SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:December 31, 2000 Commission File Number: 1-12238

MHM SERVICES, INC.
(Exact name of Registrant as specified in its charter)

|                                                                                                 |  |                                                
|------------------------------------------------------------------------------------------------ |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization)                          |  | 52-1223048
(I.R.S. Employer
Identification No.)
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|8605 Westwood Center Drive, Suite 400, Vienna, Virginia
(Address of principal executive offices) |  | 22182
(Zip Code)                               

Registrants telephone number, including area code: (703) 749-4600

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 requirement for the past 90 days. Yes XNo

As of February 14, 2001, there were 30,645 shares of Common Stock, par value
$.01 per share, outstanding.





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MHM SERVICES, INC., AND SUBSIDIARIES
Quarter Ended December 31, 2000
INDEX

|                                    |                                                                                                                     |                                                                                                                                    |        |    |    | 
|----------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------ | -- | -- | 
|                                    |                                                                                                                     |                                                                                                                                    | Page   |   
|                                    |                                                                                                                     |                                                                                                                                    | Number |   
|PART I.       FINANCIAL INFORMATION
|                                   
|                                   
|                                   
|                                   
|                                    | Item 1.     Financial Statements                                                                                   
|                                   
|                                   
|                                   
|                                   
|                                    |                                                                                                                     | Condensed Consolidated Statements of Operations-                                                                                  
|                                   
|                                   
|                                   
|                                   
|                                    |                                                                                                                     | Three Months Ended December 31, 2000 and 1999             (Unaudited)                                                              |        | 4  |    | 
|                                   
|                                   
|                                   
|                                   
|                                    |                                                                                                                     | Condensed Consolidated Balance SheetsDecember 31, 2000             (Unaudited)
and September 30, 2000                             |        | 5  |    | 
|                                   
|                                   
|                                   
|                                   
|                                    |                                                                                                                     | Condensed Consolidated Statements of Cash Flows
            Three Months Ended December 31, 2000 and 1999             (Unaudited) |        | 6  |    | 
|                                   
|                                   
|                                   
|                                   
|                                    |                                                                                                                     | Notes to Condensed Consolidated Financial
Statements             (Unaudited)                                                       |        | 7- | 10 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Item 2.
    Managements Discussion and Analysis of Financial                   Condition and Results of Operations |                                                                                                                                    | 10-    | 15 |    | 
|                                   
|                                   
|                                   
|                                   
|PART II.       OTHER INFORMATION   
|                                   
|                                   
|                                   
|                                   
|                                    | Item 1.     Legal Proceedings                                                                                       |                                                                                                                                    | 15     |    |   
|                                   
|                                   
|                                   
|                                   
|                                    | Item 2.     Changes in Securities and Use of Proceeds                                                               |                                                                                                                                    | 15     |    |   
|                                   
|                                   
|                                   
|                                   
|                                    | Item 3.     Defaults Upon Senior Securities                                                                         |                                                                                                                                    | 15     |    |   
|                                   
|                                   
|                                   
|                                   
|                                    | Item 4.     Submission of Matters to Vote of Security Holders                                                       |                                                                                                                                    | 15     |    |   
|                                   
|                                   
|                                   
|                                   
|                                    | Item 5.     Other Information                                                                                       |                                                                                                                                    | 15     |    |   
|                                   
|                                   
|                                   
|                                   
|                                    | Item 6.     Exhibits and Reports on Form 8-K                                                                        |                                                                                                                                    | 15     |    |   

2



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MHM SERVICES, INC., AND SUBSIDIARIES
Quarter Ended December 31, 2000

PART I.                                       
                FINANCIAL INFORMATION

Item 1.                                  
                           Financial Statements

3



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MHM SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                   |                               |          |           |                                 |        |      |           |           |       | 
|-------------------------------------------------- | ----------------------------- | -------- | --------- | ------------------------------- | ------ | ---- | --------- | --------- | ----- | 
|                                                   |                               |          |           | Three Months Ended December 31,
|                                                   |                               |          |           |                                
|                                                   |                               |          |           | 2000                            |        | 1999
|                                                   |                               |          |           |                                 |        |     
|Net revenues                                       |                               | $        | 5,575,000 |                                 |        |      | 4,684,000 |          
|                                                  
|                                                  
|                                                  
|                                                  
|Costs and expenses:                               
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Operating                     |          |           | 4,297,000                       |        |      |           | 3,524,000 |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | General and administrative    |          |           | 1,083,000                       |        |      |           | 932,000   |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Provision for bad debts       |          |           | 29,000                          |        |      |           | 75,000    |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Depreciation and amortization |          |           | 10,000                          |        |      |           | 23,000    |      
|                                                  
|                                                  
|                                                  
|                                                  
|Other (credits) charges:                          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Interest expense              |          |           | 23,000                          |        |      |           | 36,000    |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Loss on disposal of assets    |          |           |                                |        |      |           | 5,000     |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Other                         |          |           | (14,000                         | )      |      |           | (81,000   | )    
|                                                   |                               |          |           |                                 |        |      |           |          
|Income before gain on dissolution and income taxes |                               |          | 147,000   |                                 |        |      | 170,000   |          
|                                                  
|                                                  
|                                                  
|                                                  
|Gain on dissolution of Extended Care Services      |                               |          | (261,000  | )                               |        |      |          |          
|                                                   |                               |          |           |                                 |        |      |           |          
|Income before income taxes                         |                               |          | 408,000   |                                 |        |      | 170,000   |          
|                                                  
|                                                  
|                                                  
|                                                  
|Income tax expense                                 |                               |          | 144,000   |                                 |        |      | 14,000    |          
|                                                   |                               |          |           |                                 |        |      |           |          
|Net income                                         |                               | $        | 264,000   |                                 |        | $    | 156,000   |          
|                                                   |                               |          |           |                                 |        |      |           |          
|Earnings per common share:                        
|
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                               | -basic   |           | $                               | 8.61   |      |           | $         | 21.41 | 
|                                                   |                               |          |           |                                 |        |      |           |          
|                                                   |                               | -diluted |           | $                               | 8.45   |      |           | $         | 17.45 | 
|                                                   |                               |          |           |                                 |        |      |           |          
|Weighted average shares outstanding:              
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                               | -basic   |           |                                 | 30,645 |      |           |           | 7,287 | 
|                                                   |                               |          |           |                                 |        |      |           |          
|                                                   |                               | -diluted |           |                                 | 31,239 |      |           |           | 8,941 | 
|                                                   |                               |          |           |                                 |        |      |           |          

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4



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MHM SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|                              |                                                                                                                                                           |                            |                                      |                    |             |  |           |             |           |  | 
|----------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------------------ | ----------- |  | --------- | ----------- | --------- |  | 
|                              |                                                                                                                                                           |                            |                                      |                    | (Unaudited)
|Assets                        |                                                                                                                                                           | December 31, 2000          |                                      | September 30, 2000
|                              |                                                                                                                                                           |                            |                                      |                   
|Current assets:              
|                             
|                             
|                             
|                             
|                              | Cash and cash equivalents                                                                                                                                 |                            | $                                    | 18,000             |             |  |           | 211,000     |          
|                             
|                             
|                             
|                             
|                              | Accounts receivable, net                                                                                                                                  |                            |                                      | 1,364,000          |             |  |           | 1,479,000   |          
|                             
|                             
|                             
|                             
|                              | Prepaid expenses                                                                                                                                          |                            |                                      | 305,000            |             |  |           | 347,000     |          
|                             
|                             
|                             
|                             
|                              | Other current assets                                                                                                                                      |                            |                                      | 166,000            |             |  |           | 267,000     |          
|                             
|                             
|                             
|                             
|                              | Deferred income taxes                                                                                                                                     |                            |                                      | 557,000            |             |  |           | 251,000     |          
|                              |                                                                                                                                                           |                            |                                      |                    |             |  |           |            
|                              |                                                                                                                                                           | Total currrent assets      |                                      |                    | 2,410,000   |  |           |             | 2,555,000 | 
|                             
|                             
|                             
|                             
|Property and equipment, net   |                                                                                                                                                           |                            | 84,000                               |                    |             |  | 85,000    |            
|                             
|                             
|                             
|                             
|Restricted cash               |                                                                                                                                                           |                            | 275,000                              |                    |             |  | 275,000   |            
|                             
|                             
|                             
|                             
|Other assets                  |                                                                                                                                                           |                            | 106,000                              |                    |             |  | 106,000   |            
|                             
|                             
|                             
|                             
|Deferred income taxes         |                                                                                                                                                           |                            | 3,186,000                            |                    |             |  | 3,645,000 |            
|                              |                                                                                                                                                           |                            |                                      |                    |             |  |           |            
|                              |                                                                                                                                                           | $                          | 6,061,000                            |                    |             |  | 6,666,000 |            
|                              |                                                                                                                                                           |                            |                                      |                    |             |  |           |            
|                              |                                                                                                                                                           |                            | Liabilities and Stockholders Equity
|Current liabilities:         
|                             
|                             
|                             
|                             
|                              | Accounts payable                                                                                                                                          |                            |                                      | 667,000            |             |  |           | 454,000     |          
|                             
|                             
|                             
|                             
|                              | Accrued payroll and related expenses                                                                                                                      |                            |                                      | 919,000            |             |  |           | 977,000     |          
|                             
|                             
|                             
|                             
|                              | Estimated third-party payor settlements                                                                                                                   |                            |                                      | 50,000             |             |  |           | 106,000     |          
|                             
|                             
|                             
|                             
|                              | Other accrued expenses                                                                                                                                    |                            |                                      | 643,000            |             |  |           | 1,675,000   |          
|                             
|                             
|                             
|                             
|                              | Notes payable                                                                                                                                             |                            |                                      | 139,000            |             |  |           | 170,000     |          
|                             
|                             
|                             
|                             
|                              | Current maturities of long-term debt                                                                                                                      |                            |                                      | 3,000              |             |  |           | 67,000      |          
|                             
|                             
|                             
|                             
|                              | Deferred income taxes                                                                                                                                     |                            |                                      | 117,000            |             |  |           | 143,000     |          
|                              |                                                                                                                                                           |                            |                                      |                    |             |  |           |            
|                              |                                                                                                                                                           | Total currrent liabilities |                                      |                    | 2,538,000   |  |           |             | 3,592,000 | 
|                             
|                             
|                             
|                             
|Long-term debt                |                                                                                                                                                           |                            |                                     |                    |             |  | 1,400,000 |            
|                             
|                             
|                             
|                             
|Stockholders equity:        
|                             
|                             
|                             
|                             
|                              | Preferred stock ($.01 par value; authorized: 5,000,000;
issued and outstanding: none)                                                                     |                            |                                      |                   |             |  |           |            |          
|                             
|                             
|                             
|                             
|                              | Common stock ($.01 par value; authorized: 15,000,000;
issued and outstanding: 30,645 and 7,266
at December 31, 2000 and September 30, 2000, respectively) |                            |                                      |                   |             |  |           |            |          
|                             
|                             
|                             
|                             
|                              | Additional paid-in capital                                                                                                                                |                            |                                      | 43,714,000         |             |  |           | 42,100,000  |          
|                             
|                             
|                             
|                             
|                              | Accumulated deficit                                                                                                                                       |                            |                                      | (40,157,000        | )           |  |           | (40,421,000 | )        
|                             
|                             
|                             
|                             
|                              | Treasury stock                                                                                                                                            |                            |                                      | (34,000            | )           |  |           | (5,000      | )        
|                              |                                                                                                                                                           |                            |                                      |                    |             |  |           |            
|                              |                                                                                                                                                           | Total stockholders equity | 3,523,000                            |                    |             |  | 1,674,000 |            
|                              |                                                                                                                                                           |                            |                                      |                    |             |  |           |            
|Commitments and contingencies
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                           | $                          | 6,061,000                            |                    |             |  | 6,666,000 |            
|                              |                                                                                                                                                           |                            |                                      |                    |             |  |           |            

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5



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MHM SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                                              |                                                                     |   |                                 |         |      |   |          |        | 
|----------------------------------------------------------------------------- | ------------------------------------------------------------------- | - | ------------------------------- | ------- | ---- | - | -------- | ------ | 
|                                                                              |                                                                     |   | Three Months Ended December 31,
|                                                                              |                                                                     |   |                                
|                                                                              |                                                                     |   | 2000                            |         | 1999
|                                                                              |                                                                     |   |                                 |         |     
|Cash flows from operating activities                                         
|Net income                                                                    |                                                                     | $ | 264,000                         |         |      | $ | 156,000  |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Adjustments to reconcile net income to net cash
used in  operating activities |                                                                     |   | (432,000                        | )       |      |   | (213,000 | )     
|                                                                              |                                                                     |   |                                 |         |      |   |          |       
|Net cash used in operating activities                                         |                                                                     |   | (168,000                        | )       |      |   | (57,000  | )     
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Cash flows from investing
activities                                         
|Capital expenditures                                                          |                                                                     |   | (8,000                          | )       |      |   | (5,000   | )     
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Collections on note receivable                                                |                                                                     |   |                                |         |      |   | 40,000   |       
|                                                                              |                                                                     |   |                                 |         |      |   |          |       
|Net cash (used in) provided by investing activities                           |                                                                     |   | (8,000                          | )       |      |   | 35,000   |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Cash flows from financing activities                                         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Proceeds from Shareholders Rights Offering, net                              |                                                                     |   | 1,612,000                       |         |      |   |         |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Borrowings                                                                    |                                                                     |   | 106,000                         |         |      |   | 300,000  |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Debt repayments                                                               |                                                                     |   | (1,601,000                      | )       |      |   | (241,000 | )     
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Repurchase of stock warrants                                                  |                                                                     |   | (105,000                        | )       |      |   |         |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Purchase of treasury stock                                                    |                                                                     |   | (29,000                         | )       |      |   |         |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Change in cash overdrafts                                                     |                                                                     |   |                                |         |      |   | (24,000  | )     
|                                                                              |                                                                     |   |                                 |         |      |   |          |       
|Net cash provided by (used in) financing activities                           |                                                                     |   | (17,000                         | )       |      |   | 35,000   |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|(Decrease) increase in cash and cash equivalents                              |                                                                     |   | (193,000                        | )       |      |   | 13,000   |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Cash and cash
equivalents                                                    
|Beginning balance                                                             |                                                                     |   | 211,000                         |         |      |   | 6,000    |       
|                                                                              |                                                                     |   |                                 |         |      |   |          |       
|                                                                              | Ending balance                                                      |   | $                               | 18,000  |      |   | $        | 19,000 | 
|                                                                              |                                                                     |   |                                 |         |      |   |          |       
|Supplemental disclosure of cash flow information:                            
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Interest paid                                                       |   | $                               | 15,000  |      |   | $        | 38,000 | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Income taxes paid                                                   |   |                                 | 112,000 |      |   |          | 71,000 | 
|                                                                              |                                                                     |   |                                 |         |      |   |          |       
|Supplemental disclosure of non-cash
investing and financing activities:      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Issuance of stock warrants-to obtain
financing from Bank of America |   | $                               | 1,000   |      |   | $        | 36,000 | 
|                                                                              |                                                                     |   |                                 |         |      |   |          |       

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6



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MHM Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2000

NOTE 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated balance sheet as of December 31, 2000, the
condensed consolidated statements of operations for the three-month periods
ended December 31, 2000 and 1999, and the condensed consolidated statements of
cash flows for the three-month periods ended December 31, 2000 and 1999 have
been prepared by the Company, without audit. In the opinion of management, all
material adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly the condensed consolidated financial position,
results of operations and cash flows as of December 31, 2000, and for all
periods presented, have been made.

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended September 30, 2000. The results of operations
for the period ended December 31, 2000 are not necessarily indicative of the
operating results for the full year.

NOTE 2. DISSOLUTION OF EXTENDED CARE SERVICES

On August 25, 1999, the Companys wholly owned subsidiary, MHM Extended
Care Services, Inc, (Extended Care Services), filed a Certificate of
Dissolution with the Secretary of State of the State of Delaware. Subsequent
to the filing, Extended Care Services informed all known and foreseeable
creditors about its intent to dissolve and prepared a dissolution plan for
which to pay its outstanding creditors.

On October 30, 2000, the Delaware Court of Chancery approved Extended Care
Services dissolution plan to distribute its remaining total assets, on a
pro-rata basis, to its external creditors. The dissolution of Extended Care
Services became effective on November 30, 2000, which was the first business
day after which creditors could file an appeal of the final order and judgment
issued by the Delaware Court of Chancery.

On December 8, 2000, Extended Care Services distributed total assets of
approximately $178,000, on a pro-rata basis, to its creditors who had claims
that totaled approximately $439,000. As such, a net gain on dissolution of
$261,000 was recorded during the quarter ended December 31, 2000.

7



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NOTE 3. SHAREHOLDERS RIGHTS OFFERING

On November 20, 2000, the Company raised $1,612,000, net of offering
expenses of approximately $100,000, in investment capital as a result of a
Shareholders Rights Offering (the Offering). Each stockholder, based on a
record date of September 29, 2000, was given the right to purchase four new
shares of the Companys common stock for each share of common stock the
stockholder held on the record date, and the pro-rata right to purchase shares
which other stockholders declined to purchase. As a result of the Offering,
the Company issued 23,779 shares of common stock at $72 per share.

Effective November 15, 2000, as a measure to counter the dilutive effect
of the Offering on current stock option holders, the Board of Directors
approved an increase in the number of authorized options from 1,000 options to
4,656 options. This change raised the option pool from 13% of total
outstanding shares of the Company prior to the Offering to 15% of the
outstanding shares of the Company subsequent to the Offering. This amendment
is subject to final approval at the Annual Stockholders Meeting to be held
March 1, 2001.

Effective November 15, 2000, the Company granted 2,906 stock options to
its employees and Board members in order to offset the dilutive effects of the
Offering to option holders.

NOTE 4. DEBT

In October 1997, the Company obtained an unsecured $500,000 line of credit
from Bank of America. This line of credit was required in order to meet cash
demands, and there were no other reasonable sources for financing. Michael S.
Pinkert, Chairman and Chief Executive Officer, personally guaranteed the line
of credit. William P. Ferretti, Director and Lee Calligaro, former Vice
President and General Counsel, each indemnified Mr. Pinkert on his guarantee to
the extent of $100,000. In consideration of the risks assumed in connection
with the guarantee and indemnification, the Company granted 180 warrants to
purchase common stock of the Company at a price of $755 per share. The
warrants were issued as follows, Mr. Pinkert 108 warrants, Mr. Ferretti and
Calligaro 36 warrants each. In addition, for each month there was an
outstanding balance on the line of credit, the Company issued additional
warrants to purchase shares of the Companys common stock at $755 per share.
The Company granted warrants for the number of shares as are equal in value (at
a price of $755 per share) to one and one-half percent of the average loan
balance that was outstanding at the end of each month, based on the guarantors
and indemnitors pro-rata share.

In fiscal 1999, Mr. Pinkert, Mr. Ferretti, and Mr. Calligaro, guarantor
and indemnitors of the original line of credit of $500,000, who earned warrants
of 210, 70, and 70, respectively, during the period that this obligation was
outstanding, were granted a reduction in their warrant exercise purchase price to $50 per share to
purchase the Companys common stock with previously earned warrants.

8



---



In June 1999, the Company renegotiated the line of credit to a maximum
borrowing capacity of $1,300,000. Mr. Pinkert personally guaranteed the entire
line of credit. For his guaranty in June 1999, the Company granted an
additional 180 warrants to purchase stock of the Company at $50 per share.
Mr. Ferretti, John Silverman, Jacob Shipon, Directors, and Mr. Calligaro
indemnified Mr. Pinkert on his guarantee to the extent of $550,000. For their
indemnifications, the Company granted to each indemnitor on a pro-rata basis
according to their individual indemnification, a total of 198 warrants to
purchase stock of the Company at $50 per share. As a fee to the guarantor and
indemnitors for the ongoing risks represented by the guarantee and
indemnification obligations, for each month during which the guarantee and
indemnification obligations were outstanding, warrants for the number of shares
as are equal in value (at a price of $50 per share) to one and one-half percent
of the average loan balance which is outstanding during the month became
issuable.

Effective May 31, 2000, the Company converted the line of credit of
$1,300,000 to a promissory note due on May 31, 2002. The warrants obligations
described in the paragraphs above to Mr. Pinkert and the others as indemnitors
of Mr. Pinkert terminated when the line of credit was converted to a promissory
note. The note has a revolving feature that allows the Company to borrow,
repay and re-borrow up to the maximum aggregate amount. On July 13, 2000, with
no changes in the original terms, the Company increased the borrowing capacity
on the note to $1,800,000. Mr. Pinkert and Dr. Shipon personally
guaranteed this note in the amount of $1,300,000 and $500,000, respectively.
For their guarantees, the Company granted Mr. Pinkert an additional 180
warrants, and to Dr. Shipon 126 warrants, to purchase the Companys common
stock at $50 per share. As compensation to Mr. Pinkert and Dr. Shipon for the
ongoing risks represented by their guarantees, for each month the note was
outstanding, warrants for the number of shares of common stock as are equal in
value (at a price of $50 per share) to one and one-half percent of the average
loan balance that is outstanding during the month became issuable.

On November 22, 2000, the Company utilized a portion of the proceeds
received in the Offering to repay the outstanding balance on the note. The
note was subsequently cancelled.

Expenses totaling approximately $1,000 were recorded during the quarter
ended December 31, 2000 for the issuance of all warrants related to guarantees
and indemnifications of the Companys promissory note.

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NOTE 5. SUBSEQUENT EVENT

During September 2000, the Company requested a reopening of the 1996
Medicare cost report for a freestanding psychiatric hospital sold in fiscal
year 1996 in order to seek reimbursement for bad debts that had been previously
denied. During January 2001, the Company received a notice of reopening of the
1996 cost report from the intermediary. The notice also included proposed
adjustments amounting to $259,000 of allowable bad debts which will be recorded
as other income in the second quarter of fiscal year 2001.

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

This report contains forward-looking statements. Forward-looking
statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as
may, will, should, expects, plans, anticipates, could,
believes, estimates, predicts, potential, or continue or the negative
of these terms or other similar words. These statements are only predictions.
The outcome of the events described in these forward-looking statements is
subject to certain risks. Actual results could differ materially. We
acknowledge our risks include, but are not limited to, winning new correctional
services contracts, and the realization of future revenues under existing
contracts. Also, we acknowledge there are risks and uncertainties which may
cause actual future activities and results of our operations to be materially
different from that suggested in this report, including, among others, that we
will not have adequate cash flow to continue to fund ongoing operations and
retire debt obligations as they become due, and the on-going risk of industry
consolidation, acquisitions and competition.

The following discussion addresses the financial condition of MHM
Services, Inc. and subsidiaries as of December 31, 2000 and the results of
operations for the three-month period then ended compared with the same period
last year. Our discussion should be read in conjunction with the Managements
Discussion and Analysis section (pages 13-18) for the fiscal year ended
September 30, 2000 included in our Annual Report on Form 10-K.

GENERAL

We were originally incorporated in Virginia in 1981 and in 1994
reincorporated in Delaware. Since we were formed, we have provided mental
health services, initially in general, substance abuse and psychiatric
hospitals and then in nursing homes and correctional facilities. Today, we
principally focus on the correctional services market.

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DESCRIPTION OF BUSINESS

We currently provide mental health services at over 60 correctional
facilities encompassing over 55,000 inmates through statewide contracts with
the Departments of Corrections of the States of Georgia and Tennessee, a
subcontract covering a womens correctional facility in Florida, a subcontract
covering a jail in Mississippi, and contracts with the Departments of Juvenile
Justice of the States of Georgia and Florida. Also, under a contract with the
Georgia Department of Medical Assistance, we provide mental health services to
all of the states Medicaid patients residing in over 300 nursing homes. We
provide on-site behavioral health services to the correctional services market
through our subsidiary MHM Correctional Services, Inc. (Correctional
Services). We formed Correctional Services in 1997 and in the fourth quarter
of 1997 that entity secured contracts with the Tennessee and Georgia
Departments of Correction to provide behavioral health services on a capitated
basis to the inmates of those states correctional facilities.

We provide our services under what are known as capitation arrangements.
Capitation means we are paid a fixed fee for each inmate eligible for our
services. For that fixed fee, we are required to provide all psychiatric and
psychological services, as well as any psychotropic drugs (i.e., medications
prescribed for mental illness), which are needed by any eligible inmates.
However, we are not responsible for providing inpatient hospitalization that is
provided outside the correctional facilities. In order to limit and control our
risk, the exact level of care we are required to provide for the inmate
population is established by each contract.

In the second quarter of 1999, Correctional Services was awarded a
contract to provide similar services under a capitated arrangement to the
Broward County, Florida correctional systems as a subcontractor to Prison
Health System who provides general healthcare services to the Broward facility.

In July 1999, Correctional Services was awarded a one-year contract to
provide professional mental health staffing to the State of Georgias
Department of Juvenile Justice on a fee-for-service basis. In February 2000,
Correctional Services was also awarded a three-year contract to provide general
medical and mental health staffing to Career Systems Development Corporation at
the Florida Department of Juvenile Justices Marion Youth Development Center
located in Ocala, Florida. This contract was awarded on a fee-for-service
basis. In July 2000, we were awarded a subcontract to provide mental health
staffing with Naphcare Inc. at the Harrison County Jail in Mississippi, a subcontract to provide
general medical and mental health staffing with Career Systems Development
Corporation at the Florida Department of Juvenile Justices Marion County
Intensive Treatment Facility for the Youth, and a general medical and mental
health staffing contract with the Florida Department of Juvenile Justices St.
John Juvenile Detention Center and Marion Youth Detention Center.

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We had previously provided on-site extended care services through our
subsidiary, MHM Extended Care Services, Inc. In 1998, we decided to wind down
the operations of this subsidiary and eventually dissolve its operations.
Therefore, this subsidiary did not seek to effect a renewal of the contract it
maintained to provide on-site mental health services to residents of nursing
homes in Georgia under a contract with the Georgia Department of Medical
Assistance. Since we were aware of the opportunity under this contract, and
because Correctional Services was already operating in Georgia under its
contract with the Georgia Department of Corrections, Correctional Services
sought to procure a contract with the Georgia Department of Medical Assistance
in place of our Extended Care Services subsidiary which was then involved in
dissolution proceedings before the Delaware courts. In May 1999, through a
competitive bid process, Correctional Services was awarded a one-year contract
beginning July 1, 1999 with three successive options to renew this contract for
additional terms of up to one year each. On July 1, 2000, this contract was
renewed for another year. Between July 1, 1997 and the time the contract was
awarded to Correctional Services, Extended Care Services continued to provide
services to the Georgia Department of Medical Assistance.

When we decided to discontinue the operations of Extended Care Services,
Extended Care Services outstanding liabilities exceeded its total assets. In
August 1999, Extended Care Services initiated dissolution proceedings under the
Delaware General Corporate Law. By November 30, 2000, these dissolution
proceedings became final. Accordingly, on December 8, 2000, Extended Care
Services distributed total assets of approximately $178,000, on a pro-rata
basis, to its creditors who had claims that totaled approximately $439,000.

Financial Position December 31, 2000 Compared to September 30, 2000

Our stockholders equity increased to $3,523,000 at December 31, 2000 from
$1,674,000 at September 30, 2000. Net proceeds of $1,612,000 received from our
Shareholders Rights Offering and net income of $264,000 for the three months
ended December 31, 2000 were the primary factors which increased our
stockholders equity. Our current assets were $2,410,000 at December 31, 2000
as compared to $2,555,000 at September 30, 2000. The decrease is primarily
attributed to payments made to the creditors of Extended Care Services pursuant
to its dissolution plan. Noncurrent assets were $3,651,000 at December 31,
2000 as compared to $4,111,000 at September 30, 2000. The decrease is
primarily attributable to the utilization of our deferred income tax asset to
reduce the amount of income tax expense payable as of December 31, 2000 as a
result of the operating income generated during the quarter ended December 31,
2000. Total current liabilities were $2,538,000 at December 31, 2000 as
compared to $3,592,000 at September 30, 2000. As a result of the first
quarter operations, and the compromise of liabilities associated with the
dissolution proceedings of our subsidiary, Extended Care Services, during the
quarter ended December 31, 2000, we were able to reduce our current liabilities
by $1,054,000.

As a result of the dissolution of Extended Care Services and the use of a
portion of the proceeds we received in our Shareholders Rights Offering to
pay-off our outstanding note to our bank, our cash balance decreased from
$211,000 at September 30, 2000 to $18,000 at December 31, 2000. The Company
had a deficit in working capital at

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December 31, 2000 of $128,000, which represents a reduction of $909,000 from
the working capital deficit at September 30, 2000 of $1,037,000.

First Quarter 2000 Compared To First Quarter 1999

Net revenues for the quarter ended December 31, 2000 were $5,575,000, an
increase of 19% as compared to $4,684,000 for the quarter ended December 31,
1999. The increase is the result of the growth in our correctional services
business.

Operating expenses for the quarter ended December 31, 2000 were
$4,297,000, or 77% of net revenues, as compared to $3,524,000, or 75% of net
revenues for the quarter ended December 31, 1999. Operating expenses increased
by 22% over prior years quarter from continuing operations due primarily to
the addition of new correctional services contracts during the third and fourth
quarter of fiscal year 2000.

General and administrative expenses for the quarter ended December 31,
2000 were $1,083,000, or 19% of net revenues as compared to $932,000, or 20% of
net revenues for the quarter ended December 31, 1999. Correctional Services
had general and administrative expenses of $410,000 for the quarter ended
December 31, 2000 as compared to $363,000 for the quarter ended December 31,
1999. The increase was as a result of expanding services to clients and the
award of certain new correctional services contracts during the third and
fourth quarters of fiscal year 2000. Corporate general and administrative
expenses were $668,000 for the quarter ended December 31, 2000 as compared to
$567,000 for the quarter ended December 31, 1999. The dissolved Extended Care
Services operations had general and administrative expenses of $5,000 from the
wind down of operations for the quarter ended December 31, 2000 as compared to
$2,000 for the quarter ended December 31, 1999.

Our provision for bad debts for the quarter ended December 31, 2000
decreased to $29,000 as compared to $75,000 for quarter ended December 31,
1999. As a percentage of net revenues, the provision for bad debts was .5% at
December 31, 2000 and 1.6% at December 31, 1999, respectively. Our bad debt
provision primarily represents our best estimate of potential uncollectible
revenues for clients we serve under our contract with the Georgia Department of
Medical Assistance, who may not obtain the Medicaid coverage required to
reimburse us for certain services we have provided. Our bad debt provision
also estimates potential uncollectible revenues from our modest correctional
fee-for-service business.

Depreciation and amortization expenses were $10,000 for the quarter ended
December 31, 2000 as compared to $23,000 for the quarter ended December 31,
1999. The decrease is attributed to a reduction in depreciable fixed assets.

Interest expense for the quarter ended December 31, 2000 was $23,000 as
compared to $36,000 for the quarter ended December 31, 1999. Interest expense as of
ended December 31, 2000 was primarily from our outstanding bank loan and other
short-term debt. With proceeds from our operations and our Shareholders Rights
Offering, we repaid our promissory note which had an outstanding balance $1,400,000 as
of September 30, 2000.

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The dissolution of Extended Care Services became effective on November 30,
2000. As of September 30, 2000, Extended Care Services assets were $178,000
and its outstanding liabilities were $439,000. On December 8, 2000, Extended
Care Services paid all existing creditors as noted per the terms of its Plan of
Liquidation and Dissolution to resolve all of its outstanding liabilities. As
such, we recognized a net gain on dissolution of $261,000.

We disposed of certain fixed assets deemed obsolete during the quarter
ended December 31, 1999 that resulted in a loss on disposal of $5,000.

We recognized other income of $14,000 from interest earned on invested
cash balances for the quarter ended December 31, 2000.

We recognized other income of $81,000 in the quarter ended December 31,
1999. Other income was primarily the result of collecting $77,000 in accounts
receivable previously reserved as uncollectible as a result of the sale of our
Extended Care Services operating units and Hospital division. Interest income
on invested cash balances was $4,000 as of the quarter ended December 31, 1999.

As a result of the foregoing, we recognized net income of $264,000 for the
quarter ended December 31, 2000, compared to net income of $156,000 for the
quarter ended December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have funded operating losses through a combination of the
proceeds derived from the sale of certain operations of our subsidiaries
operating units and through borrowed funds. As of December 31, 2000, we had
stockholders equity of $3,523,000 and a working capital deficit of $128,000.

On October 30, 2000, the Delaware Court of Chancery approved Extended Care
Services dissolution plan, effective November 30, 2000, to distribute its
total remaining assets of approximately $178,000 on a pro-rata basis, to its
external creditors. Extended Care Services external liabilities were $439,000
on December 8, 2000 which was the date we distributed the remaining Extended
Care Services assets to the external creditors of Extended Care Services.

On November 20, 2000, as a result of a Shareholders Rights Offering, we
raised approximately $1,612,000, net of offering expenses, through the issuance
of 23,779 shares of our common stock at $72.00 per share to our existing
stockholders. We used a portion of the proceeds from this offering to
liquidate our promissory note with Bank of America. The remaining proceeds
were used as working capital.

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As a result of the dissolution of Extended Care Services and investment
capital raised through a Shareholders Rights Offering, we have been able to
reduce our working capital deficit. We believe our future operating results
will produce additional working capital, which we intend to use to further
reduce our working capital deficit and to obtain additional contracts to
provide mental health services in correctional facilities.

PART II    OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We know of no new litigation, either pending or threatened, against the
Company which is likely to have a material adverse effect on our condensed
consolidated financial statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



| |                
| | ---------------
| | Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



| |                
| | ---------------
| | Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



| |                
| | ---------------
| | Not applicable.

ITEM 5. OTHER INFORMATION



| |                
| | ---------------
| | Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a)              Exhibits



| |     
| | ----
| | None

b)              Reports on Form 8-K



| |                
| | ---------------
| | Not applicable.

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SIGNATURES

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

|                        |  |                                                                                                
|----------------------- |  | -----------------------------------------------------------------------------------------------
|Dated February 14, 2001 |  | MHM Services, Inc.
/s/ CLEVELAND E. SLADE
Vice President, Chief
Financial Officer and Secretary

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