According to the federal Health Care Financing Administration, healthcare expenditures in the United States grew at an average annual rate of 6% from 1997 to 1999, were expected to exceed $1.3 trillion in 2000 and are expected to continue to increase.

Managed behavioral healthcare organizations attempt to match an appropriate healthcare provider and treatment setting to the patient to provide care in a cost-efficient manner, with early access to care and treatments believed to be the most effective. According to Open Minds, a leading industry publication, enrollment in managed behavioral healthcare organizations rose by 143% from

approximately 86.3 million covered lives in 1993 to approximately 209.2 million covered lives in 2000. These organizations had revenues of approximately $4.4 billion in 1999, according to that publication.

Parity legislation presents a significant growth opportunity for the industry. The federal government mandated, effective January 1, 2001, that all health maintenance organizations and insurers providing healthcare coverage to federal employees offer comparable benefits for both mental healthcare and medical care benefits to these employees. In addition, a majority of states have previously enacted some form of parity legislation covering either state residents generally or state employees.

Managed behavioral healthcare organizations have responded to the increased demand for behavioral healthcare services by attempting to improve member access to behavioral healthcare services and by offering clients assistance with the complexity and costs of providing these services.

The Company maintains a network of providers, which included approximately 26,000 individual providers and approximately 850

facility providers as of December 31, 2000. The Company verifies the credentials of its network providers in accordance with standards of the National Committee for Quality Assurance and applicable law and monitors the quality and efficiencyof the treatment they provide through various methods, including provider profiling.

For each of its clients, the Company develops a customized arrangement for the transmission of data to it for use in its information systems that verifies the eligibility of a particular member for services. The Company matches the member-patient with an appropriate provider for treatment, based on its understanding of the patient's

individual needs and preferences. The Company also offers members the ability to find providers through its web sites.

The Company reviews and, when appropriate, suggests changes to patient treatment plans to assure that appropriate care is being provided. The Company attempts to customize treatment plans to meet the individual member's needs and periodically monitor progress and outcomes.

The Company electronically processes and pays submitted claims. The Company’s information systems automatically access the necessary membership, benefits, authorization and provider files and require manual intervention in only limited cases.

The Company creates and delivers customized management reports to clients, increasingly in an electronic format. The Company owns the source code for the software that generates these reports, allowing it to readily customize the reports to its client's individual preferences and needs.

Under its at-risk programs, the Company arranges for the provision of a full range of behavioral healthcare services for its clients and members of their health plans and assume full responsibility for the cost of providing these services and the related administrative services.

Under its administrative services only programs, the Company offers clients the same services it provides in its at-risk programs, but do not assume financial responsibility for the cost of treatment. Clients purchase only those services they desire and the Company receives a fixed annual or per member per month administrative fee for the services selected.

Direct service expense increased 85% from $29.4 million for the year ended September 30, 1999 to $54.3 million for the year ended September 30, 2000.

General and administrative expense increased 16% from $5.7 million for the year ended September 30, 1999 to $6.6 million for the year ended September 30, 2000.

Depreciation and amortization expense increased 109% from $1.2 million for the year ended September 30, 1999 to $2.6 million for the year ended September 30, 2000.

Interest expense increased 56% from $903.0 thousand for the year ended September 30, 1999 to $1.4 million for the year ended September 30, 2000.