CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act") and are subject to the Safe Harbor provisions created by the statute. Generally words such as "may", "will", "should", "could", "anticipate", "expect", "intend", "estimate", "plan", "continue", and "believe" or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements.

The following is a discussion and analysis of the financial condition and results of operations of the Company for the years ended June 30, 2009 and 2008. It should be read in conjunction with the operating statistics (Part I, Item 1) and selected financial data (Part II, Item 6) and the accompanying consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K.

Overview

The Company presently provides behavioral health care services through two substance abuse treatment centers, two psychiatric hospitals, a residential treatment facility and eight outpatient psychiatric centers (collectively called "treatment facilities"). The Company's revenue for providing behavioral health services through these facilities is derived from contracts with managed care companies, Medicare, Medicaid, state agencies, railroads, gaming industry corporations and individual clients. The profitability of the Company is largely dependent on the level of patient census and the payer mix at these treatment facilities. Patient census is measured by the number of days a client remains overnight at an inpatient facility or the number of visits or encounters with clients at outpatient clinics. Payor mix is determined by the source of payment to be received for each client being provided billable services. The Company's administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases. Until February 2009, the Company operated a research division, Pivotal Research Centers, Inc. The results of operations for this division are shown as discontinued operations on the accompanying financial statements. During the third quarter of fiscal 2009, the Company returned to profitability, which continued in the fourth quarter of the year with census at Seven Hills progressively increasing and the Capstone facility full.

The healthcare industry is subject to extensive federal, state and local regulation governing, among other things, licensure and certification, conduct of operations, audit and retroactive adjustment of prior government billings and reimbursement. In addition, there are on-going debates and initiatives regarding the restructuring of the health care system in its entirety. The extent of any regulatory changes and their impact on the Company's business is unknown. The previous administration put forth proposals to mandate equality in the benefits available to those individuals suffering from mental illness (The Parity Act). This Act is now law and the target date for full implementation is January 1, 2010. This legislation will improve access to the Company's programs but its total effect on behavioral health providers has not yet been assessed. Managed care has had a profound impact on the Company's operations, in the form of shorter lengths of stay, extensive certification of benefits requirements and, in some cases, reduced payment for services.

Critical Accounting Policies

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including but not limited to those related to revenue recognition, accounts receivable reserves, income tax valuation allowances, and the impairment of goodwill and other intangible assets. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue recognition and accounts receivable:

Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts provided and subsequent settlements are recorded in operations in the period of settlement. Amounts due as a result of cost report settlements are recorded and listed separately on the consolidated balance sheets as "Other receivables" or "Other payables". The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable. The allowance for doubtful accounts does not include the contractual allowances.

The Company currently has two "at-risk" contracts. The contracts call for the Company to provide for all of the inpatient and outpatient behavioral health needs of the insurance carrier's enrollees in a specified area for a fixed monthly fee per member per month. Revenues are recorded monthly based on this formula and the expenses related to providing the services under these contracts are recorded as incurred. The Company provides as much of the care directly and, through utilization review, monitors closely, all inpatient and outpatient services not provided directly. The contracts are considered "at-risk" because the cost of providing the services, including payments to third-party providers for services rendered, could equal or exceed the total amount of the revenue recorded.

All revenues reported by the Company are shown net of estimated contractual adjustment and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the AICPA "Audit and Accounting Guide for Health Care Organizations." Net contractual adjustments recorded in fiscal 2009 for revenue booked in prior years resulted in an increase in net revenue of approximately $59,200. Net contractual adjustments recorded in fiscal 2008 for revenue booked in prior years resulted in an increase in net revenue of approximately $48,500.

During the fiscal year ended June 30, 2008, a Medicare cost report settlement of $360,588 was received. For the fiscal years ended June 30, 2009, no third party cost report settlements were expected; however, the Company sent a required Medicare settlement payment of approximately $170,000 based on desk review of the 2008 cost report. This settlement, although paid, is currently on appeal and is expected to be recouped; therefore, no settlement expense was recorded.

Below is revenue by payor and the accounts receivable aging information as of June 30, 2009 and June 30, 2008 for our treatment services segment.

Net Patient Care Revenue by Payor (in thousands) For the Twelve Months Ended

             June 30, 2009   June 30, 2008
            Amount  Percent Amount  Percent
Private Pay $2,224    5%    $1,893    5%
Commercial  29,553    70%   27,229    66%
Medicare*    1,027    2%     1,263    3%
Medicaid     9,796    23%   10,471    26%

Net Revenue $42,600         $40,856



*includes Medicare cost report settlement revenue as noted above

    Accounts Receivable Aging (Net of allowance for bad debts- in thousands)


June 30, 2009
Payor         Current      Over 30       Over 60       Over 90      Over 120      Over 150       Over 270      Over 360      Total

Private Pay   $    102     $    123     $     114     $     139     $     139     $     283     $       45     $     214     $ 1,159
Commercial       2,161          981           226           181            70           111              4            41       3,775
Medicare            49           --             5            --             2            --             --            --          56
Medicaid         1,110          157            26            32            16            18             --             2       1,361
Total         $  3,422     $  1,261     $     371     $     352     $     227     $     412     $       49     $     257     $ 6,351

June 30, 2008
Payor         Current      Over 30       Over 60       Over 90      Over 120      Over 150      Over 270      Over 360      Total

Private Pay   $    544     $     72     $      45     $      58     $      56     $     235     $     107     $     263     $ 1,380
Commercial       1,382          985           746           194           228           183            10            60       3,788
Medicare            38            -             -             1            --            --            --            --          39
Medicaid         1,140           98             5             -            --            25            --            --       1,268
Total         $  3,104     $  1,155     $     796     $     253     $     284     $     443     $     117     $     323     $ 6,475

Contract support service revenue is a result of fixed fee contracts to provide telephone support. Revenue for these services is recognized ratably over the service period. All revenues and receivables from our contract services division are based on a prorated monthly allocation of the total contract amount and usually paid within 30 days of the end of the month.

Allowance for doubtful accounts:

The provision for bad debts is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account remains outstanding until the account is over 360 days outstanding, at which time the provision is 80-100% of the outstanding balance. These percentages vary by facility based on each facility's experience in and expectations for collecting older receivables, which is reviewed at least quarterly and adjusted if required. The Company compares this required reserve amount to the current "Allowance for doubtful accounts" to determine the required bad debt expense for the period. This method of determining the required "Allowance for doubtful accounts" has historically resulted in an allowance for doubtful accounts of 20% or greater of the total outstanding receivables balance, which the Company believes to be a reasonable valuation of its accounts receivable.

Income Taxes:

The Company follows the liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. The Company's policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods. During fiscal 2008 the Company recorded a provision for tax expense of $1,365,723 excluding discontinued operations and during fiscal 2009 the Company recorded a tax expense from continuing operations of $65,764.

On July 1, 2007 the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN48"), "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109". In accordance with FIN 48, we may establish reserves for tax uncertainties that reflect the use of the comprehensive model for the recognition and measurement of uncertain tax positions. Tax authorities periodically challenge certain transactions and deductions reported on our income tax returns. We do not expect the outcome of these examinations, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations, or cash flows.

Valuation of Goodwill and Other Intangible Assets

Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions. The Company makes significant estimates and assumptions, which are derived from information obtained from the management of the acquired businesses and the Company's business plans for the acquired businesses in determining the value ascribed to the assets acquired. Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to: (i) future expected cash flows from services to be provided, customer contracts and relationships, and
(ii) the acquired market position. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company identifies the impairment.

Investment in unconsolidated subsidiaries

Included in other assets as of June 30, 2009 and 2008 is the Company's investment in Seven Hills Psych Center, LLC of $354,428 and $399,735, respectively. This LLC holds the assets of the Seven Hills Hospital completed in May, 2008, being leased and operated by the Company's subsidiary Seven Hills Hospital, Inc. Also included, as of June 30, 2009 and 2008, is the Company's investment in Behavioral Health Partners, LLC of $698,869 and $700,000, respectively. This LLC constructed an out patient clinic which was completed in the fourth fiscal quarter of 2009 and occupied as a fourth site to the Company's Harmony subsidiary on July 1, 2009. Both investments are accounted for based on the equity method of accounting. Accordingly, the Company records its share of the investor companies' income/loss as an increase/decrease to the carrying value of these investments.

Results of Operations

During the fiscal year ended June 30, 2009 the Company experienced continued increases in the patient treatment revenue, which was offset by the start up of our Seven Hills Hospital operation which opened in May 2008. We also experienced a decrease in Contract Services revenue with the expiration of the smoking cessation contract.

The following table illustrates our consolidated results of operations for the years ended June 30, 2009 and 2008 (in thousands):

                                                    2009                         2008
Statements of Operations Data:                               ($ in thousands)
                                              Amount             %         Amount             %
Revenues                                   $  46,411         100.0 %    $  45,397         100.0 %
Cost and Expenses:
Patient care expenses                         23,835          51.4 %       22,133          48.7 %
Contract expenses                              3,016           6.5 %        3,390           7.5 %
Administrative expenses                       18,721          40.3 %       15,465          34.0 %
Provision for doubtful accounts                1,638           3.5 %        1,311           2.9 %
Interest expense                                 452           1.0 %          397           0.9 %
Other (income) expenses including
interest income, net                            (275 )        (0.6 %)        (249 )        (0.5 %)
Total expenses                                47,387         102.1 %       42,447          93.5 %

Income (loss) before income taxes               (976 )        (2.1 %)       2,950           6.5 %

Provision for income taxes                        65           0.1 %        1,366           3.0 %

Net income (loss) from continuing
operations                                    (1,041 )        (2.2 %)       1,585           3.5 %

Net income (loss) from discontinued
operations                                    (1,413 )        (3.0 %)      (1,260 )        (2.8 %)

Net income (loss) applicable to common
shareholders                               $  (2,454 )        (5.3 %)   $     325           0.7 %

Year ended June 30, 2009 as compared to year ended June 30, 2008

The Company returned to profitability during the third quarter of fiscal 2009 with steady increases in census and revenue at our two start up operations Seven Hills Hospital in Las Vegas and Capstone Academy in Michigan. Fourth quarter results continued to improve significantly over the third quarter indicating that these businesses are beginning to mature. The Company's income from continuing operations decreased to a loss of $1,041,375 for the fiscal year ended June 30, 2009 from income of $1,584,607 for the fiscal year ended June 30, 2008. Net income decreased to a net loss of $2,454,008 for the fiscal year ended June 30, 2009 compared to net income of $324,728 for the fiscal year ended June 30, 2008. Income from continuing operations before taxes decreased to a loss of $975,611 for the fiscal year ended June 30, 2009 from $2,950,330 for the fiscal year ended June 30, 2008. This decrease is primarily the result of the slow start up of Seven Hills Hospital, the relocation of the Detroit Behavioral Institute and as a result of deteriorating general economic conditions at the beginning of the fiscal year. General economic conditions also resulted in very high utilization of services under our capitated contracts resulting in higher than anticipated costs under the contracts. New rates under these contracts were negotiated and implemented in the third quarter of the fiscal year as utilization continued to be higher than anticipated.

Total revenues increased 2.2% to $46,411,019 for the year ended June 30, 2009 from $45,397,337 for the year ended June 30, 2008.

Total net patient care revenue from all facilities increased 4.3% to $42,599,963 for the year ended June 30, 2009 as compared to $40,856,077 for the year ended June 30, 2008. Patient days increased 1,591 days for the fiscal year ending June 30, 2009 over the fiscal year ended June 30, 2008, which includes 5,180 bed days provided by Seven Hills Hospital for clients covered under the Harmony capitated contracts, which is recorded as intercompany revenue and eliminated in consolidation. In fiscal 2009 the Company added residential beds at Detroit Behavioral Institute, increasing the total number of licensed beds at our facilities from 244 to 260. These additional available beds accounted for the increase in patient days for the fiscal year ended June 30, 2009. The contracted rate for the residential beds is lower than that of our other facilities, which negatively impacts our revenue per patient day without positive changes in our census and payor mix at our other facilities. Net inpatient care revenue from inpatient psychiatric services increased 5.9% to $23,634,602 for the year ended June 30, 2009 from $22,327,159 the fiscal year ended June 30, 2008. This increase is due to a change in payor mix to payors with more favorable approved rates and from the increase in residential treatment beds. Net partial hospitalization and outpatient care revenue increased 2.4% to $18,965,362 for the year ended June 30, 2009 from $18,528,918 for the year ended June 30, 2008. This increase is primarily due to a more favorable payor mix. Managed care continues to utilize these step-down programs as a treatment alternative to inpatient care. Wellplace revenues decreased 16.1% to $3,811,056 for the year ended June 30, 2009 from $4,541,260 for the year ended June 30, 2008 due to the expiration of the smoking cessation contract. All revenues reported in the accompanying consolidated statements of operations are shown net of estimated contractual adjustments and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the AICPA Audit and Accounting Guide for Health Care Organizations.

Patient care expenses increased by $1,701,641, or 7.7%, to $23,834,841 for the year ended June 30, 2009 from $22,133,200 for the year ended June 30, 2008 due to the increase in available beds contributing to the increase in patient census at our inpatient facilities and increased utilization under our capitated contracts. Inpatient census increased by 1,591 patient days, 2.8%, for the year ended June 30, 2009 compared to the year ended June 30, 2008. Contract expense, which includes the cost of outside service providers for our capitated contracts, increased 43.5% to $4,723,122 for the year ended June 30, 2009 from $3,291,891 for the year ended June 30, 2008 due to high utilization under the capitated contracts. Payroll and service related consulting expenses, including agency nursing, increased 13.7% to $18,946,118 for the year ended June 30, 2009 from $16,656,560 for the year ended June 30, 2008. Food and dietary expense increased 11.5% to $954,654 for the year ended June 30, 2009 from $856,114 for the year ended June 30, 2008. Hospital supplies expense increased 15.0% to $94,707 for the year ended June 30, 2009 from $82,363 for the year ended June 30, 2008. Housekeeping expense increased 43.4% to $137,649 for the year ended June 30, 2009 from $96,019 for the year ended June 30, 2008. Lab fees increased 5.3% to $268,373 for the year ended June 30, 2009 from $254,965 for the year ended June 30, 2008. Laundry expense increased 19.9% to $114,461 for the year ended June 30, 2009 from $95,434 for the year ended June 30, 2008. Pharmacy expense increased 36.1% to $881,778 for the year ended June 30, 2009 from $647,952 for the year ended June 30, 2008. Other patient related expenses increased 45.2% to $156,718 for the year ended June 30, 2009 from $107,918 for the year ended June 30, 2008. All of these increases were a result of increased patient census and the inclusion of a full twelve months of operations for our Seven Hills Hospital and six months of operations of our new site at Detroit Capstone Academy. We continue to closely monitor the ordering of all hospital supplies, food and pharmaceutical supplies, but these expenses all relate directly to the number of days of inpatient services we provide and are expected to increase with higher patient census and outpatient visits. (see "Operating Statistics" Part I, Item 1).

Cost of contract support services related to Wellplace decreased 11.0% to $3,015,782 for the year ended June 30, 2009 from $3,390,224 for the year ended June 30, 2008. Payroll expense decreased 20.7% to $1,059,178 for the year ended June 30, 2009 from $1,334,954 for the year ended June 30, 2008. Maintenance decreased 39.8% to $74,788 for the fiscal year ended June 30, 2009 from $124,200 for the year ended June 30, 2008. Office expense decreased 46.9% to $24,040 for the year ended June 30, 2009 from $45,303 for the year ended June 30, 2008. All of these decreases in expense are a result in the expiration of the smoking cessation contract mentioned above. Postage expense increased 35. 18% to $23,220 for the year ended June 30, 2009 from $17,177 for the year ended June 30 2008 as mailing requirements for the Wayne County contract continued to increase.

Provision for doubtful accounts increased 24.9% to $1,637,738 for the fiscal year ended June 30, 2009 from $1,311,431 for the fiscal year ended June 30, 2008. This increase is a result of increases in the age of accounts resulting from the new Seven Hills Hospital. The policy of the Company is to provide an allowance for doubtful accounts based on the age of receivables resulting in higher bad debt expense as receivables age. The goal of the Company, given this policy, is to keep any changes in the provision for doubtful accounts at a rate lower than changes in aged accounts receivable.

The environment the Company operates in today makes collection of receivables, particularly older receivables, more difficult than in previous years. Accordingly, the Company has increased staff, standardized some procedures for collecting receivables and instituted a more aggressive collection policy, which has for the most part resulted in an overall decrease in the age of its accounts receivable. The Company's gross receivables from direct patient care increased 0.9% to $8,781,311 for the year ended June 30, 2009 from $8,705,104 for the year ended June 30, 2008. The Company believes its reserve of approximately 28% is sufficient based on the age of the receivables. We continue to reserve for bad debt based on managed care denials and past difficulty in collections. The growth of managed care has negatively impacted reimbursement for behavioral health services with higher contractual adjustments and a higher rate of denials requiring higher reserves.

Total administrative expenses increased 21.1% to $18,721,491 for the year ended June 30, 2009 from $15,464,544 for the year ended June 30, 2008. Payroll and consultant expense increased 7.6% to $6,760,875 for the year ended June 30, 2009 from $6,285,678 for the year ended June 30, 2008. Payroll tax expense increased 12.1% to $467,287 for the year ended June 30, 2009 from $417,023 for the year ended June 30, 2008. Employee benefits increased 20.7% to $951,413 for the year ended June 30, 2009 from $788,309 for the year ended June 30, 2008. All of these increases in payroll and employee related expenses are a result of an increase in staff to facilitate the opening of our new facility, Seven Hills Hospital, expansion of the Detroit Behavioral Institute and greater competition for experienced health care administrative staff. Rent expense increased 96.1% to $3,687,305 for the year ended June 30, 2009 from $1,879,896 for the year ended June 30, 2008. This increase is due to the opening of Seven Hills Hospital in Las Vegas, the opening of the new Detroit Behavioral Institute site, the start of the lease on the new Harmony location at Post Road which officially opened July 1, 2009 and normal CPI increases included in our property leases. Depreciation expense increased 40.9% to $956,703 for the year ended June 30, 2009 from $679,214 for the year ended June 30, 2008 due to the new equipment purchased related to new operations mentioned above. Utilities increased 72.8% to $364,284 for the year ended June 30, 2009 from $210,834 for the year ended June 30, 2008, due to the opening of Seven Hills in May of 2008 and the change in location of Detroit Behavioral Institute to Capstone Academy in January 2009.

Interest expense increased 14.0% to $452,207 for the year ended June 30, 2009 from $396,630 for the year ended June 30, 2008. This increase is primarily due to a temporary cash shortage experienced during the third quarter of the fiscal year prior to the sale of the research division. The need to access short term capital in today's fiscal environment carried with it high origination fees and high interest expense.

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