>                         <C>            <C>            <C>            <C>              <C>
Fiscal year ended
  September 30, 1998:
  Allowance for doubtful                                   $15,031(A)      $24,440(B)
    accounts..............     $40,311       $ 4,977(D)      4,376(C)        5,388(F)        $34,867
                               -------       -------       -------         -------           -------
                               $40,311       $ 4,977       $19,407         $29,828           $34,867
                               =======       =======       =======         =======           =======
Fiscal year ended
  September 30, 1999:
                                                                           $ 1,280(B)
  Allowance for doubtful                     $ 3,277(D)    $ 2,362(A)          672(F)
    accounts..............     $34,867        (8,072)(E)       604(C)        2,649(H)        $28,437
                               -------       -------       -------         -------           -------
                               $34,867       $(4,795)      $ 2,966         $ 4,601           $28,437
                               =======       =======       =======         =======           =======
Fiscal year ended
  September 30, 2000:
  Allowance for doubtful                                                   $ 3,355(B)
    accounts..............     $28,437       $ 8,651(D)    $   494(A)       22,635(C)        $11,592
                               -------       -------       -------         -------           -------
                               $28,437       $ 8,651       $   494         $25,990           $11,592
                               =======       =======       =======         =======           =======
</TABLE>

 
------------------------
 
(A) Recoveries of accounts receivable previously written off.
 
(B) Accounts written off.
 
(C) Allowance for doubtful accounts (net) assumed or disposed of in acquisitions
    or dispositions.
 
(D) Bad debt expense.
 
(E) Accounts receivable collection fees included in loss on Crescent
    Transactions.
 
(F) Accounts receivable collection fees payable to CBHS and outside vendors.
 
(G) Amounts reclassified to contractual allowances.
 
(H) Conversion of Provider JVs from consolidation to equity method.
 
                                      S-1





<PAGE>

                                                                   Exhibit 4(r)


                    AMENDMENT No. 7 entered into as of September 19, 2000 (this
                    "Amendment"), to the Credit Agreement dated as of February
                    12, 1998 (as amended, supplemented or otherwise modified
                    from time to time, the "CREDIT AGREEMENT"), among Magellan
                    Health Services, Inc., a Delaware corporation (the "PARENT
                    BORROWER"); Charter Behavioral Health System of New Mexico,
                    Inc., a New Mexico corporation; Merit Behavioral Care
                    Corporation, a Delaware corporation; each other wholly owned
                    domestic subsidiary of the Parent Borrower that becomes a
                    "Subsidiary Borrower" pursuant to Section 2.23 of the Credit
                    Agreement (each, a "SUBSIDIARY BORROWER" and, collectively,
                    the "SUBSIDIARY BORROWERS" (such term is used herein as
                    modified in Article I of the Credit Agreement); the Parent
                    Borrower and the Subsidiary Borrowers are collectively
                    referred to herein as the "BORROWERS"); the Lenders (as
                    defined in Article I of the Credit Agreement); The Chase
                    Manhattan Bank, a New York banking corporation, as
                    administrative agent (in such capacity, the "ADMINISTRATIVE
                    AGENT") for the Lenders, as collateral agent (in such
                    capacity, the "COLLATERAL AGENT") for the Lenders and as an
                    issuing bank (in such capacity, an "ISSUING BANK"); First
                    Union National Bank, a national
 banking corporation, as
                    syndication agent (in such capacity, the "SYNDICATION
                    AGENT") for the Lenders and as an issuing bank (in such
                    capacity, an "ISSUING BANK"); and Credit Lyonnais New York
                    Branch, a licensed branch of a bank organized and existing
                    under the laws of the Republic of France, as documentation
                    agent (in such capacity, the "DOCUMENTATION AGENT") for the
                    Lenders and as an issuing bank (in such capacity, an
                    "ISSUING BANK" and, together with The Chase Manhattan Bank
                    and First Union National Bank, each in its capacity as an
                    issuing bank, the "ISSUING BANKS").


                  A. The Lenders and the Issuing Banks have extended credit to
the Borrowers, and have agreed to extend credit to the Borrowers, in each case
pursuant to the terms and subject to the conditions set forth in the Credit
Agreement.

                  B.  Capitalized terms used but not defined herein have the
meanings assigned to them in the Credit Agreement (as amended hereby).

                  C. The Borrowers and the Required Lenders have agreed to amend
certain provisions of the Credit Agreement as set forth herein on the terms and
subject to the conditions set forth in this Amendment.

                  Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto agree as follows:

                  SECTION 1. AMENDMENTS TO SECTION 1.01. (a) The definition of
the term "Excess Cash Flow" is hereby amended by (i) adding after the words "the
term `Net Cash Proceeds'" the following text: "arising as a result of any
Condemnation Event or Casualty Event" and (ii)(A) replacing the term "and" with
a "," prior to clause (ii) of the 


<PAGE>


proviso at the end of such defined term and (B) adding the following text at
the end of such clause (ii): "and (iii) for avoidance of doubt, any proceeds
resulting from the Mentor Sale."

                           (b) The definition of the term "Permitted
 Acquisition" is amended by replacing clause (e) with the following text:

                           (e) the amounts paid for all Permitted Acquisitions
                  (including, without limitation, any Indebtedness incurred or
                  assumed in connection therewith, but excluding (i) any capital
                  stock or other equity interests issued or delivered as part of
                  the consideration for such Permitted Acquisition, (ii)
                  Permitted CBHS Lease Transaction Amounts, and (iii) the
                  Permitted Premier Acquisition and the Permitted CBHS Joint
                  Venture Acquisitions/Sales) (x) after the Closing Date shall
                  not exceed, in the event the Leverage Ratio as of the last day
                  of the most recently ended fiscal quarter for which financial
                  statements have been delivered, or were required to have been
                  delivered, by the Parent Borrower pursuant to Section 5.04(a)
                  or 5.04(b), prior to such Permitted Acquisition, on a pro
                  forma basis after giving effect to all such Permitted
                  Acquisitions, is greater than or equal to 4.00:1.00,
                  $100,000,000, and (y) after the completion of the Mentor Sale
                  shall not exceed, in the event the Leverage Ratio as of the
                  last day of the most recently ended fiscal quarter for which
                  financial statements have been delivered, or were required to
                  have been delivered, by the Parent Borrower pursuant to
                  Section 5.04(a) or 5.04(b), prior to such Permitted
                  Acquisition, on a pro forma basis after giving effect to all
                  such Permitted Acquisitions, is greater than or equal to the
                  applicable Leverage Ratio shown below, the respective sublimit
                  amount shown for such Leverage Ratio:


<TABLE>
<CAPTION>
LEVERAGE RATIO                                                   PERMITTED ACQUISITIONS SUBLIMIT
--------------                                                   -------------------------------
<S>                                                             <C>       
Greater than 5.00:1.00                                                     $2,500,000

Greater than 4.50:1.00, but less than or equal to                         $10,000,000
5:00:1.00

Greater than 3.75:1.00, but less than or equal to                         $25,000,000
4.50:1.00

Less than or equal to 3.75:1.00                                           No Sublimit
</TABLE>



                  (c) The definition of the term "Permitted Stock Repurchases or
Dividends" is hereby amended to replace the word "and" prior to clause (y) in
the second clause (B) of the first sentence thereof with a "," and adding the
following text after such clause (y):

                   and (z) in the case of Permitted Stock Repurchases or
                   Dividends as described in clauses (a) or (b) above made
                   after the completion of the Mentor Sale, and so long as the
                   Leverage Ratio as of the last day of the most recently ended
                   fiscal quarter for which financial statements have been
                   delivered, or were required to have been delivered, by the
                   Parent Borrower pursuant to Section 5.04(a) or 5.04(b),
                   prior to such Permitted



                                       2


<PAGE>


                   Stock Repurchase or Dividend, is greater than or equal to
                   4.00:1.00, $2,000,000,


                  (d) Section 1.01 of the Credit Agreement is hereby amended by
adding the defined terms "Permitted CBHS Joint Venture Acquisition/Sale" and
"Permitted Premier Acquisition" to read in the entirety as follows:

                  "PERMITTED CBHS JOINT VENTURE ACQUISITION/SALE" shall mean the
acquisition by the Parent Borrower or any of its Subsidiaries of the partnership
or limited liability company interests of any other partners or limited
liability company members of any CBHS Joint Venture, to the extent such
acquisition is (i) made in contemplation of a CBHS Joint Venture Sale in respect
of such CBHS Joint Venture or the assets owned or used by it, (ii) effected for
an amount paid by the Parent Borrower or such Subsidiaries that is to be
recouped by the Parent Borrower or such Subsidiaries in the contemplated CBHS
Joint Venture Sale, and (iii) preceded or promptly followed by a closing of the
contemplated CBHS Joint Venture Sale pursuant to which such amount is recouped;
PROVIDED, HOWEVER, that to the extent any such amount is not so recouped, such
excess amount shall be included in determining the Parent Borrower's compliance
with the limitations on Permitted Acquisitions set forth in clause (e) of the
definition thereof.

                  "PERMITTED PREMIER ACQUISITION" shall mean the acquisition by
the Parent Borrower or any of its Subsidiaries of Premier Behavioral Systems of
Tennessee, LLC ("Premier") through the redemption or purchase of the limited
liability company interests held by other member(s) of Premier, to the extent
such redemption or purchase is effected directly or indirectly from funds or
other property of Premier paid or distributed for such purpose; PROVIDED,
HOWEVER, to the extent any funds or other property of the Parent Borrower or any
Subsidiary are used to effect such redemption or purchase, the amount of such
funds or property shall be included in determining the Parent Borrower's
compliance with the limitations on Permitted Acquisitions set forth in clause
(e) of the definition thereof.

                  SECTION 2. AMENDMENT TO SECTION 2.13(B). Section 2.13(b) of
the Credit Agreement is hereby amended by substituting the date "September 30,
2001" for the date "September 30, 2002" in clause (i) of such Section.

                  SECTION 3. REPRESENTATIONS AND WARRANTIES. Each Borrower
represents and warrants to the Administrative Agent and to each of the Lenders
that:

                  (a) This Amendment has been duly authorized, executed and
delivered by it and constitutes a legal, valid and binding obligation of each
Loan Party party hereto, enforceable against such Loan Party in accordance with
its terms.

                  (b) Before and after giving effect to this Amendment, the
representations and warranties set forth in Article III of the Credit Agreement
are true and correct in all material respects on and as of the date hereof with
the same effect as if made on and as of the date hereof, except to the extent
such representations and warranties expressly relate to an earlier date.

                  (c) Before and after giving effect to this Amendment, no Event
of Default or Default has occurred and is continuing.


                                       3


<PAGE>

                  SECTION 4. CONDITIONS TO EFFECTIVENESS. This Amendment shall
be deemed agreed to by the parties to the Credit Agreement when the
Administrative Agent shall have received counterparts of this Amendment that,
when taken together, bear the signatures of the Borrowers and the Required
Lenders, but this Amendment shall not become effective until the date that the
Mentor Sale is completed.

                  SECTION 5. CREDIT AGREEMENT. Except as specifically amended
hereby, the Credit Agreement shall continue in full force and effect in
accordance with the provisions thereof as in existence on the date hereof. After
the date hereof, any reference to the Credit Agreement shall mean the Credit
Agreement as amended hereby. This Amendment shall be a Loan Document for all
purposes.

                  SECTION 6. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

                  SECTION 7. COUNTERPARTS. This Amendment may be executed in two
or more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one agreement. Delivery of an
executed signature page to this Amendment by facsimile transmission shall be
effective as delivery of a manually signed counterpart of this Amendment.

                  SECTION 8. EXPENSES. The Parent Borrower agrees to reimburse
the Administrative Agent for its out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and disbursements of Cravath,
Swaine & Moore, counsel for the Administrative Agent.


                                       4


<PAGE>


                  IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first written above.


                            MAGELLAN HEALTH SERVICES, INC.,

                              By  /s/ James R. Bedenbaugh
                                ----------------------------
                                Name:  James R. Bedenbaugh
                                Title: SVP & Treasurer

                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC.,

                              By  /s/ Charlotte A. Sanford
                                ----------------------------
                                Name:  Charlotte A. Sanford
                                Title: Treasurer

                            MERIT BEHAVIORAL CARE CORPORATION,

                              By  /s/ Charlotte A. Sanford
                                ----------------------------
                                Name:  Charlotte A. Sanford
                                Title: Treasurer

                            THE CHASE MANHATTAN BANK, individually and as
                            Administrative Agent, Collateral Agent and an
                            Issuing Bank,

                              By  /s/ Dawn Lee Lum
                                ----------------------------
                                Name:  Dawn Lee Lum
                                Title: Vice President

                            FIRST UNION NATIONAL BANK, individually and as
                            Syndication Agent and an Issuing Bank,

                              By  /s/ Joyce L. Barry
                                ----------------------------
                                Name:  Joyce L. Barry
                                Title: SVP



                                       5


<PAGE>




                            ML CLO XV PILGRIM AMERICA (CAYMAN) LTD.
                            BY: PILGRIM INVESTMENTS, INC.
                                AS ITS INVESTMENT MANAGER

                              By  /s/ Michel Prince, CFA
                                 ------------------------------
                                 Name:  Michel Prince, CFA
                                 Title: Vice President


                            PILGRIM AMERICA HIGH INCOME INVESTMENTS LTD.
                            BY: PILGRIM INVESTMENTS, INC. 
                                AS ITS INVESTMENT MANAGER

                              By  /s/ Michel Prince, CFA
                                 ------------------------------
                                 Name:  Michel Prince, CFA
                                 Title: Vice President


                            PILGRIM PRIME RATE TRUST
                            BY: PILGRIM INVESTMENTS, INC.
                                AS ITS INVESTMENT MANAGER

                              By  /s/ Michel Prince, CFA
                                 ------------------------------
                                 Name:  Michel Prince, CFA
                                 Title: Vice President


                            HIGHLAND CAPITAL MANAGEMENT, L.P.,

                              By  /s/ James Dondero
                                 ------------------------------
                                 Name:  James Dondero
                                 Title: President


                            MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
 
                              By  /s/ Colleen M. Cunniffe
                                 ------------------------------
                                 Name:  Colleen M. Cunniffe
                                 Title: Authorized Signatory


                                       6


<PAGE>




                            MERRILL LYNCH DEBT STRATEGIES PORTFOLIO
                            BY: MERRILL LYNCH INVESTMENT MANAGERS, L.P.,
                                AS INVESTMENT ADVISOR,

                              By  /s/ Colleen M. Cunniffe
                                 ------------------------------
                                 Name:  Colleen M. Cunniffe
                                 Title: Authorized Signatory


                            MERRILL LYNCH GLOBAL INVESTMENT
                            SERIES: INCOME STRATEGIES PORTFOLIO
                            BY: MERRILL LYNCH INVESTMENT MANAGERS, L.P., 
                                AS INVESTMENT ADVISOR,

                              By  /s/ Colleen M. Cunniffe
                                 ------------------------------
                                 Name:  Colleen M. Cunniffe
                                 Title: Authorized Signatory


                            INDOSUEZ CAPITAL FUNDING IV, L.P.
                            BY: INDOSUEZ CAPITAL
                                AS PORTFOLIO ADVISOR,

                              By  /s/ Melissa Marano
                                 ------------------------------
                                 Name:  Melissa Marano
                                 Title: Vice President


                            BLACK DIAMOND CLO 1998-1 LTD.,

                              By  /s/ John H. Cullinane
                                 ------------------------------
                                 Name:  John H. Cullinane
                                 Title: Director


                            BLACK DIAMOND INTERNATIONAL FUNDING, LTD.,

                              By  /s/ John H. Cullinane
                                 ------------------------------
                                 Name:  John H. Cullinane
                                 Title: Director


                                       7


<PAGE>





                            VAN KAMPEN PRIME RATE INCOME TRUST
                            BY: VAN KAMPEN INVESTMENT ADVISORY CORP.,

                              By  /s/ Brian T. Buscher
                                 ------------------------------
                                 Name:  Brian T. Buscher
                                 Title: Manager Operations & Compliance


                            SENIOR DEBT PORTFOLIO
                            BY: BOSTON MANAGEMENT AND RESEARCH
                                AS INVESTMENT ADVISOR,

                              By  /s/ Scott H. Page
                                 ------------------------------
                                 Name:  Scott H. Page
                                 Title: Vice President


                            EATON VANCE INSTITUTIONAL SENIOR LOAN FUND
                            BY: EATON VANCE MANAGEMENT
                                AS INVESTMENT ADVISOR,

                              By  /s/ Scott H. Page
                                 ------------------------------
                                 Name:  Scott H. Page
                                 Title: Vice President


                            ARCHIMEDES FUNDING II, LTD.,

                               By  /s/ Helen Y. Rhee
                                  ------------------------------
                                  Name:  Helen Y. Rhee
                                  Title: Vice President & Portfolio Manager


                            SUMMIT BANK,

                              By  /s/ William Dinicola
                                 ------------------------------
                                 Name:  William Dinicola
                                 Title: Vice President


                                       8


<PAGE>


                            BATTERSON PARK CBO I
                            BY: GENERAL RE-NEW ENGLAND ASSET MANAGEMENT, INC.,
                                AS COLLATERAL MANAGER,

                              By  /s/ Susan Bosworth
                                 ------------------------------
                                 Name:  Susan Bosworth
                                 Title: Vice President


                            BANK POLSKA KASA OPIEKI S.A., NEW YORK BRANCH,

                              By  /s/ Barry W. Henry
                                 ------------------------------
                                 Name:  Barry W. Henry
                                 Title: Vice President
                                        Senior Lending Officer

                            C.M. LIFE INSURANCE COMPANY,

                              By  /s/ Clifford M. Noreen
                                 ------------------------------
                                 Name:  Clifford M. Noreen
                                 Title: Senior Managing Director


                            MASSMUTUAL HIGH YIELD PARTNERS II LLC,
                            BY: HYP MANAGEMENT, INC.
                                AS MANAGING MEMBER

                              By  /s/ Clifford M. Noreen
                                 ------------------------------
                                 Name:  Clifford M. Noreen
                                 Title: Senior Managing Director


                            MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY,

                               By  /s/ Clifford M. Noreen
                                  ------------------------------
                                  Name:  Clifford M. Noreen
                                 Title: Senior Managing Director




                                       9


<PAGE>


                            MASSMUTUAL/DARBY CBO LLC
                            BY: MASSMUTUAL/DARBY CBO IM, INC.
                                AS LLC MANAGER

                               By  /s/ Clifford M. Noreen
                                  ------------------------------
                                  Name:  Clifford M. Noreen
                                  Title: Senior Managing Director


                            MASSMUTUAL CORPORATE VALUE PARTNERS LTD.
                            BY: DAVID L. BABSON AND COMPANY INC. UNDER DELEGATED
                            AUTHORITY FROM MASS. MUTUAL LIFE INSURANCE COMPANY,
                            AS MANAGER,

                              By  /s/ Clifford M. Noreen
                                 ------------------------------
                                 Name:  Clifford M. Noreen
                                 Title: Senior Managing Director



                            KZH HIGHLAND-2 LLC,

                              By  /s/ Kimberly Rowe
                                 ------------------------------
                                 Name:  Kimberly Rowe
                                 Title: Authorized Agent


                            KZH PAMCO LLC,

                              By  /s/ Kimberly Rowe
                                 ------------------------------
                                 Name:  Kimberly Rowe
                                 Title: Authorized Agent


                            CREDIT LYONNAIS NEW YORK BRANCH,

                              By  /s/ Charles Heidsieck
                                 ------------------------------
                                 Name:  Charles Heidsieck
                                 Title: Senior Vice President




                                       10


<PAGE>



                            KZH ING-2 LLC,

                              By  /s/ Kimberly Rowe
                                 ------------------------------
                                 Name:  Kimberly Rowe
                                 Title: Authorized Agent


                            KZH ING-3 LLC,

                              By  /s/ Kimberly Rowe
                                 ------------------------------
                                 Name:  Kimberly Rowe
                                 Title: Authorized Agent


                            KZH PONDVIEW LLC,

                              By  /s/ Kimberly Rowe
                                 ------------------------------
                                 Name:  Kimberly Rowe
                                 Title: Authorized Agent


                            KZH SHOSHONE LLC,

                              By  /s/ Kimberly Rowe
                                 ------------------------------
                                 Name:  Kimberly Rowe
                                 Title: Authorized Agent


                            KZH SOLEIL LLC,

                              By  /s/ Kimberly Rowe
                                 ------------------------------
                                 Name:  Kimberly Rowe
                                 Title: Authorized Agent


                            BANK OF TOKYO-MITSUBISHI TRUST CO.,

                               By  /s/ Spencer Hughes
                                  ------------------------------
                                  Name:  Spencer Hughes
                                  Title: Vice President



                                       11


<PAGE>


                            THE BANK OF NOVA SCOTIA,

                              By  /s/ W.J. Brown
                                 ------------------------------
                                 Name:  W.J. Brown
                                 Title: Vice President


                            GENERAL ELECTRIC CAPITAL CORPORATION,

                              By  /s/ Thomas E. Johnstone
                                 ------------------------------
                                 Name:  Thomas E. Johnstone
                                 Title: Duly Authorized Signatory


                            KZH CRESCENT-2 LLC,

                              By  /s/ Kimberly Rowe
                                 ------------------------------
                                 Name:  Kimberly Rowe
                                 Title: Authorized Agent


                            TCW LEVERAGED INCOME TRUST, L.P.
                            BY: TCW ADVISERS (BERMUDA), LTD.,
                                AS GENERAL PARTNER,

                              By  /s/ Mark Gold
                                 ------------------------------
                                 Name:  Mark Gold
                                 Title: Managing Director


                            By: TCW INVESTMENT MANAGEMENT COMPANY,
                                AS INVESTMENT ADVISER,

                              By  /s/ Jonathan Berg
                                 ------------------------------
                                 Name:  Jonathan Berg
                                 Title: Assistant Vice President




                                       12



<PAGE>


                            TCW LEVERAGED INCOME TRUST II, L.P.
                            BY: TCW ADVISERS (BERMUDA), LTD.,
                                AS GENERAL PARTNER,
 
                              By  /s/ Mark Gold
                                 ------------------------------
                                 Name:  Mark Gold
                                 Title: Managing Director


                            By: TCW INVESTMENT MANAGEMENT COMPANY, 
                                AS INVESTMENT ADVISER,

                              By  /s/ Jonathan Berg
                                 ------------------------------
                                 Name:  Jonathan Berg
                                 Title: Assistant Vice President


                            SEQUILS I, LTD.
                            BY: TCW ADVISORS, INC.
                                AS ITS COLLATERAL MANAGER,

                               By /s/ Mark Gold
                                 ------------------------------
                                 Name:  Mark Gold
                                 Title: Managing Director


                               By /s/ Jonathan Berg
                                 ------------------------------
                                 Name:  Jonathan Berg
                                 Title:  Assistant Vice President





                                       13



<PAGE>

                                                                   Exhibit 4(s)


                    AMENDMENT No. 8 entered into as of November 21, 2000 (this
                    "AMENDMENT"), to the Credit Agreement dated as of February
                    12, 1998 (as amended, supplemented or otherwise modified
                    from time to time, the "CREDIT AGREEMENT"), among Magellan
                    Health Services, Inc., a Delaware corporation (the "PARENT
                    BORROWER"); Charter Behavioral Health System of New Mexico,
                    Inc., a New Mexico corporation; Merit Behavioral Care
                    Corporation, a Delaware corporation; each other wholly owned
                    domestic subsidiary of the Parent Borrower that becomes a
                    "Subsidiary Borrower" pursuant to Section 2.23 of the Credit
                    Agreement (each, a "SUBSIDIARY BORROWER" and, collectively,
                    the "SUBSIDIARY BORROWERS" (such term is used herein as
                    modified in Article I of the Credit Agreement); the Parent
                    Borrower and the Subsidiary Borrowers are collectively
                    referred to herein as the "BORROWERS"); the Lenders (as
                    defined in Article I of the Credit Agreement); The Chase
                    Manhattan Bank, a New York banking corporation, as
                    administrative agent (in such capacity, the "ADMINISTRATIVE
                    AGENT") for the Lenders, as collateral agent (in such
                    capacity, the "COLLATERAL AGENT") for the Lenders and as an
                    issuing bank (in such capacity, an "ISSUING BANK"); First
                    Union National Bank, a national
 banking corporation, as
                    syndication agent (in such capacity, the "SYNDICATION
                    AGENT") for the Lenders and as an issuing bank (in such
                    capacity, an "ISSUING BANK"); and Credit Lyonnais New York
                    Branch, a licensed branch of a bank organized and existing
                    under the laws of the Republic of France, as documentation
                    agent (in such capacity, the "DOCUMENTATION AGENT") for the
                    Lenders and as an issuing bank (in such capacity, an
                    "ISSUING BANK" and, together with The Chase Manhattan Bank
                    and First Union National Bank, each in its capacity as an
                    issuing bank, the "ISSUING BANKS").


                  A. The Lenders and the Issuing Banks have extended credit to
the Borrowers, and have agreed to extend credit to the Borrowers, in each case
pursuant to the terms and subject to the conditions set forth in the Credit
Agreement.

                  B. The Parent Borrower has requested that the Required Lenders
amend certain provisions of the Credit Agreement as set forth herein, and the
Required Lenders are willing so to amend such provisions of the Credit
Agreement, on the terms and subject to the conditions set forth in this
Amendment.

                  C. Capitalized terms used but not defined herein have the
meanings assigned to them in the Credit Agreement (as amended hereby).

                  Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto agree as follows:

                  SECTION 1. AMENDMENT TO SECTION 6.05. Section 6.05 of the
Credit Agreement is hereby amended by (a) deleting the word "and" immediately
after the semicolon in paragraph (k) of such Section, (b) deleting the "." at
the end of paragraph (l)



<PAGE>


of such Section and substituting in lieu thereof the text"; and" and (c) adding
a new paragraph (m) to such Section, to read in its entirety as follows:

                  (m) the Parent Borrower and its Subsidiaries may
          conduct an Asset Sale in respect of Green Spring Health Services of
          Canada Co. (whether conducted as a sale of assets or a sale of capital
          stock, or as a sale of equity interests of any Person(s) whose only
          material asset is the capital stock of Green Spring Health Services of
          Canada Co., in any case for an amount equal to the fair market value
          thereof (as determined in good faith by a Financial Officer of the
          Parent Borrower)), PROVIDED that no Default or Event of Default has
          occurred and is continuing at the time of sale and the Net Cash
          Proceeds from such sale shall be applied as required by Section
          2.13(a)(2).

                  SECTION 2. REPRESENTATIONS AND WARRANTIES. Each Borrower
represents and warrants to the Administrative Agent and to each of the Lenders
that:

                  (a) This Amendment has been duly authorized, executed and
delivered by it and constitutes a legal, valid and binding obligation of each
Loan Party party hereto, enforceable against such Loan Party in accordance with
its terms.

                  (b) Before and after giving effect to this Amendment, the
representations and warranties set forth in Article III of the Credit Agreement
are true and correct in all material respects on and as of the date hereof with
the same effect as if made on and as of the date hereof, except to the extent
such representations and warranties expressly relate to an earlier date.

                  (c) Before and after giving effect to this Amendment, no Event
of Default or Default has occurred and is continuing.

                  SECTION 3. CONDITIONS TO EFFECTIVENESS. This Amendment shall
become effective as of November 21, 2000, when (a) the Administrative Agent
shall have received counterparts of this Amendment that, when taken together,
bear the signatures of the Borrowers and the Required Lenders and (b) the
representations and warranties set forth in Section 2 hereof are true and
correct.

                  SECTION 4. CREDIT AGREEMENT. Except as specifically amended
hereby, the Credit Agreement shall continue in full force and effect in
accordance with the provisions thereof as in existence on the date hereof. After
the date hereof, any reference to the Credit Agreement shall mean the Credit
Agreement as amended hereby. This Amendment shall be a Loan Document for all
purposes.

                  SECTION 5. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

                  SECTION 6. COUNTERPARTS. This Amendment may be executed in two
or more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one agreement. Delivery of an
executed signature page to this Amendment by facsimile transmission shall be
effective as delivery of a manually signed counterpart of this Amendment.

 
                                      2


<PAGE>


                  IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first written above.


                            MAGELLAN HEALTH SERVICES, INC.,

                            By /s/ JAMES R. BEDENBAUGH    
                               --------------------------------------
                               Name:  James R. Bedenbaugh
                               Title: Senior Vice President & Treasurer

                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC.,

                            By /s/ CHARLOTTE A. SANFORD   
                               --------------------------------------
                               Name:  Charlotte A. Sanford
                               Title: Treasurer

                            MERIT BEHAVIORAL CARE CORPORATION,

                            By /s/ CHARLOTTE A. SANFORD   
                               --------------------------------------
                               Name:  Charlotte A. Sanford
                               Title: Treasurer

                            THE CHASE MANHATTAN BANK,
                            individually and as Administrative Agent,
                            Collateral Agent and an Issuing Bank,

                            By /s/ DAWN LEE LUM  
                               --------------------------------------
                               Name: Dawn Lee Lum
                               Title: Vice President

                            FIRST UNION NATIONAL BANK,
                            individually and as Syndication Agent and
                            an Issuing Bank,

                            By /s/ JOYCE L. BARRY
                               --------------------------------------
                               Name: Joyce L. Barry
                               Title: Senior Vice President



                                       3


<PAGE>




                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       NAME OF INSTITUTION: ARCHIMEDES FUNDING II, LTD.
                            BY: ING Capital Advisors LLC,
                                as Collateral Manager

                            By /s/ HELEN Y. RHEE     
                               --------------------------------------
                               Name:  Helen Y. Rhee
                               Title: Vice President & Portfolio Manager


       NAME OF INSTITUTION: BANK OF TOKYO-MITSUBISHI TRUST COMPANY,

                            By /s/ SPENCER HUGHES    
                               --------------------------------------
                               Name:  Spencer Hughes
                               Title: Vice President


       NAME OF INSTITUTION: BLACK DIAMOND CLO 98-1 LTD.,

                            By /s/ JOHN H. CULLINANE 
                               --------------------------------------
                               Name:  John H. Cullinane
                               Title: Director




                                       4



<PAGE>


                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.


       NAME OF INSTITUTION: BLACK DIAMOND INTERNATIONAL FUNDING, LTD.,

                            By /s/ DAVID DYER        
                               --------------------------------------
                               Name:  David Dyer
                               Title: Director


       NAME OF INSTITUTION: CREDIT LYONNAIS NEW YORK BRANCH,

                            By /s/ CHARLES H. HEIDSIECH      
                               --------------------------------------
                               Name:  Charles H. Heidsiech
                               Title: Senior Vice President

       NAME OF INSTITUTION: DELANO COMPANY
                            By: Pacific Investment Management Company
                              LLC, as its Investment Advisor

                            By /s/ RAYMOND G. KENNEDY        
                               --------------------------------------
                               Name: Raymond G. Kennedy
                               Title: Executive Vice President




                                       5






<PAGE>


                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       NAME OF INSTITUTION: CAPTIVA III FINANCE LTD.,
                            as advised by Pacific Investment Management
                            Company LLC

                            By /s/ DAVID DYER        
                               --------------------------------------
                               Name:  David Dyer
                               Title: Director


       NAME OF INSTITUTION: GENERAL ELECTRIC CAPITAL CORPORATION,

                            By /s/ WILLIAM E. MAGEE  
                               --------------------------------------
                               Name:  William E. Magee
                               Title: Duly Authorized Signatory


      NAME OF INSTITUTION:  HIGHLAND CAPITAL MANAGEMENT L.P.,

                            By /s/ MARK K. OKADA CFA 
                               --------------------------------------
                               Name:  Mark K. Okada CFA
                               Title: Executive Vice President
                                      Highland Capital Management L.P.





                                       6


<PAGE>




                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       NAME OF INSTITUTION: INDOSUEZ CAPITAL FUNDING IIA, LIMITED
                            By: Indosuez Capital as Portfolio Advisor

                            By /s/ MELISSA MARANO    
                               --------------------------------------
                               Name:  Melissa Marano
                               Title: Vice President


       NAME OF INSTITUTION: INDOSUEZ CAPITAL FUNDING IV, L.P.
                            By: Indosuez Capital as Portfolio Advisor

                            By /s/ MELISSA MARANO            
                               --------------------------------------
                               Name:  Melissa Marano
                               Title: Vice President


       NAME OF INSTITUTION: KZH CRESCENT-2 LLC,

                            By /s/ SUSAN LEE                 
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent

       NAME OF INSTITUTION: KZH ING-2 LLC,

                            By /s/ SUSAN LEE                 
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent





                                       7


<PAGE>


                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       NAME OF INSTITUTION: KZH ING-3 LLC,

                            By /s/ SUSAN LEE         
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent


       NAME OF INSTITUTION: KZH HIGHLAND-2 LLC,

                            By /s/ SUSAN LEE                 
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent


       NAME OF INSTITUTION: KZH PAMCO LLC,

                            By /s/ SUSAN LEE                 
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent


       NAME OF INSTITUTION: KZH PONDVIEW LLC,

                            By /s/ SUSAN LEE                 
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent





                                       8



<PAGE>





                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       NAME OF INSTITUTION: KZH SHOSHONE LLC,

                            By /s/ SUSAN LEE                 
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent


       NAME OF INSTITUTION: KZH SOLEIL LLC,

                            By /s/ SUSAN LEE                 
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent


       NAME OF INSTITUTION: MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST,

                            By /s/ SHEILA FINNERTY           
                               --------------------------------------
                               Name:  Sheila Finnerty
                               Title: Senior Vice President








                                       9


<PAGE>


                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       NAME OF INSTITUTION: PACIFICA PARTNERS I, L.P.,
                            BY: IMPERIAL CREDIT ASSET
                                MANAGEMENT, INC.
                                AS ITS INVESTMENT MANAGER

                            By /s/ DEAN K. KAWAI     
                               --------------------------------------
                               Name:  Dean K. Kawai
                               Title: Vice President


       NAME OF INSTITUTION: PARIBAS CAPITAL FUNDING LLC,

                            By /s/ M. STEVEN ALEXANDER       
                               --------------------------------------
                               Name:  M. Steven Alexander
                               Title: Director


       NAME OF INSTITUTION: PILGRIM AMERICA HIGH INCOME INVESTMENTS LTD.
                            By: Pilgrim Investments Inc.
                                As its investment manager

                            By /s/ MICHEL PRINCE, CFA        
                               --------------------------------------
                               Name:  Susan Lee
                               Title: Authorized Agent





                                       10



<PAGE>


                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       ME OF INSTITUTION:   ML CLO XV PILGRIM AMERICA (CAYMAN) LTD.
                            By: Pilgrim Investments Inc.
                                As its Investment manager

                            By /s/ MICHEL PRINCE, CFA        
                               --------------------------------------
                               Name:  Michel Prince, CFA
                               Title: Vice President


       NAME OF INSTITUTION: PILGRIM PRIME RATE TRUST
                            By: Pilgrim Investments Inc,
                                As its investment manager

                            By /s/ MICHEL PRINCE, CFA        
                               --------------------------------------
                               Name:  Michel Prince, CFA
                               Title: Vice President


       NAME OF INSTITUTION: SENIOR DEBT PORTFOLIO
                            By: Boston Management and Research
                                as Investment Advisor

                            By /s/ PAYSON F. SWAFFIELD       
                               --------------------------------------
                               Name: Payson F. Swaffield
                               Title: Vice President




                                       11



<PAGE>


                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       NAME OF INSTITUTION: EATON VANCE INSTITUTIONAL SENIOR LOAN FUND
                            By: EATON VANCE MANAGEMENT
                                AS INVESTMENT ADVISOR

                            By /s/ PAYSON SWAFFIELD  
                               --------------------------------------
                               Name:  Payson Swaffield
                               Title: Vice President


       NAME OF INSTITUTION: SUMMIT BANK,

                            By /s/ WILLIAM DINICOLA          
                               --------------------------------------
                               Name:  William DiNicola
                               Title: Vice President


       NAME OF INSTITUTION: THE BANK OF NOVA SCOTIA,

                            By /s/ W.J. BROWN                
                               --------------------------------------
                               Name:  W.J. Brown
                               Title: Vice President




                                       12



<PAGE>





                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       ME OF INSTITUTION:   VAN KAMPEN PRIME RATE INCOME TRUST,
                            By: Van Kampen Investment Advisory Corp.

                            By /s/ DARVIN D. PIERCE  
                               --------------------------------------
                               Name:  Darvin D. Pierce
                               Title: Vice President

       NAME OF INSTITUTION: AMSOUTH BANK,

                            By /s/ WILLIAM H. BERRELL        
                               --------------------------------------
                               Name:  William H. Berrell
                               Title: Vice President

       NAME OF INSTITUTION: BANK POLSKA KASA OPIEKI, S.A.,

                            By /s/ BARRY W. HENRY    
                               --------------------------------------
                               Name:  Barry W. Henry
                               Title: Vice President

       NAME OF INSTITUTION: BATTERSON PARK CBO I
                            By: General Re-New England Asset Management,
                                Inc., as Collateral Manager

                            By /s/ SUSAN BOSWORTH    
                               --------------------------------------
                               Name:  Susan Bosworth
                               Title: Vice President



                                       13


<PAGE>


                            SIGNATURE PAGE TO AMENDMENT NO. 8 DATED AS OF
                            NOVEMBER 21, 2000, TO THE CREDIT AGREEMENT DATED
                            AS OF FEBRUARY 12, 1998 (AS PREVIOUSLY AMENDED,
                            SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
                            TIME), AMONG MAGELLAN HEALTH SERVICES, INC.,
                            CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO,
                            INC., MERIT BEHAVIORAL CARE CORPORATION, THE
                            SUBSIDIARY BORROWERS, THE LENDERS, THE CHASE
                            MANHATTAN BANK, AS ADMINISTRATIVE AGENT, AS
                            COLLATERAL AGENT AND AS AN ISSUING BANK, FIRST
                            UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS
                            AN ISSUING BANK, AND CREDIT LYONNAIS NEW YORK
                            BRANCH, AS DOCUMENTATION AGENT.

       NAME OF INSTITUTION: MERRILL LYNCH GLOBAL INVESTMENT SERIES INCOME
                            STRATEGIES PORTFOLIO
                            By: Merrill Lynch Investment Managers, L.P.
                                as its Investment Advisor

                            By /s/ COLLEEN M. CUNNIFFE                
                               --------------------------------------
                               Name:  Colleen M. Cunniffe
                               Title: Authorized Signatory

       NAME OF INSTITUTION: MERRILL LYNCH DEBT STRATEGIES PORTFOLIO
                            By: Merrill Lynch Investment Managers, L.P.
                                as its Investment Advisor

                            By /s/ COLLEEN M. CUNNIFFE                
                               --------------------------------------
                               Name:  Colleen M. Cunniffe
                               Title: Authorized Signatory

       NAME OF INSTITUTION: MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.

                            By /s/ COLLEEN M. CUNNIFFE                
                               --------------------------------------
                               Name:  Colleen M. Cunniffe
                               Title: Authorized Signatory






                                       14



<PAGE>

                                                                 Exhibit 10(ae)








                         MAGELLAN HEALTH SERVICES, INC.
                         EMPLOYEE STOCK PURCHASE PLAN

                         2000 SUMMARY PLAN DESCRIPTION



<PAGE>


                         MAGELLAN HEALTH SERVICES, INC.
                        2000 EMPLOYEE STOCK PURCHASE PLAN

         1. PURPOSE. The purpose of the Magellan Health Services, Inc. 2000
Employee Stock Purchase Plan (the "Plan"), is to provide employees of Magellan
Health Services, Inc. (the "Company") and its subsidiary companies with an
opportunity to be compensated through the benefits of stock ownership and to
acquire an interest in the Company through the purchase of Common Stock of the
Company. It is the intention of the Company to have the Plan qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986 (the "Code"). The provisions of the Plan shall, accordingly, be construed
so as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.

         2. DEFINITIONS.

            (a) "Base Pay" means the compensation payable to an employee by the
Company or a designated subsidiary (as defined in Code Section 424(f)) (a
"subsidiary") calculated at that employee's base salary or standard hourly rate
of compensation, but excluding overtime, commissions, shift differential,
incentive bonus compensation
 and compensation payable under any deferred
compensation or other fringe benefit plan.

            (b) "Employee" means for each Offering Period (as defined in 
Section 4) any person who is employed by the Company or by any subsidiary of the
Company designated from time to time by the Committee (as defined in Section 13)
to participate in such Offering Period.

         3. ELIGIBILITY.

            (a) Any Employee who shall be employed on the 60th day preceding the
Offering Date of an Offering Period shall be eligible to participate in the Plan
for such Offering Period. Notwithstanding the foregoing, the Committee, in its
sole discretion, may credit the employment service of persons employed by a
business acquired by the Company or by any subsidiary thereof for the purpose of
satisfying the 60-day rule herein.

         (b) Any provision of the Plan to the contrary notwithstanding, no
Employee shall be granted an option:

                  (i)      If, immediately after the grant such Employee would
                           own shares, and/or hold outstanding options to
                           purchase stock, possessing 5% or more of the total
                           combined voting power or value of all classes of
                           shares of the Company or of any subsidiary of the
                           Company; or

                  (ii)     Which permits his rights to purchase shares under all
                           employee stock purchase plans of the Company and its
                           subsidiaries to accrue at a rate which exceeds
                           $25,000 of the fair market value of the shares
                           (determined at the time such option is granted) for
                           each calendar year in which such stock option is
                           outstanding at any time.


<PAGE>

         4. OFFERING PERIODS. The Committee shall establish the Offering Periods
under the Plan which shall be of not less than three months nor more than twelve
months duration each, the first of which shall not begin before January 1, 2000,
and the last of which shall end not later than December 31, 2002. The beginning
date (the "Offering Date") and the ending date (the "Termination Date") of each
Offering Period shall be set in advance of each Offering Period by the
Committee.

         5. PARTICIPATION. An eligible Employee may become a participant only by
completing an election notice provided by the Company and filing it with the
designated representative of the Company no later than the date specified by the
Company in the election notice form.

         Unless otherwise adjusted in accordance with rules established by the
Committee in its sole discretion, payroll deductions for a participant with
respect to an Offering Period shall commence with the first pay date beginning
on or after the Offering Date, and shall end with the last pay date ending on or
before the Termination Date, unless sooner terminated by the participant as
provided in Section 10. All Employees granted options under the Plan shall have
the same rights and privileges, except that the amount of stock which may be
purchased under such option may vary in a uniform manner as described in Section
7.

         6. METHOD OF PAYMENT. Payments for shares under the Plan may be made
only by payroll deductions, as follows:

         (a) If a participant wishes to participate in the Plan, then at the
time he files his election notice, he shall elect to have deductions made from
his Base Pay at a rate, expressed as a percentage, not to exceed 10% of his
annualized Base Pay as of the Offering Date. Any or all amounts withheld during
the one-month period immediately preceding the Termination Date in any Offering
Period may be applied to the purchase of shares on the Termination Date or to
the purchase of shares offered for the next subsequent Offering Period in a
manner as may be determined by the Committee, in its sole discretion, but only
if such application is administered consistently among all participants during
such Offering Period.

         (b) All payroll deductions made for a participant shall be credited to
his account under the Plan. A participant may not make any separate cash payment
into such account. A participant's account shall be no more than a bookkeeping
account maintained by the Company, and neither the Company nor any subsidiary
shall be obligated to segregate or hold in trust or escrow any funds in a
participant's account.

         (c) A participant's election to have deductions made from his Base 
Pay shall be effective for all pay dates occurring during the Offering Period 
which commences immediately following the filing, in accordance with Section 
5, of the participant's election notice and for each subsequent Offering 
Period until such election is modified or revoked by the participant or until 
such participant no longer meets the eligibility requirements of Section 
3(a). A participant may discontinue his participation in the Plan as provided 
in Section 10. A participant may elect to change the rate of payroll 
deductions at such times and in accordance with such rules as may be 
prescribed by the Committee; any such change in the rate of payroll


<PAGE>

deductions shall be applicable only with respect to Offering Periods 
commencing after a participant files with the Committee an election notice 
requesting such change.

         7. GRANTING OF OPTION.

         (a) Subject to any adjustment under Sections 12 or 17, on the Offering
Date for each Offering Period, a participant shall be granted an option to
purchase a number of whole shares determined by dividing the amount to be
withheld for participation in the Plan and applied to such Offering Period by
the option price per share of Common Stock determined in accordance with Section
7(b) but, in no event shall the maximum number of shares for which an option is
granted to a participant with respect to any single Offering Period exceed 200
shares per month for each full or partial month during the Offering Period.

         (b) The option price per share of shares purchased with payroll
deductions for a participant will be equal to the lesser of: (i) 85% of the
closing price of the Common Stock on the New York Stock Exchange on the Offering
Date; or (ii) 85% of the closing price of the Common Stock on the New York Stock
Exchange on the Termination Date. If no shares are traded on such exchange on
either such date, such price shall be determined on the last trading date for
such shares immediately preceding the Offering Date or the Termination Date, as
applicable.

         8. EXERCISE OF OPTION. Unless a participant gives written notice of
withdrawal pursuant to Section 10(a) or such participant's payroll deductions
are returned in accordance with Section 10(c), his option for the purchase of
shares during an Offering Period with payroll deductions will be exercised
automatically for him on the Termination Date of that Offering Period. The
automatic exercise shall, subject to Sections 12 and 17, be for the purchase of
the maximum number of full shares subject to his option which the sum of payroll
deductions credited to the participant's account on the Termination Date can
purchase at the option price.

         9. DELIVERY. As promptly as practicable after the end of an Offering
Period, the Company will deliver the shares purchased upon the exercise of the
option to a designated broker selected by the Company to administer and hold
shares in individual accounts established for the benefit of each participant.
The Committee, in its sole discretion, may establish procedures to permit a
participant to receive such shares directly. Amounts credited to the
participant's account in excess of the amount necessary to pay the option price
for the maximum number of full shares subject to his option shall either be
refunded to the participant or credited to the participant's account for the
next subsequent Offering Period as may be determined by the Committee, in its
sole discretion.

         10. WITHDRAWAL.

             (a) A participant may withdraw payroll deductions credited to his
account under the Plan by giving written notice to the representative of the
Company designated on the election notice form. A participant may withdraw
amounts credited to his account at any time prior to the first day of the
calendar month ending on the Termination Date or such later date as may be
established by the Committee in its sole discretion. All of the participant's
payroll 


<PAGE>

deductions credited to his account will be paid to him promptly after receipt of
his notice of withdrawal, and no further deductions will be made from his pay
during that Offering Period.

            (b) A participant's withdrawal will not limit his eligibility to
participate in any similar plan which may hereafter be adopted by the Company or
in any subsequent Offering Period.

            (c) Upon termination of the participant's employment during an 
Offering Period for any reason, including death or retirement, the payroll 
deductions credited to his account for such period will be returned to him or, 
in the case of his death, to the person or persons entitled thereto under 
Section 14. Notwithstanding the foregoing, the payroll deductions credited to 
the account of any participant whose employment is terminated during the 
calendar month ending on the Termination Date shall not be returned but shall 
instead be used to purchase shares in accordance with Section 8.

         11. NO INTEREST. No interest shall be accrued or payable with respect
to amounts in a participant's account.

         12. STOCK.

             (a) The shares of Common Stock to be sold to participants under the
Plan may, at the election of the Company, be either treasury shares or shares
originally issued for such purpose. The maximum number of shares which shall be
made available for sale under the Plan shall be 1,000,000 shares and the maximum
number of shares available for sale in each Offering Period shall be determined
by the Committee in its sole discretion, subject in each case to adjustment upon
changes in capitalization of the Company as provided in Section 17. If the total
number of shares for which options are to be exercised for an Offering Period in
accordance with Section 8 exceeds the number of shares then available under the
Plan for such Offering Period, the Company shall make a pro rata allocation of
the shares available based on a fraction, the numerator of which shall be the
number of shares with respect to which a participant has an option to purchase
for an Offering Period and the denominator of which shall be the number of
shares available for purchase, with rounding down for each participant to the
nearest whole number.

            (b) A participant will have no interest in shares covered by an 
option until such option has been exercised.

         13. ADMINISTRATION. The Plan shall be administered by a Committee (the
"Committee") consisting of not less than three members who shall be appointed by
the Chief Executive Officer of the Company. Each member of the Committee shall
be either a director, an officer, or an employee of the Company or of a
subsidiary thereof. The Committee shall be vested with full authority to make,
administer, and interpret such rules and regulations as it deems necessary to
administer the Plan, and any determination, decision, or action of the Committee
in connection with the construction, interpretation, administration, or
application of the Plan shall be final, conclusive, and binding upon all
participants and all persons claiming under or through any participant.


<PAGE>


         14. DESIGNATION OF BENEFICIARY. A participant may file a written
designation of a beneficiary who is to receive any shares or cash to the
participant's credit under the Plan in the event of such participant's death
before, on, or after the Termination Date but prior to the delivery of shares
and, if applicable, cash. Such designation of beneficiary may be changed by the
participant at any time by written notice. Upon the death of a participant and
upon receipt by the Company of proof of the identity and existence at the
participant's death of a beneficiary validly designated by him under the Plan,
the Company shall deliver such shares or cash to the account of such
beneficiary. In the event of the death of a participant and in the absence of a
beneficiary validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such shares or cash to the
account of the executor or administrator of the estate of the participant, or if
no such executor or administrator has been appointed (to the knowledge of the
Company) the Company, in its discretion, may deliver such shares or cash to the
account of the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent, or relative is known to the Company,
then to the account of such other person as the Company may designate. No
designated beneficiary shall, prior to the death of the participant by whom he
has been designated, acquire any interest in the shares or cash credited to the
participant under the Plan.

         15. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way by the participant. Any such attempted
assignment, transfer, pledge, or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 10.

         16. USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose.

         17. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event that the
outstanding shares of Common Stock of the Company are hereafter increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of a recapitalization,
reclassification, stock split, combination of shares, or dividend payable in
shares of Common Stock, an appropriate adjustment shall be made by the Committee
to the number and kind of shares as to which outstanding options shall be
exercisable and to the option price. No fractional shares shall be issued or
optioned in making the foregoing adjustments. All adjustments made by the
Committee under this paragraph shall be conclusive and binding on all
participants and all persons claiming under or through any participant.

         Subject to any required action by the stockholders, if the Company
shall be a party to any reorganization involving merger, consolidation,
acquisition of the stock or acquisition of the assets of the Company, the
Committee in its discretion may declare (a) that all options granted hereunder
are to be terminated after giving at least ten days' notice to holders of
outstanding options, or (b) that any option granted hereunder shall pertain to
and apply with appropriate adjustment as determined by the Committee to the
securities of the resulting corporation to which a holder of the number of
shares of Common Stock subject to the option would have been entitled. The
adoption of a plan of dissolution or liquidation by the Board of Directors and


<PAGE>

stockholders of the Company shall cause every option outstanding hereunder to
terminate on the fifteenth day thereafter, except that, in the event of the
adoption of a plan of dissolution or liquidation in connection with a
reorganization as provided in the preceding sentence, options outstanding
hereunder shall be governed by and shall be subject to the provisions of the
preceding sentence.

         Any issue by the Company of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to any option, except as specifically provided
otherwise in this Section 17. The grant of an option pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.

         18. AMENDMENT OR TERMINATION. The Board of Directors of the Company may
at any time terminate or amend the Plan. No such termination can affect options
previously granted and no amendment can make any change in any option
theretofore granted which would adversely affect the rights of any participant.
No amendment can be made without prior approval of the stockholders of the
Company if such amendment would:

            (a) Require the sale of more shares than are authorized under 
Section 12; or

            (b) Permit payroll deductions or cash payments at a rate in excess 
of 10% of a participant's Base Pay.

         19. NOTICES. All notices or other communications by a participant to
the Company under or in connection with the Plan shall not be deemed to have
been duly given until actually received by the representative of the Company
designated on the election notice form provided by Section 5.

         20. MISSING PAYEE. If (i) the Company utilizes a designated broker to
administer and hold in individual accounts the shares purchased by the
participants, (ii) the Company subsequently cannot ascertain the whereabouts of
a participant whose account is held with the designated broker, (iii) after
three years from the date of the last purchase by such participant, a notice of
such account balance and pending action under this section is mailed to the last
known address of such person, as shown on the records of the designated broker
or the Company, and (iv) within three months after such mailing, such person has
not made written claim therefor, then the Committee may direct that such account
balance (including both shares and withholdings) otherwise due to such person be
canceled and returned to the Company. Upon such cancellation, the Company or the
designated broker shall have no further liability therefor, except that, in the
event such person, within one year of the date of the notice referred to in
(iii) above, notifies the Company or the broker of his whereabouts and requests
the amounts due to him under the Plan, the number of shares (as may be adjusted
to reflect any extraordinary corporate event or recapitalization) together with
any dividends or other accretions thereon and the amount of withholdings
contained in such account so canceled shall be delivered to him as provided
herein by the Plan.




<PAGE>
                                                          Exhibit 10(af)

                         MAGELLAN HEALTH SERVICES, INC.
                   2000 LONG-TERM INCENTIVE COMPENSATION PLAN

                                    ARTICLE I

                                     PURPOSE

         The purpose of the 2000 Long-Term Incentive Compensation Plan is to
promote the long-term viability and financial success of Magellan Health
Services, Inc. (the Company) and its Affiliates by assisting in the recruiting
and retention of key employees. The Plan is designed to enable key employees to
acquire or increase a proprietary interest in the Company.


                                   ARTICLE II

                                   DEFINITIONS

         2.01 "Affiliate" means any entity that is (i) a member of a controlled
group of corporations as defined in Code Section 1563 (a), determined without
regard to Code Sections 1563 (a) (4) and 1563 (e) (3) (c), of which the Company
is a member according to Code Section 414(b); (ii) an unincorporated trade or
business that is under common control with the Company, as determined according
to Code Section 414(c); (iii) a member of an affiliated service group of which
the Company is a member according to Code Section 414(m); or (iv) any other
subsidiary corporation or business in which the Company has a substantial
interest or business relation.

         2.02 "Agreement" means a written agreement (including any amendment or
supplement thereto) between the Company
 and a Participant specifying the terms
and conditions of an Award.

         2.03 "Award" means Options, Restricted Stock, Stock Appreciation
Rights, Performance Shares, Dividend Units, and Incentive Awards.

         2.04 "Board" means the Board of Directors of the Company.

         2.05 "Code" means the Internal Revenue Code of 1986, as amended.

         2.06 "Committee" means the Compensation Committee of the Board or any
other Committee of the Board appointed to administer the Plan, provided that the
composition of such Committee shall at all times meet the requirements of Rule
16b-3 under the Securities Exchange Act of 1934, and Code Section 162(m), each
as amended.

         2.07 "Common Stock" means the Common Stock of the Company, par value
$0.25 per share.


                                       1

<PAGE>

         2.08 "Company" means Magellan Health Services, Inc.

         2.9 "Covered Employee" means a Participant who, as of the date of
vesting and/or payout of an Award, as applicable, is one of the group of
"covered employees," as defined in the regulations promulgated under Code
Section 162(m), or any successor statue.

         2.10 "Disability" means a physical or mental condition which prevents
the Participant from engaging in any substantially gainful activity.

         2.11 "Dividend Unit" means an Award granted under Article XI of the
Plan.

         2.12 "Fair Market Value" means, on any given date, the closing price of
a share of Common Stock as reported on the New York Stock Exchange composite
tape on such day or, if the Common Stock was not traded on such day, then on the
next preceding day that the Common Stock was traded, all as reported by such
source as the Committee may select.

         2.13 "Final Award" means the actual Incentive Award earned during a
Plan Year by a Participant, as determined by the Committee following the end of
the Plan Year.

         2.14 "Incentive Award" means an Award granted under Article XII of the
Plan.

         2.15 "Incentive Pool" means the fund established for purposes of
determining potential aggregate Awards to all participants, according to the
provisions of Section 12.02 herein.

         2.16 "Incentive Pool Percentage" shall mean the percentage ascribed to
such eligible Participant under Section 12.01 hereof.

         2.17 "Option" means an Award granted under Article VII of the Plan.

         2.18 "Participant" means a key employee of the Company or of an
Affiliate, including a key employee who is a member of the Board, who satisfies
the requirements of Article V of the Plan.

         2.19 "Performance-Based Exception" means the performance-based
exception from the tax deductibility limitations of Code Section 162(m).

         2.20 "Performance Shares" means an Award granted under Article X of the
Plan.

         2.21 "Plan" means the Magellan Health Services, Inc. 2000 Long-Term
Incentive Compensation Plan herein set forth, as the same may from time to time
be amended.

         2.22 "Plan Year" means the Company's fiscal year.

         2.23 "Restricted Stock" means shares of Common Stock awarded to a
Participant under 


                                       2

<PAGE>

Article VIII of the Plan.

         2.24 "Retirement" means normal retirement or early retirement as
provided under the Company's Retirement Savings Plan.

         2.25 "Stock Appreciation Rights" means an Award granted under Article
IX of the Plan.


                                   ARTICLE III

                                 ADMINISTRATION

         The Plan shall be administered by the Committee. The Committee shall
have authority to grant Awards upon such terms (not inconsistent with the
provisions of the Plan) as the Committee may consider appropriate. Such terms
may include conditions (in addition to those contained in the Plan) on the
exercisability of all or any part of an Option or of Stock Appreciation Rights
or on the transferability or forfeitability of Restricted Stock. In addition,
the Committee shall have complete authority to interpret all provisions of the
Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules
and regulations pertaining to the administration of the Plan; and to make all
other determinations necessary or advisable for the administration of the Plan.
The express grant in the Plan of any specific power to the Committee shall not
be construed as limiting any power or authority of the Committee. Any decision
made, or action taken, by the Committee shall not be construed as limiting any
power or authority of the Committee. Any decision made, or action taken, by the
Committee in connection with the administration of the Plan shall be final,
conclusive, and binding with respect to all persons including all Participants.
No member of the Committee shall be liable for any act done, or for any failure
to act, if such act or failure to act was done or omitted in good faith with
respect to the Plan or any Agreement or Award.


                                   ARTICLE IV

                  SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS

         4.01 NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as
provided in Section 4.02 herein, the number of shares of Common Stock hereby
reserved for issuance to Participants under the Plan shall be one million
(1,000,000), no more than fifty thousand (50,000) of which may be granted in the
form of Restricted Shares. The Committee shall determine the appropriate
methodology for calculating the number of shares issued pursuant to the Plan.
Shares of Common Stock delivered by the Company under the Plan may be authorized
and unissued Common Stock, Common Stock held in the treasury of the Company, or
Common Stock purchased on the open market (including private purchases) in
accordance with applicable securities laws. Unless and until the Committee
determines that an Award to a Covered Employee shall not be designed to comply
with the Performance-Based Exception, the following rules shall apply to grants


                                       3

<PAGE>


of such Awards under the Plan:

         (a)      STOCK OPTIONS: The maximum aggregate number of shares of
                  Common Stock that may be granted in the form of Stock Options,
                  pursuant to any Award granted in any one fiscal year to any
                  one single Participant shall be five hundred thousand
                  (500,000).

         (b)      SARS: The maximum aggregate number of shares of Common Stock
                  that may be granted in the form of Stock Appreciation Rights,
                  pursuant to any Award granted in any one fiscal year to any
                  one single Participant shall be one hundred thousand
                  (100,000).

         (c)      RESTRICTED STOCK: The maximum aggregate grant with respect to
                  Awards of Restricted Stock granted in any one fiscal year to
                  any one Participant shall be twenty-five thousand (25,000)
                  shares.

         (d)      PERFORMANCE SHARES, DIVIDEND UNITS, AND INCENTIVE AWARDS: The
                  maximum aggregate payout (determined as of the end of the
                  applicable performance period) with respect to Awards of
                  Performance Shares and Incentive Awards granted in any one
                  fiscal year to any one Participant shall be equal to the value
                  of one hundred thousand (100,000) shares of Common Stock.

         4.02 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of shares of Common Stock which may be
delivered under Section 4.01, in the number and class of and/or price of shares
of Common Stock subject to outstanding Awards granted under the Plan, and in the
Award limits set forth in subsections 4.01(a), (b), (c), and (d), as may be
determined to be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; provided, however,
that the number of shares of Common Stock subject to any Award shall always be a
whole number.


                                    ARTICLE V

                                   ELIGIBILITY

         Key employees of the Company or of any Affiliate are eligible to
receive Awards under the Plan. An individual may receive more than one Award.
The Committee shall, in its discretion, select the eligible key employees and
shall base its selection on the employees' job responsibilities 


                                       4

<PAGE>

and present and potential contributions to the success of the Company and its
Affiliates.


                                   ARTICLE VI

                                 GRANT OF AWARDS

         The Committee may, from time to time, grant Awards to one or more
eligible employees. In determining the size of Awards, the Committee shall take
into account a Participant's responsibility level, performance, potential, and
cash compensation level, the Fair Market Value at the time of the Award, as well
as such other considerations as it deems appropriate.


                                   ARTICLE VII

                                  STOCK OPTIONS

         7.01 GRANT OF OPTIONS. One or more Options may be granted to any
eligible employee. Options shall be embodied in an Agreement in a form approved
by the Committee. Options shall be subject to such terms and conditions as
designated by the Committee in the Agreement, which shall not be inconsistent
with the terms of the Plan.

         7.02 INCENTIVE STOCK OPTIONS/NONQUALIFIED STOCK OPTIONS. The Agreement
may provide for "incentive stock options" that are intended to satisfy the
requirements of Section 422A of the Code, or such other options that are not
intended to satisfy the requirements of Section 422A of the Code (hereinafter
described as "nonqualified stock options"), that entitle the holder to purchase
from the Company a stated number of shares of Common Stock at the price set
forth in the Agreement. Each Option shall be an incentive stock option or a
nonqualified stock option as specified in the Agreement. All Options that are
not identified as incentive stock options in the Agreement are intended to be
nonqualified stock options.

         7.03 OPTION PRICE. The exercise price per share of an Option shall be
an amount equal to the Fair Market Value per share of the Common Stock on the
date of grant of such Option (or, in the case of a grant of an incentive stock
option to a prospective employee, the date the grant becomes effective),
provided, however, that the Committee may in its discretion elect to grant
Options at an exercise price below the Fair Market Value per share of the Common
Stock on the date of grant of such Option.

         7.04 ADDITIONAL PROVISIONS APPLICABLE TO INCENTIVE STOCK OPTIONS. The
aggregate Fair Market Value (determined at the time any incentive stock option
is granted) of the Common Stock with respect to any Participant's incentive
stock options, together with incentive stock options granted under any other
plan of the Company or any subsidiary (as defined in Code Section 425 (f)), that
are exercisable for the first time by such Participant during any calendar year
shall not exceed 


                                       5

<PAGE>

$100,000. In the event that a Participant holds incentive stock options that
become first exercisable (as a result of acceleration of exercisability under
the Plan or an Agreement, or otherwise) in any one calendar year for shares
having a Fair Market Value at the date of grant in excess of $100,000, then the
most recently granted of such incentive stock options, to the extent that they
are exercisable for shares having an aggregate Fair Market Value in excess of
$100,000, shall be deemed to be nonqualified stock options.

         No incentive stock option may be granted under the Plan to any person
who owns, directly or indirectly, within the meaning of Sections 422A(b) (6) and
425(d) of the Code, at the time the incentive stock option is granted, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary (as defined in Code Section 425(f))
unless the exercise price is at least 110% of the Fair Market Value of the
shares subject to the incentive stock option, determined on the date of the
grant, and the incentive stock option by its terms is not exercisable after the
expiration of five years from the date such incentive stock option is granted.

         7.05 OPTION EXERCISE PERIOD. Options are exercisable only to the extent
that they are vested as provided in the applicable Stock Option Agreement. No
Option shall be exercisable more than ten years from the date the Option was
granted.

         7.06 EMPLOYEE STATUS. In the event that the terms of any Option provide
that it may be exercised only during employment or within a specified period of
time after termination of employment, the Committee may decide in each case to
what extent leaves of absence for governmental or military service, illness,
temporary disability, or other reasons shall not be deemed terminations of
employment.

         7.07 NONTRANSFERABILITY.

         (i) INCENTIVE STOCK OPTIONS. Except as otherwise provided in a
Participant's Agreement, no incentive stock option granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
incentive stock options granted to a Participant under the Plan shall be
exercisable during his or her lifetime only by such Participant.

         (ii) NONQUALIFIED STOCK OPTIONS. Except as otherwise provided in a
Participant's Agreement, no nonqualified stock option granted under this Article
VII may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, except as otherwise provided in a Participant's Agreement, all
nonqualified stock options granted to a Participant under this Article VII shall
be exercisable during his or her lifetime only by such Participant.

         7.08 EXERCISABILITY.


                                       6

<PAGE>

         (i) GENERALLY. Subject to the other provisions of the Plan, an Option
may be exercised in whole at any time or in part, from time to time, at such
times and in compliance with such requirements as set forth in the Agreement. An
Option granted under the Plan may be exercised with respect to any number of
whole shares less than the full number for which the Option could be exercised.
Such partial exercise of an Option shall not affect the right to exercise the
Option from time to time in accordance with the Plan with respect to remaining
shares subject to the Option. Upon the exercise of an Option granted in
connection with Stock Appreciation Rights, the Participant shall surrender
unexercised the Stock Appreciation Rights or, if the Option is not exercised in
full, any portion of the Stock Appreciation Rights to which the exercised
portion of the Option is related.

         (ii) TERMINATION OF EMPLOYMENT.

                  (a)      DEATH, DISABILITY, OR RETIREMENT. Except as otherwise
                           provided in a Participant's Agreement, in the event
                           of a Participant's death or Disability, Options shall
                           become exercisable either according to the terms of
                           the Agreement or on a pro-rata basis based upon the
                           vesting period specified in the Agreement, whichever
                           permits the Participant or beneficiary to exercise
                           Options for a greater number of shares of Common
                           Stock. In the event of Retirement, the Committee may
                           accelerate the exercisability of Options.

                  (b)      OTHER THAN DEATH, DISABILITY, OR RETIREMENT. Each
                           Agreement shall set forth the extent to which the
                           Participant shall have the right to exercise the
                           Option following termination of the Participant's
                           employment with the Company other than for death,
                           Disability, or Retirement. Such provisions shall be
                           determined in the sole discretion of the Board, shall
                           be included in the Agreement entered into with each
                           Participant, need not be uniform among all Options
                           issued pursuant to this Article VII, and may reflect
                           distinctions based on the reasons for termination.

         7.09 EXERCISE; PAYMENT.

         (i) EXERCISE. Unless provided otherwise in an Agreement, an Option
shall be exercised, in whole or in part, by a written notice delivered to the
Committee, which notice shall be on a form proscribed by the Committee and shall
contain the provision or authorization with respect to tax withholding required
by Section 17.06. The Option shall be deemed to have been exercised when such
notice is received by the Committee.

         (ii) PAYMENT. Payment of the Option exercise price shall be made in
cash or a cash equivalent acceptable to the Committee. If the Agreement so
provides, payment of all or part of the Option exercise price may be made in
shares of Common Stock, or through such other arrangements as specified in the
Agreement. If Common Stock is used to pay all or part of the Option exercise
price, the shares surrendered must have a Fair Market Value (determined as of
the day of exercise) 


                                       7

<PAGE>

that is not less than such price or part thereof.

         7.10 SHAREHOLDER RIGHTS. No Participant shall, as a result of having
been granted any Option, have any rights as a shareholder until the date the
Participant becomes a shareholder of record of shares of Common Stock upon
exercise of such Option.


                                  ARTICLE VIII

                                RESTRICTED STOCK

         8.01 AWARDS. In accordance with the provisions of Article V of the
Plan, the Committee may, in its discretion, designate individuals to whom any
subsequent Awards of Restricted Stock are to be made and shall specify the terms
and conditions subject to, and the number of shares of Common Stock covered by,
the Awards.

         8.02 GRANT. An Award of Restricted Stock shall be granted for no
consideration other than services. Each grant of Restricted Stock shall be
evidenced by an Agreement that shall specify the period(s) of restriction, the
number of shares of Restricted Stock granted, and such other provisions as the
Committee shall determine.

         8.03 RESTRICTION PERIOD. The Committee shall establish restriction
periods applicable to any Award and the time(s) at which such restrictions will
lapse.

         8.04 TERMINATION OF EMPLOYMENT.

         (i) DEATH OR DISABILITY. In the event of a Participant's death or
Disability, restrictions on Restricted Stock shall lapse on a pro-rata basis as
designated by the Committee.

         (ii) RETIREMENT. In the event of Retirement, the Committee may
terminate any remaining restrictions on Restricted Stock.

         (iii) OTHER THAN DEATH, DISABILITY OR RETIREMENT. Unless otherwise
provided by the Committee in a Participant's Agreement, in the event that a
Participant granted an Award of Restricted Stock shall cease to be an employee
of the Company and all Affiliates for any reason, including, but not limited to
an employing Affiliate's ceasing to be such, but other than death, Disability,
or Retirement prior to the lapse of all restrictions applicable to such
Restricted Stock, the shares of Restricted Stock awarded to the Participant
shall be forfeited to the Company, effective with the effective date of the
Participant's termination of employment. The Committee may decide in each case
to what extent leaves of absence for governmental or military service, illness,
temporary disability, or other reasons shall not be deemed a termination of
employment.

         8.05 SHAREHOLDER RIGHTS. While the shares are Restricted Stock, a
Participant shall have 


                                       8

<PAGE>

all rights of a shareholder with respect to such shares, including the right to
receive dividends and to vote the shares; provided, however, that (i) a
Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise
dispose of shares of Restricted Stock and (ii) the Company shall retain custody
of the certificates evidencing shares of Restricted Stock.

         8.06 WITHHOLDING NOTICE. Unless provided otherwise in an Agreement, at
the time at which shares become freely transferable upon the lapse of
restrictions, the Participant shall provide written notice to the Committee
setting forth the provision or authorization with respect to tax withholding
required by Section 17.06.


                                   ARTICLE IX

                            STOCK APPRECIATION RIGHTS

         9.01 GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may
be granted under the Plan in connection with an Option either at the time of
grant or by amendment, or may be separately awarded. Stock Appreciation Rights
shall be subject to such terms and conditions not inconsistent with the Plan as
the Committee shall impose. Each grant of Stock Appreciation Rights shall be
evidenced by an Agreement that shall specify the terms and conditions applicable
to such Award.

         9.02 EXERCISABILITY. Stock Appreciation Rights granted in connection
with an Option shall be exercisable to the extent the Option is exercisable.
Stock Appreciation Rights not granted in connection with an Option shall be
exercisable pursuant to such terms and conditions established by the Committee
and designated in the Agreement.

         9.03 FAILURE TO EXERCISE. If a Participant who has been granted Stock
Appreciation Rights has not exercised such rights as of the day the Stock
Appreciation Rights expire due to passage of time, then such rights shall be
deemed to have been exercised by the Participant on such day. The foregoing
sentence applies only if the Fair Market Value of one share of Common Stock on
such day exceeds the Fair Market Value of one share of Common Stock on the day
the Stock Appreciation Rights were granted.

         9.04 EXERCISE; FORM OF PAYMENT.

         (i) EXERCISE. Unless otherwise provided otherwise in an Agreement,
Stock Appreciation Rights shall be exercised, in whole or in part, by a written
notice delivered to the Committee, which notice shall contain the provision or
authorization with respect to tax withholding required by Section 17.06. The
Stock Appreciation Rights shall be deemed to have been exercised when such
notice is received by the Committee.

         (ii) FORM OF PAYMENT. Upon the exercise of Stock Appreciation Rights
granted in 


                                       9

<PAGE>

connection with an Option, the Participant shall surrender unexercised the
Option or, if the Stock Appreciation Rights are not exercised in full, any
portion of the Option to which the Stock Appreciation Rights are related, and
shall be entitled to receive payment (in cash or shares of Common Stock or a
combination thereof as set forth in the Agreement at the time of grant) equal to
the product of the excess of the Fair Market Value of one share of Common Stock
at the date of exercise over the Option price, multiplied by the number of
shares called for by the Stock Appreciation Rights (or portion thereof) which
are so exercised. Upon exercise of Stock Appreciation Rights not granted in
connection with an Option, the Participant shall be entitled to payment (in cash
or shares of Common Stock or a combination thereof as set forth in the Agreement
at the time of grant) equal to the product of the excess of the Fair Market
Value of one share of Common Stock at the date of exercise over the Fair Market
Value of one share of Common Stock at the date of grant of the Stock
Appreciation Rights, multiplied by the number of shares called for by the Stock
Appreciation Rights (or portion thereof) which are so exercised. The value of
any Common Stock payable upon exercise of Stock Appreciation Rights shall be the
Fair Market Value of the Common Stock on the day on which the Stock Appreciation
Rights are exercised. Solely for purposes of Article VI of the Plan, to the
extent that Stock Appreciation Rights granted in connection with an Option are
exercised, such Option shall be deemed to have been exercised, and shall not be
deemed to have lapsed.

         9.05 NONTRANSFERABILITY. Stock Appreciation Rights granted under the
Plan shall not be transferable by the Participant except by will or the laws of
descent and distribution and shall be exercisable during the Participant's
lifetime only by the Participant or, in the event of the Participant's mental or
physical incapacity, by his legal representative.

         9.06 LAPSE OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights
granted in connection with an Option shall lapse in accordance with the same
terms and conditions specified in the underlying Option. Stock Appreciation
Rights not granted in connection with an Option shall lapse in accordance with
the terms and conditions specified by the Committee in the Award.

         9.07 TERMINATION OF EMPLOYMENT. Each Agreement shall set forth the
extent to which the Participant shall have the right to exercise the Stock
Appreciation Right following termination of the Participant's employment with
the Company and/or its Affiliates. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Agreement entered
into with Participants, need not be uniform among all Stock Appreciation Rights
issued pursuant to the Plan, and may reflect distinctions based on the reasons
for termination.

         9.08 SHAREHOLDER RIGHTS. No Participant shall, as a result of having
been granted Stock Appreciation Rights, have any rights as a shareholder until
the date the Participant becomes a shareholder of record of shares of Common
Stock upon exercise of the Stock Appreciation Rights if shares of Common Stock
are issued to such Participant as a result of such exercise.


                                       10

<PAGE>

                                    ARTICLE X

                      PERFORMANCE SHARES/PERFORMANCE UNITS

         10.01 GRANT OF PERFORMANCE SHARES/PERFORMANCE UNITS. Awards made
pursuant to this Article X shall be granted in the form of bookkeeping entries
called Performance Shares or Performance Units, subject to such terms and
conditions not inconsistent with the Plan as the Committee shall impose. Each
Performance Unit shall have an initial value that is established by the
Committee at the time of grant. Each Performance Share shall have an initial
value equal to the Fair Market Value of a share of Common Stock on the date of
grant. The Agreement shall specify the terms and conditions of the Award,
including the performance-related objectives applicable to the Award and the
extent to which satisfaction of such specified objectives will determine the
number and/or value of Performance Units or Performance Shares that will be paid
out to the Participant.

         10.02 PERFORMANCE PERIOD. The measuring period to establish the
performance objectives set forth in a Performance Share or Performance Unit
Agreement shall be no less than three years.

         10.03 FORM OF PAYMENT. Upon the completion of the applicable
performance period, a determination shall be made as to the number of shares of
Common Stock or cash equal to the Award value to be paid to the Participant for
no consideration other than services. Unless provided otherwise in an Agreement,
at the time of payment under the Performance Share or Performance Unit Award,
the Participant shall provide written notice to the Committee setting forth the
provision or authorization with respect to tax withholding required by Section
17.06.

         10.04 TERMINATION OF EMPLOYMENT. Each Agreement shall set forth the
extent to which the Participant shall have the right to receive a payout with
respect to any outstanding Performance Shares or Performance Units following
termination of the Participant's employment with the Company and/or its
Affiliates. Such provisions shall be determined in the sole discretion of the
Committee, shall be included in the Agreement entered into with Participants,
need not be uniform among all Performance Shares or Performance Units issued
pursuant to the Plan, and may reflect distinctions based on the reasons for
termination.

         10.05 SHAREHOLDER RIGHTS. No Participant shall, as a result of having
been awarded Performance Shares or Performance Units, have any rights as a
shareholder until the date the Participant becomes a shareholder of record of
shares of Common Stock upon payment of the Performance Shares, if shares of
Common Stock are issued to such Participant as a result of such payment.


                                       11

<PAGE>

                                   ARTICLE XI

                                 DIVIDEND UNITS

         The Committee may grant Dividend Units equal to a specified number of
shares of Common Stock on which Participants will receive cash payments equal to
the dividends paid on the underlying number of shares when, as, and if paid.
Each grant of Dividend Units shall be evidenced by an Agreement that shall
specify the terms and conditions applicable to such Award, including the
treatment of such Award upon the Participant's termination of employment. An
Award of Dividend Units shall entitle the Participant to payment of an amount of
cash equal to such cash dividends only and not to any right to the actual
dividends on the underlying shares or to the underlying shares themselves. Such
Awards of Dividend Units may be combined with other Awards.


                                   ARTICLE XII

                                INCENTIVE AWARDS

         12.01 GRANT OF INCENTIVE AWARDS. Subject to the terms of the Plan, the
Committee may designate Participants to receive Incentive Awards under the Plan.
Incentive Awards shall be made from an Incentive Pool established for each Plan
Year by the Committee. The Committee shall allocate an Incentive Pool Percentage
to each applicable Participant for each Plan Year. Such allocation shall be made
within ninety (90) days of the commencement of the Plan Year. In no event may
the Incentive Pool Percentage for any one individual Participant exceed fifty
percent (50%) of the total Incentive Pool. In addition, the sum of all
Participants' applicable Incentive Pool Percentages shall not equal more than
one hundred percent (100%) of the Incentive Pool. Each Incentive Award shall be
evidenced by an Agreement that shall specify the terms and conditions applicable
to such Award.

         12.02 DETERMINATION OF INCENTIVE POOL. The Incentive Pool shall be an
amount designated by the Committee each Plan Year. The Incentive Pool amount for
each Plan Year shall be determined by the Committee as soon as practicable
following the close of such Plan Year.

         12.03 DETERMINATION OF INCENTIVE AWARDS. As soon as possible after the
final Incentive Pool amount can be determined, the Committee shall determine
each Participant's allocated amount of the Incentive Pool by multiplying the
final Incentive Pool amount for the Plan Year by each Participant's Incentive
Pool Percentage. A Participant's Incentive Award shall then be determined based
on the Participant's allocated portion of the Incentive Pool, as reduced in the
sole discretion of the Committee. In no event, however, may a Participant's
allocated portion of the Incentive Pool be increased as a result of a reduction
of any other Participant's allocated portion. In reducing a Participant's
Incentive Award, the Committee may consider any such factors it determines
applicable.

         12.04 FORM AND TIMING OF PAYMENT. Unless a qualifying deferral election
is made by a Participant pursuant to Article XIV herein, each Participant's
Final Award shall be paid in one (1) lump sum cash payment as soon as possible
following the release of the Company's audited financial 


                                       12

<PAGE>

statement for the Plan Year.

         12.05 TERMINATION OF EMPLOYMENT.

         (i) TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
Unless determined otherwise by the Committee, in the event the employment of a
Participant is terminated by reason of death, Disability, or Retirement during a
Plan Year, the Participant shall receive a payout of the Incentive Awards which
is prorated, as specified by the Committee in its discretion.

         Payment of earned Incentive Awards shall be made at a time specified by
the Committee in its sole discretion and set forth in the Participant's Award
Agreement. Notwithstanding the foregoing, with respect to Covered Employees who
retire during a Plan Year, payments shall be made at the same time as payments
are made to Participants who did not terminate employment during the applicable
Plan Year.

         (ii) TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a
Participant's employment terminates for any reason other than those reasons set
forth in Section 12.06(i) herein, all Incentive Awards shall be forfeited by the
Participant to the Company unless determined otherwise by the Committee.

         12.06 NONTRANSFERABILITY. Except as otherwise provided by the
Committee, Incentive Awards may not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, other than by will or by the laws of
descent and distribution. Further, except as otherwise provided by the
Committee, a Participant's rights under the Plan shall be exercisable during the
Participant's lifetime only by the Participant's legal representative.


                                  ARTICLE XIII

                              PERFORMANCE MEASURES

         Unless and until the Committee proposes for shareholder vote and
shareholders approve a change in the general performance measures set forth in
this Article XIII, the attainment of which may determine the degree of payout
and/or vesting with respect to Awards to Covered Employees which are designed to
qualify for the Performance-Based Exception, the performance measure(s) to be
used for purposes of such grants shall be chosen from among:

         (a)      Earnings per share;

         (b)      Net income (before or after taxes);

         (c)      Return measures (including, but not limited to, return on
                  assets, equity, or sales);


                                       13

<PAGE>

         (d)      Cash flow return on investments which equals net cash flows
                  divided by owners equity;

         (e)      Earnings before interest, taxes, depreciation, amortization
                  (EBITDA);

         (f)      Gross revenues;

         (g)      Share price (including, but no limited to, growth measures and
                  total shareholder return).

         Company performance shall be based, at the Committee's discretion, on
overall Company performance, performance of a specified segment of the Company's
operations, such a business unit, division, product line, or other such
segmentation, or any combination thereof. This measure may be expressed as a
concrete goal, in terms of an increase or decrease, or in comparison to the
Company's competitors, the industry, or some other comparator group.

         The Committee shall have the discretion to adjust the determinations of
the degree of attainment of the preestablished performance goals; provided,
however, that Awards which are designed to qualify for the Performance-Based
Exception, and which are held by Covered Employee, may not be adjusted upward
(the Committee shall retain the discretion to adjust such Awards downward).

         In the event that applicable tax and/or securities laws change to
permit Committee or Board discretion to alter the governing performance measures
without obtaining shareholder approval of such changes, the Committee shall have
sole discretion to make such changes without obtaining shareholder approval. In
addition, in the event that the Committee determines that it is advisable to
grant Awards which shall not qualify for the Performance-Based Exception, the
Committee may make such grants without satisfying the requirements of Code
Section 162(m).


                                   ARTICLE XIV

                                    DEFERRALS

         The Committee may permit or require a Participant to defer receipt of
the payment of cash or the delivery of shares of Common Stock that would
otherwise be due to such Participant by virtue of the exercise of an Option or
SAR, the lapse or waiver of restrictions with respect to Restricted Stock, the
satisfaction of any requirements or goals with respect to Performance Shares or
Incentive Awards or the receipt of dividend payments on Dividend Units. If any
such deferral election is required or permitted, the Committee shall, in its
sole discretion, establish rules and procedures for such payment deferrals.

                                       14

<PAGE>

                                   ARTICLE XV

         COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES; LEGENDS

         15.01 COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES, LEGENDS.
No Option or Stock Appreciation Rights shall be exercisable, no Common Stock
shall be issued, no certificates for shares of Common Stock shall be delivered,
and no payment shall be made under the Plan except in compliance with all
applicable federal and state laws and regulations (including, without
limitation, tax withholding requirements) and the rules of all stock exchanges
on which the Common Stock may be listed. The Company shall have the right to
rely on an opinion of its counsel as to such compliance. No Option or Stock
Appreciation Rights shall be exercisable, no Common Stock shall be issued, no
certificate for shares shall be delivered, and no payment shall be made under
the Plan until the Company has obtained such consent or approval as the Company
may deem advisable from regulatory bodies having jurisdiction over such matters.
Any share certificate issued to evidence Common Stock or Restricted Stock may
bear such legends and statements as the Company may deem advisable to assure
compliance with the Plan and all federal and state laws and regulations.

         15.02 COMPLIANCE WITH CODE SECTION 162(m). At all times when Code
Section 162(m) is applicable, all Awards granted under this Plan shall comply
with the requirements of Code Section 162(m); provided, however, that in the
event the Committee determines that such compliance is not desired with respect
to any Award or Awards available for grant under the Plan, then compliance with
Code Section 162(m) will not be required. In addition, in the event that changes
are made to Code Section 162(m) to permit greater flexibility with respect to
any Award or Awards available under the Plan, the Board may, subject to this
Article XV, make any adjustments it deems appropriate.


                                   ARTICLE XVI

                    ACCELERATION OF AWARDS; CHANGE OF CONTROL

         16.01 ACCELERATION OF AWARDS. Any other provision to the contrary in
the Plan or any Award or Agreement notwithstanding, in the event that an Award
pursuant to the terms of its grant is not immediately exercisable, is subject to
restrictions, or is subject to the meeting of specified performance objectives,
the Award may initially provide, or the Committee may at any time amend it to
provide, for accelerated exercisability, termination of restrictions, or waiver
or modification of performance objectives, subject to such terms and conditions
and upon the occurrence of such events determined by the Committee in its sole
discretion to justify such acceleration.

         16.02 CHANGE OF CONTROL - ACCELERATION; AUTOMATIC VESTING OF AWARDS.



                                       15

<PAGE>

         (i) ACCELERATION. Subject to the limitations in Section 16.03, any
other provision to the contrary in the Plan or any Award or Agreement
notwithstanding, all Options and Stock Appreciation Rights shall automatically
become fully exercisable, all restrictions applicable to Restricted Stock shall
automatically terminate and all performance objectives in Performance Share
Awards and Incentive Awards shall be waived upon the occurrence of any one or
more of the triggering events specified below:

         (a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii), and (iii) of subsection (c) of this Section 16.02; or

         (b) Individuals who, as of December 31, 1999, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a Director subsequent to
December 31, 1999 whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the Directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the board; or

         (c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially owned, directly or indirectly, more than 50%
of, respectively, the then-outstanding shares of common stock and the combined
voting power of the then-outstanding voting securities entitled to vote
generally in the election of the directors, as the case may be, of the
Corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the Company
or all or substantially all of the Companies assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding
Company Common 

                                       16

<PAGE>

Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Persons (excluding any Corporations resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such Corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then-outstanding shares of common
stock of the Corporation resulting from such Business Combination, or the
Combined Voting Power of the then-outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the Board
of Directors of the Corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or the action of the Board, providing for such Business Combination;
or

         (d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.

         (ii) VESTING OF AWARDS. Except as provided below, upon the occurrence
of any of the triggering events described in Section 16.02(i) above, all
outstanding Awards shall automatically vest and be surrendered, and the
Participants shall receive in full satisfaction therefore, distribution in the
form of shares of Common Stock.

         16.03 CERTAIN REDUCTION OF PAYMENTS. Anything in this Plan to the
contrary notwithstanding, in the event the Company determines that any payment
by it to a Participant (whether paid pursuant to the terms of this Plan or
otherwise) would be nondeductible by the Company for federal income tax purposes
because of Section 28OG of the Code, then any amounts payable to a Participant
pursuant to this Plan shall be reduced automatically to an amount that maximizes
the payments under the Plan without causing any payments to be nondeductible by
the Company because of Section 280G of the Code.


                                  ARTICLE XVII

                               GENERAL PROVISIONS

         17.01 EFFECT ON EMPLOYMENT. Neither the adoption of the Plan, nor the
receipt of any Award under the Plan, nor any documents under the Plan (or any
part thereof), including but not limited to any Agreement, shall confer upon any
employee any right to continue in the employ of the Company or any Affiliate, or
in any way affect any right and power of the Company or any Affiliate to
terminate the employment of any employee at any time with or without assigning a
reason therefor.

         17.02 UNFUNDED PLAN. The Plan shall be unfunded, and neither the
Company nor any Affiliate shall be required to segregate any assets that may at
any time be represented by Awards under the Plan. Any liability of the Company
or any Affiliate to any person with respect to any Award under the Plan shall be
based solely upon contractual obligations created pursuant to the Plan.


                                       17

<PAGE>

No such obligation of the Company or any Affiliate shall be deemed to be secured
by any pledge of, or other encumbrance on, any property of the Company or any
Affiliate.

         17.03 RULES OF CONSTRUCTION. Headings are given to the articles and
sections of the Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.

         17.04 FRACTIONAL SHARES. Any fractional shares concerning Awards shall
be eliminated by rounding down for fractions less than one-half and rounding up
for fractions equal to or more than one-half. No cash settlements shall be made
with respect to fractional shares eliminated by rounding.

         17.05 NONALIENATION. No benefit provided under the Plan shall be
subject to alienation or assignment by a Participant (or by any person entitled
to such benefit pursuant to the terms of the Plan), nor shall it be subject to
attachment or other legal process of whatever nature. Any attempted alienation,
assignment, or attachment shall be void and of no effect whatsoever. Payment
shall be made only to the Participant entitled to receive the same or the
Participant's authorized legal representative. Deposit of any sum in any
financial institution to the credit of any Participant (or a person entitled to
such sum pursuant to the terms of the Plan) shall constitute payment to that
Participant (or such person).

         17.06 TAX WITHHOLDING. Either the Company or an Affiliate, as
appropriate, shall have the right to deduct from all Awards paid in cash any
federal, state, or local taxes as it deems to be required by law to be withheld
with respect to such cash payments. In the case of Awards paid in shares of
Common Stock, the Participant receiving such Common Stock may be required to pay
to the Company or an Affiliate, as appropriate, the amount of any such taxes
which the Company or Affiliate is required to withhold with respect to such
Common Stock. At the request of a Participant, or as required by law, such sums
as may be required for the payment of any estimated or accrued income tax
liability may be withheld or paid to the Company or an Affiliate, as
appropriate, and paid over to the governmental entity entitled to receive the
same.

         17.07 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company
to make payment of Awards in Common Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act of 1933, as amended, or under any state
securities or Blue Sky laws any of the shares of Common Stock issued, delivered,
or paid in settlement under the Plan. If Common Stock awarded under the Plan may
in certain circumstances be exempt from such registration, the Company may
restrict its transfer in such manner as it deems advisable to ensure such exempt
status.

         17.08 RELIANCE ON REPORTS. Each member of the Committee shall be fully
justified in relying or acting in good faith upon any report made by the
independent public accountants of the 


                                       18

<PAGE>

Company and upon any other information furnished in connection with the Plan. In
no event shall any person who is or shall have been a member of the Committee be
liable for any determination made, any other action taken, or any omission to
act in reliance upon any such report or information.

         17.09 COMPANY SUCCESSORS. In the event the Company becomes a party to a
merger, consolidation, sale of substantially all of its assets, or any other
corporate reorganization in which the Company will not be the surviving
corporation or in which the holders of the Common Stock will receive securities
of another corporation (in any such case, the "New Company"), then the New
Company shall assume the rights and obligations of the Company under the Plan.

         17.10 GOVERNING LAW. All matters relating to the Plan, any Awards, or
any Agreements, shall be governed by the laws of the District of Columbia,
without regard to the principles of conflict of laws.

         17.11 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall
be taken into account in determining any benefits under any other pension,
retirement, profit-sharing, or other employee benefit plan of the Company or any
Affiliate.

         17.12 EXPENSES. The expenses of administering the Plan shall be borne
by the Company.

         17.13 PROCEEDS. Any cash proceeds received by the Company under the
Plan shall be used for general corporate purposes, and any shares of Common
Stock withheld by or paid to the Company under the Plan shall be held by the
Company as treasury stock or shall be canceled, as the Company in its discretion
shall determine.


                                  ARTICLE XVIII

                                    AMENDMENT

         The Board may amend the Plan from time to time. No amendment may become
effective until shareholder approval is obtained if such approval is required by
any federal or state law or regulation or the rules of any stock exchange on
which the Common Stock may be listed, or if the Board in its discretion
determines that the obtaining of such shareholder approval is for any reason
advisable. No amendment shall, without a Participant's consent, adversely affect
any rights of such Participant under any Award outstanding at the time such
amendment is made.


                                       19

<PAGE>

                                   ARTICLE XIX

                      EFFECTIVE DATE; DURATION OF THE PLAN

         The effective date of the Plan is October 1, 1999, subject to
shareholder approval. Unless sooner terminated by the Board, the Plan shall
terminate on September 30, 2009; provided, however, that any Award outstanding
at the time of such termination shall continue in full force and effect and
shall continue to be governed by the Plan and its applicable Agreement until the
Award expires or is discharged by its terms.






                                       20



<PAGE>

                                                                     Exhibit 21

    C=corporation; GP=general partnership; LLC=limited liability company;
LP=limited partnership; NP=non-profit corporation; ULLC=unlimited liability
company


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------- ---------------- ---------
ENTITY NAME:                                                                                              JURISDICTION OF   ENTITY
                                                                                                          DOMICILE:          TYPE:
--------------------------------------------------------------------------------------------------------- ---------------- ---------
<S>                                                                                                       <C>              <C>
Allied Specialty Care Services, Inc.                                                                      Florida               C
          Vivra, Inc.                                                                                     Nevada                C
                     Vivra Heart Services, Inc.                                                           Nevada                C
                     Vivra Network Services, Inc.                                                         Florida               C
                     Eye Management, Inc.                                                                 Florida               C
                     PHP Holdings, Inc.                                                                   Colorado              C
Care Management Resources, Inc.                                                                           Florida               C
Charter Behavioral Corporation                                                                            Delaware              C
Green Spring Health Services, Inc.                                                                        Delaware              C
         Advantage Behavioral Systems, Inc.                                                               Pennsylvania          C
                  Resource Day Treatment Center                                                           Pennsylvania         NP
         AdvoCare of Tennessee, Inc.                                                                      Tennessee             C
                  Premier Holdings, Inc.                                                                  Tennessee             C
                               Magellan - PBS, LLC                                                                             LLC
                           Premier Behavioral Systems of Tennessee, LLC(1)                                Tennessee            LLC
         Ceres Behavioral Healthcare System, LLC(2)                                                       Oregon               LLC
         Green Spring Canadian Holding, Inc.                                                              Delaware              C
                  Green Spring Health Services of Canada Co.                                              Nova Scotia         ULLC
                           CHC Quebec les specialistes en PAE, Inc
             Group Practice Affiliates, Inc.                                                              Delaware              C
                           GPA Pennsylvania, Inc.                                                         Pennsylvania          C
                               GMV, LLC
                           Novapsy Clinic, LLC(3)                                                         Virginia             LLC
         Magellan Behavioral of Michigan, Inc.                                                            Michigan              C
         Green Spring of Pennsylvania,
 Inc.                                                               Pennsylvania          C
         Managed Care Services Mainstay of Central Pennsylvania, Inc.                                     Pennsylvania          C
         Maryland Health Partners, LLC(4)                                                                 Maryland             LLC
         Vista Behavioral Health Plans, Inc.                                                              California            C
Human Affairs International, Incorporated                                                                 Utah                  C
         Human Affairs of Alaska, Inc.                                                                    Alaska                C
         Human Affairs International of California                                                        California            C
         Human Affairs International of Pennsylvania, Inc.                                                Pennsylvania          C
Magellan Behavioral Health, Inc.                                                                          Delaware              C
         Magellan Behavioral Health of Washington, Inc.                                                   Washington            C
         MCI/Magellan Partners, L.L.C.(5)                                                                 Delaware             LLC
         Magellan Military Health Solutions, Inc.                                                         Delaware              C
         Tennessee Behavioral Health, Inc.                                                                TN                    C
Magellan Behavioral Health of Texas, Inc.                                                                 Texas                 C
Magellan Capital, Inc.                                                                                    Delaware              C
Magellan CBHS Holdings, Inc.                                                                              Delaware              C
         Behavioral Health Systems of Indiana, Inc.                                                       Indiana               C
                  The Charter Behavioral Health System of Northwest Indiana, LLC(6)                       Delaware             LLC
</TABLE>


--------
(1)      50% owned by Premier Holdings, Inc.
(2)      95% owned by Green Spring Health Services, Inc.
(3)      50% owned by Group Practice Affiliates, Inc.
(4)      50% owned by Green Spring Health Services, Inc.; 50% owned by CMG 
         Health, Inc., a direct subsidiary of Merit Behavioral Care Corporation.
(5)      50% owned by Magellan Behavioral Health, Inc.
(6)      5% owned by Behavioral Health Systems of Indiana, Inc.; 95% owned by 
         Charter Indiana BHS Holding, Inc.


<PAGE>

    C=corporation; GP=general partnership; LLC=limited liability company;
LP=limited partnership; NP=non-profit corporation; ULLC=unlimited liability
company


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------- ---------------- ---------
ENTITY NAME:                                                                                              JURISDICTION OF   ENTITY
                                                                                                          DOMICILE:          TYPE:
--------------------------------------------------------------------------------------------------------- ---------------- ---------
<S>                                                                                                       <C>              <C>
         CCM, Inc.(7)                                                                                     Nevada                C
         Charter Alvarado Behavioral Health System, Inc.                                                  California            C
         Charter Asheville Behavioral Health System, Inc.                                                 North Carolina        C
         Charter Bay Harbor Behavioral Health System, Inc.                                                Florida               C
         Charter Behavioral Health System of Athens, Inc.                                                 Georgia               C
         Charter Behavioral Health System of Central Georgia, Inc.                                        Georgia               C
         Charter Behavioral Health System of Charleston, Inc.                                             South Carolina        C
         Charter Behavioral Health System of Charlottesville, Inc.                                        Virginia              C
         Charter Behavioral Health System of Chicago, Inc.                                                Illinois              C
         Charter Behavioral Health System of Columbia, Inc.                                               Missouri              C
         Charter Behavioral Health System of Corpus Christi, Inc.                                         Texas                 C
         Charter Behavioral Health System of Dallas, Inc.                                                 Texas                 C
         Charter Behavioral Health System of Delmarva, Inc.                                               Maryland              C
         Charter Behavioral Health System at Fair Oaks, Inc.                                              New Jersey            C
         Charter Behavioral Health System of Fort Worth, Inc.                                             Texas                 C
         Charter Behavioral Health System at Hidden Brook, Inc.                                           Maryland              C
         Charter Behavioral Health System of Jackson, Inc.                                                Mississippi           C
         Charter Behavioral Health System of Kansas City, Inc.                                            Kansas                C
         Charter Behavioral Health System of Lafayette, Inc.                                              Louisiana             C
                  The Charter Cypress Behavioral Health System, L.L.C.(8)                                 Tennessee            LLC
         Charter Behavioral Health System of Lake Charles, Inc.                                           Louisiana             C
         Charter Behavioral Health System of Massachusetts, Inc.                                          Massachusetts         C
                  Westwood/Pembroke Health System Limited Partnership(9)                                  Massachusetts        LP
         Charter Behavioral Health System of Mississippi, Inc.                                            Mississippi           C
         Charter Behavioral Health System of Nashua, Inc.                                                 New Hampshire         C
         Charter Behavioral Health System of Nevada, Inc.                                                 Nevada                C
         Charter Behavioral Health System of New Mexico, Inc.                                             New Mexico            C
                  The Charter Heights Behavioral Health System Limited Partnership(10)                    Delaware             LP
         Charter Behavioral Health System of Northwest Arkansas, Inc.                                     Arkansas              C
         Charter Behavioral Health System of Paducah, Inc.                                                Kentucky              C
         Charter Behavioral Health System at Potomac Ridge, Inc.                                          Maryland              C
         Charter Behavioral Health of Puerto Rico, Inc.                                                   Georgia               C
         Charter Behavioral Health System of San Jose, Inc.                                               California            C
         Charter Behavioral Health System of Toledo, Inc.                                                 Ohio                  C
         Charter Canyon Behavioral Health System, Inc.                                                    Utah                  C
         Charter Canyon Springs Behavioral Health System, Inc.                                            California            C
         Charter Centennial Peaks Behavioral Health System, Inc.                                          Colorado              C
         Charter Community Hospital, Inc.                                                                 California            C
         Charter Fairmount Behavioral Health System, Inc.                                                 Pennsylvania          C
         Charter Fenwick Hall Behavioral Health System, Inc.                                              South Carolina        C
         Charter Forest Behavioral Health System, Inc.                                                    Louisiana             C
</TABLE>


--------
(7)      50% owned by Magellan CBHS Holdings, Inc.; 50% owned by CMCI, Inc.
(8)      50% owned by Charter Behavioral Health System of Lafayette, Inc.
(9)      Approximately 97.5% owned by Charter Behavioral Health System of 
         Massachusetts, Inc.
(10)     67% owned by Charter Behavioral Health System of New Mexico, Inc.


<PAGE>

    C=corporation; GP=general partnership; LLC=limited liability company;
LP=limited partnership; NP=non-profit corporation; ULLC=unlimited liability
company


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------- ---------------- ---------
ENTITY NAME:                                                                                              JURISDICTION OF   ENTITY
                                                                                                          DOMICILE:          TYPE:
--------------------------------------------------------------------------------------------------------- ---------------- ---------
<S>                                                                                                       <C>              <C>
         Charter Grapevine Behavioral Health System, Inc.                                                 Texas                 C
         Charter Hospital of Mobile, Inc.                                                                 Alabama               C
         Charter Hospital of Santa Teresa, Inc.                                                           New Mexico            C
         Charter Hospital of St. Louis, Inc.                                                              Missouri              C
         Charter Indiana BHS Holding, Inc.                                                                Indiana               C
                  The Charter Behavioral Health System of Northwest Indiana, LLC(11)                      Delaware             LLC
         Charter Lakehurst Behavioral Health System, Inc.                                                 New Jersey            C
         Charter Linden Oaks Behavioral Health System, Inc.                                               Illinois              C
                  Naperville Psychiatric Ventures (12)                                                    Illinois             GP
         Charter Little Rock Behavioral Health System, Inc.                                               Arkansas              C
         Charter Louisiana Behavioral Health System, Inc.                                                 Louisiana             C
         Charter Meadows Behavioral Health System, Inc.                                                   Maryland              C
         Charter Medical (Cayman Islands) Ltd.                                                            Cayman Islands        C
         Charter Medical - Clayton County, Inc.                                                           Georgia               C
         Charter Medical of East Valley, Inc.                                                             Arizona               C
         Charter Medical International, Inc.                                                              Cayman Islands        C
         Charter Medical International, S.A., Inc.                                                        Nevada                C
         Charter Medical International Services, Inc.                                                     Cayman Islands        C
         Charter Medical Leasing Limited                                                                  United Kingdom        C
         Charter Medical - Long Beach, Inc.                                                               California            C
         Charter Medical of Puerto Rico, Inc.                                                             Puerto Rico           C
         Charter Milwaukee Behavioral Health System, Inc.                                                 Wisconsin             C
         Charter Mission Viejo Behavioral Health System, Inc.                                             California            C
         Charter MOB of Charlottesville, Inc.                                                             Virginia              C
                  Mental Healthsource, L.L.C.(13)                                                         Virginia             LLC
         Charter North Behavioral Health System, Inc.                                                     Alaska                C
         Charter North Counseling Center, Inc.                                                            Alaska                C
         Charter North Star Behavioral Health System, L.L.C.(14)                                          Tennessee            LLC
         Charter Northridge Behavioral Health System, Inc.                                                North Carolina        C
                  Holly Hill/Charter Behavioral Health System, L.L.C.(15)                                 Tennessee            LLC
         Charter Oak Behavioral Health System, Inc.                                                       California            C
         Charter Palms Behavioral Health System, Inc.                                                     Texas                 C
         Charter Park Hospital Limited                                                                    United Kingdom        C
         Charter Plains Behavioral Health System, Inc.                                                    Texas                 C
         Charter Real Behavioral Health System, Inc.                                                      Texas                 C
         Charter Rockford Behavioral Health System, Inc.                                                  Delaware              C
         Charter San Diego Behavioral Health System, Inc.                                                 California            C
         Charter Sioux Falls Behavioral Health System, Inc.                                               South Dakota          C
         Charter Springs Behavioral Health System, Inc.                                                   Florida               C
         Charter Westbrook Behavioral Health System, Inc.                                                 Virginia              C
                  CPS Associates, Inc.                                                                    Virginia              C
         Charter White Oak Behavioral Health System, Inc.                                                 Maryland              C
</TABLE>


--------
(11)     95% owned by Charter Indiana BHS Holding, Inc.; 5% owned by Behavioral 
         Health Systems of Indiana, Inc.
(12)     75% owned by Charter Linden Oaks Behavioral Health System, Inc.
(13)     50% owned by Charter MOB of Charlottesville, Inc.
(14)     57% owned by Magellan CBHS Holdings, Inc.
(15)     50% owned by Charter Northridge Behavioral Health System, Inc.


<PAGE>

    C=corporation; GP=general partnership; LLC=limited liability company;
LP=limited partnership; NP=non-profit corporation; ULLC=unlimited liability
company


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------- ---------------- ---------
ENTITY NAME:                                                                                              JURISDICTION OF   ENTITY
                                                                                                          DOMICILE:          TYPE:
--------------------------------------------------------------------------------------------------------- ---------------- ---------
<S>                                                                                                       <C>              <C>
         Charter Woods Behavioral Health System, Inc.                                                     Alabama               C
         Desert Springs Hospital, Inc.                                                                    Nevada                C
                  CMCI, Inc.                                                                              Nevada                C
                           CCM, Inc.(16)                                                                  Nevada                C
                  CMFC, Inc.                                                                              Nevada                C
         Florida Health Facilities, Inc.                                                                  Florida               C
         Golden Isle Assurance Company Ltd.                                                               Bermuda               C
         NEPA - Massachusetts, Inc.                                                                       Massachusetts         C
         New Allied, Inc.                                                                                 Florida               C
                  Charter Behavioral Health System of the Inland Empire, Inc.                             California            C
         Plymouth Insurance Company, Ltd.                                                                 Bermuda               C
         Strategic Advantage, Inc.                                                                        Minnesota             C
         Western Behavioral Systems, Inc.                                                                 California            C
Magellan Executive Corporation                                                                            Delaware              C
Magellan Public Solutions, Inc.                                                                           Delaware              C
         KidsCareNet of Milwaukee, LLC(17)                                                                Wisconsin            LLC
         Magellan Public Network, Inc.                                                                    Delaware              C
                  Correctional Behavioral Solutions, Inc.                                                 Delaware              C
                           Correctional Behavioral Solutions of Indiana, Inc.                             Indiana               C
                           Correctional Behavioral Solutions of New Jersey, Inc.                          New Jersey            C
                           Correctional Behavioral Solutions of Ohio, Inc.                                Ohio                  C
                  National Mentor, Inc.                                                                   Delaware              C
                           Center for Comprehensive Services, Inc.                                        Illinois              C
                           First Step Independent Living Program, Inc.                                    California            C
                           Horrigan Cole Enterprises, Inc.                                                California            C
                           Illinois Mentor, Inc.                                                          Illinois              C
                                    Rehabilitation Achievement Center, Inc.                               Illinois              C
                           Massachusetts Mentor, Inc.                                                     Massachusetts         C
                           National Mentor Healthcare, Inc.                                               Massachusetts         C
                                    Carolina Behavioral Services, LLC                                     Delaware             LLC
                                    Loyd's Liberty Homes, Inc.                                            California            C
                                    Unlimited Quest, Inc.                                                 California            C
                           Ohio Mentor, Inc.                                                              Ohio                  C
                           South Carolina Mentor, Inc.                                                    South Carolina        C
         Solutions For Care, Inc.                                                                         Delaware             NP
Magellan Specialty Health, Inc.                                                                           Delaware              C
         iHealth Technologies, Inc.(18)                                                                   Delaware              C
                  CAI Merger Corporation                                                                  Delaware              C
MBCH, Inc.                                                                                                Delaware              C
         Merit Behavioral Care Corporation                                                                Delaware              C
                  American Biodyne, Inc.                                                                  Delaware              C
                           AGCA Acquisition Corporation-New York                                          Delaware              C
                           AGCA, Inc.                                                                     Pennsylvania          C
</TABLE>


--------
(16)     50% owned by CMCI, Inc.; 50% owned by Magellan CBHS Holdings, Inc.
(17)     50% owned by Magellan Public Solutions, Inc.
(18)     Formerly known as CAI Holdings, Inc.


<PAGE>

    C=corporation; GP=general partnership; LLC=limited liability company;
LP=limited partnership; NP=non-profit corporation; ULLC=unlimited liability
company


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------- ---------------- ---------
ENTITY NAME:                                                                                              JURISDICTION OF   ENTITY
                                                                                                          DOMICILE:          TYPE:
--------------------------------------------------------------------------------------------------------- ---------------- ---------
<S>                                                                                                       <C>              <C>


                                    AGCA Headquarters Limited Partnership(19)                             Pennsylvania         LP
                                    AGCA New York, Inc.                                                   New York              C
                                            AGCA IPA of New York, Inc.                                    New York              C
                                            MBC Health Care of New York, Inc., a New                      New York              C
                                             York Independent Practice Association
                                            MBC Health Services of New York, Inc., a New York             New York              C
                                             Independent Practice Association
                                            MBC of New York, Inc., a New York                             New York              C
                                             Independent Practice Association
                                            MBC Providers of New York, Inc., a New                        New York              C
                                             York Independent Practice Association
                                            U.S. IPA Providers, Inc.                                      New York              C
                                    Quality Healthcare Solutions, Inc.                                    Pennsylvania          C
                           Alliance Health Systems, Inc.(20)                                              Indiana               C
                           Arizona Biodyne, Inc.                                                          Arizona               C
                           Colorado Biodyne, Inc.                                                         Colorado              C
                           Hawaii Biodyne, Inc.                                                           Hawaii                C
                           Louisiana Biodyne, Inc.                                                        Louisiana             C
                           MBC Federal Programs, Inc.                                                     Delaware              C
                           MBC of New Mexico, Inc.                                                        New Mexico            C
                           Merit Behavioral Care of Florida, Inc.                                         Florida               C
                           Merit Behavioral Care of Illinois, Inc.                                        Illinois              C
                           Merit Behavioral Care of Massachusetts, Inc.                                   Massachusetts         C
                           Merit Behavioral Care of Montana, Inc.                                         Montana               C
                                       Magellan Behavioral Health of Pennsylvania, Inc.                   Pennsylvania          C
                                       (f/k/a Merit Behavioral Care of Pennsylvania, Inc.)
                           Merit Behavioral Care of Texas, Inc.                                           Texas                 C
                           Ohio Biodyne, Inc.                                                             Ohio                  C
                           Vermont Biodyne, Inc.                                                          Vermont               C
                  BCOV-GP, Inc.(21)                                                                       Delaware              C
                     Benesys Doctors, P.A.                                                                Texas
                  Benesys, Inc.                                                                           Delaware              C
                  CMG Health, Inc.                                                                        Maryland              C
                           ARD Properties, Inc.                                                           Delaware              C
                           Choice Behavioral Health Partnership(22)                                       Virginia             GP
                           CMG Health of New York, Inc.                                                   New York              C
                           Inpsych, Inc.                                                                  Maryland              C
                           Inpsych Kentucky, Inc.                                                         Kentucky              C
                           Inpsych Midwest, Inc.                                                          Missouri              C
                           Maryland Health Partners, LLC(23)                                              Maryland             LLC
                           Montana Community Partners, Inc.(24)                                           Montana               C
</TABLE>


--------
(19)     15% owned by AGCA, Inc.
(20)     80% owned by American Biodyne, Inc.
(21)     50% owned by Merit Behavioral Care Corporation
(22)     50% owned by CMG Health, Inc.
(23)     50% owned by CMG Health, Inc.; 50% owned by Green Spring Health 
         Services, Inc.
(24)     55% owned by CMG Health, Inc.


<PAGE>

    C=corporation; GP=general partnership; LLC=limited liability company;
LP=limited partnership; NP=non-profit corporation; ULLC=unlimited liability
company


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------- ---------------- ---------
ENTITY NAME:                                                                                              JURISDICTION OF   ENTITY
                                                                                                          DOMICILE:          TYPE:
--------------------------------------------------------------------------------------------------------- ---------------- ---------
<S>                                                                                                       <C>              <C>


                  Continuum Behavioral Care, LLC(25)                                                      Rhode Island         LLC
                  Continuum Behavioral Healthcare Corporation                                             Delaware              C
                           Spectrum-Continuum Management Services of New York, LLC(26)                    Delaware             LLC
                                    Spectrum-Continuum IPA Providers of New York, LLC(27)                 Delaware             LLC
                  EMHC-MBC of New York, LLC(28)                                                           New York             LLC
                           EMHC/MBC IPA Providers of New York, LLC(29)                                    New York             LLC
                           EMHC-MBC Services of New York, LLC(30)                                         New York             LLC
                  Group Plan Clinic, Inc.                                                                 Texas                 C
                  MBC Health Providers of Texas, Inc.                                                     Texas                 C
                  MBC of America, Inc.                                                                    Delaware              C
                           EMHC/MBC IPA Providers of New York, LLC(31)                                    New York             LLC
                           EMHC-MBC Services of New York, LLC(32)                                         New York             LLC
                           Empire Community Delivery Systems, LLC(33)                                     New York             LLC
                           MBC Management Services of New York, LLC(34)                                   New York             LLC
                           MBC of Nebraska, L.L.C.(35)                                                    Nebraska             LLC
                           MBC of Tennessee, Inc.                                                         Tennessee             C
                           MBC of Tennessee, LLC(36)                                                      Tennessee            LLC
                           MBC/IPA Providers of New York, LLC(37)                                         New York             LLC
                           Royal Health Care, LLC(38)                                                     New York             LLC
                  MBC of North Carolina, LLC                                                              North Carolina       LLC
                  MBC of Tennessee, LLC(39)                                                               Tennessee            LLC
                  MBC Washington Systems, Inc.                                                            Washington            C
                           Community Sector Systems, Inc.(40)                                             Washington            C
                  Merit Behavioral Care Corporation of Iowa                                               Iowa                  C
                  Merit Behavioral Care Systems Corporation                                               Ohio                  C
                           INROADS Behavioral Health Services of Texas, L.P.(41)                          Texas                LP
                           MBCS of Florida, Inc.                                                          Florida               C
                           MBCS of North Carolina, Inc.                                                   North Carolina        C
                           Merit INROADS Behavioral Health Services of Illinois, LLC(42)                  Illinois             LLC
                  Merit Health Insurance Company                                                          Illinois              C
</TABLE>


--------
(25)     50% owned by Merit Behavioral Care Corporation
(26)     50% owned by Continuum Behavioral Healthcare Corporation
(27)     100% owned by Spectrum-Continuum Management Services of New York, LLC
(28)     79.8% owned by Merit Behavioral Care Corporation
(29)     99% owned by EMHC-MBC of New York, LLC; 1% owned by MBC of 
         America, Inc.
(30)     99% owned by EMHC-MBC of New York, LLC; 1% owned by MBC of 
         America, Inc.
(31)     1% owned by MBC of America, Inc.; 99% owned by EMHC-MBC of 
         New York, LLC
(32)     1% owned by MBC of America, Inc.; 99% owned by EMHC-MBC of 
         New York, LLC
(33)     16.667% owned by MBC of America, Inc.
(34)     80.2 % owned by MBC of America, Inc.
(35)     50% owned by MBC of America, Inc.
(36)     MBC of America, Inc and Merit Behavioral Care Corporation serve as sole
         members
(37)     80.2% owned by MBC of America, Inc.
(38)     50% owned by MBC of America, Inc.
(39)     Merit Behavioral Care Corporation and MBC of America, Inc. serve as 
         sole members
(40)     19.9 % owned by MBC Washington Systems, Inc.
(41)     1% owned by Merit Behavioral Care Systems Corporation; 99% owned by 
         Merit INROADS Behavioral Health Services, LLC
(42)     1% owned by Merit Behavioral Care Systems Corporation; 99% owned by 
         Merit INROADS Behavioral Health Services, LLC


<PAGE>

    C=corporation; GP=general partnership; LLC=limited liability company;
LP=limited partnership; NP=non-profit corporation; ULLC=unlimited liability
company


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------- ---------------- ---------
ENTITY NAME:                                                                                              JURISDICTION OF   ENTITY
                                                                                                          DOMICILE:          TYPE:
--------------------------------------------------------------------------------------------------------- ---------------- ---------
<S>                                                                                                       <C>              <C>


                           Orion Life Insurance Company                                                   Delaware              C
                  Merit Holdings Corp.                                                                    Delaware              C
                           MBC National Service Corporation                                               Delaware              C
                           Merit Behavioral Care of Arkansas, Inc.                                        Arkansas              C
                           Merit Behavioral Care of Maryland, Inc.                                        Maryland              C
                           Merit INROADS Behavioral Health Services, LLC(43)                              Delaware             LLC
                                    Merit INROADS Behavioral Health Services of 
                                     Illinois, LLC(44)                                                    Illinois             LLC
                                    INROADS Behavioral Health Services of Texas, L.P.(45)                 Texas                LP
                           MeritChoice, Inc.(46)                                                          Delaware              C
                           MeritChoice, Ltd.(47)                                                          Pennsylvania         LP
                           ProPsych, Inc.                                                                 Florida               C
                  PPC Group, Inc.                                                                         Delaware              C
                           Merit Behavioral Care of California, Inc.                                      Missouri              C
                           P.P.C., Inc.                                                                   Missouri              C
                                    Personal Performance Consultants of New York, Inc.                    New York              C
                  Washton Institute, Inc.                                                                 New York              C



NOTE:     The ownership  interest in each non-indented  entity is directly-held by Magellan Health Services,  Inc.;
          the ownership  interest in each indented entity is  directly-held by the preceding  non-indented  entity.
          The percentage of ownership in each entity is 100% unless otherwise noted in a footnote.
</TABLE>



--------
(43)     99% owned by Merit Holdings Corp.; 1% owned by Merit Behavioral Care of
         Illinois, Inc.
(44)     99% owned by Merit INROADS Behavioral Health Services, LLC; 1% owned by
         Merit Behavioral Care Systems
         Corporation
(45)     99% owned by Merit INROADS Behavioral Health Services, LLC; 1% owned by
         Merit Behavioral Care Systems Corporation
(46)     50% owned by Merit Holdings Corp.
(47)     50% owned by Merit Holdings Corp.



<PAGE>

                                                                    Exhibit 23

Consent of independent public accountants

As independent public accountants, we hereby consent to the incorporation of our
report dated December 11, 2000, and to all references to our firm included in
this Form 10-K into the Company's previously filed Registration Statements on
Form S-3 (File Nos. 333-20371, 333-50423, and 333-53353) and Form S-8 (File Nos.
333-12877, 333-46386, 333-46388, 333-49149, 333-57729, 333-72307, and
333-93911).


Baltimore, Maryland,
December 26, 2000







<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          SEP-30-2000
<PERIOD-END>                               SEP-30-2000
<CASH>                                          41,628
<SECURITIES>                                         0
<RECEIVABLES>                                  137,224
<ALLOWANCES>                                    11,592
<INVENTORY>                                          0
<CURRENT-ASSETS>                               319,653
<PP&E>                                         112,612
<DEPRECIATION>                                  34,463
<TOTAL-ASSETS>                               1,803,787
<CURRENT-LIABILITIES>                          469,879
<BONDS>                                      1,063,928
<PREFERRED-MANDATORY>                           57,834
<PREFERRED>                                          0
<COMMON>                                         8,733
<OTHER-SE>                                     128,464
<TOTAL-LIABILITY-AND-EQUITY>                 1,803,787
<SALES>                                      1,873,554
<TOTAL-REVENUES>                             1,873,554
<CGS>                                                0
<TOTAL-COSTS>                                1,652,582
<OTHER-EXPENSES>                                91,019
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              97,286
<INCOME-PRETAX>                                 32,667
<INCOME-TAX>                                    15,478
<INCOME-CONTINUING>                             17,075
<DISCONTINUED>                                (82,883)
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (65,808)
<EPS-BASIC>                                     (2.17)
<EPS-DILUTED>                                   (2.15)
        

</TABLE>