**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**


**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the fiscal year ended June 30, 2005**





**Commission
      File No. 0-24807**





CORECARE
      SYSTEMS, INC.


**(Name
      of Small Business Issuer in Its Charter)**





Delaware
            23-2840367**(State
                or jurisdiction of**
            **(I.R.S.
                Employer Identification No.)****incorporation
                or organization)**





111
      N.
      49 th Street


Philadelphia,
      PA 19139


**(Address
      of principal executive offices)**





215/471-2358


**(Issuer’s
      telephone number)**





Securities
      registered under Section 12(b) of the Exchange Act:  None





Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, par value
      $.001 per share





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.





Yes 
      [ ]   No
      [X]





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this form 10-KSB. [ ]





Indicated
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).  Yes 
      [ ]No
      [X]





The
      issuer’s revenues from continuing operations for its most recent fiscal year
      were $23,406,643.





The
      aggregate market value of the common equity held by non-affiliates based on
      the
      closing sale price of Common stock as of June 30, 2005 was
      $4,312,548.





The
      number of shares outstanding of each class of the issuer’s common equity, as of
      June 30, 2005 was as follows: Common Stock - 20,535,941 shares.





Transitional
      Small Business Disclosure Format (check one):  Yes 
      [ ]No
      [X]





**CORECARE
      SYSTEMS, INC.**


**FORM
      10-KSB**





**TABLE
      OF CONTENTS**





PART
                IITEM
                1-
            DESCRIPTION
                OF BUSINESS
            4ITEM
                2-
            DESCRIPTION
                OF PROPERTY
            17ITEM
                3-
            LEGAL
                PROCEEDINGS
            19ITEM
                4-
            SUBMISSION
                OF MATTERSTO
                A VOTE OF SECURITY HOLDERS
            21PART
                IIITEM
                5-
            MARKET
                FOR COMMON EQUITYAND
                RELATED STOCKHOLDER MATTERS
            22ITEM
                6-
            MANAGEMENT’S
                DISCUSSION ANDANALYSIS
                OF FINANCIAL CONDITIONAND
                RESULTS OF OPERATIONS
            23ITEM
                7-
            CONSOLIDATED
                FINANCIAL STATEMENTS
            30ITEM
                8-
            CHANGES
                IN AND DISAGREEMENTSWITH
                ACCOUNTANTS ON ACCOUNTINGAND
                FINANCIAL DISCLOSURE
            30ITEM
                8A-
            CONTROLS
                AND PROCEDURES
            30ITEM
                8B-
            OTHER
                INFORMATION
            31PART
                IIIITEM
                9-
            DIRECTORS,
                EXECUTIVE OFFICERS,PROMOTERS
                AND CONTROL PERSONS;COMPLIANCE
                WITH SECTION16
                (A) OF THE EXCHANGE ACT
            31ITEM
                10-
            EXECUTIVE
                COMPENSATION
            36ITEM
                11-
            SECURITY
                OWNERSHIP OFCERTAIN
                BENEFICIAL OWNERSAND
                MANAGEMENT ANDRELATED
                STOCKHOLDER MATTERS
            39ITEM
                12-
            CERTAIN
                RELATIONSHIPSAND
                RELATED TRANSACTIONS
            47ITEM
                13-
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            47ITEM
                14
            EXHIBITS,
                FINANCIAL STATEMENT SCHEDULESAND
                REPORTS ON FORM 8-K
            48





2


**Cautionary
      Statement Concerning Forward-Looking Statements**







This
      Report contains forward-looking statements concerning our financial condition,
      results of operations and business, including, without limitation, statements
      pertaining to:




·
            Implementing
                aspects of our business plans; and




·
            Financing
                goals and plans;




These
      and
      other forward-looking statements are primarily in the sections entitled "Item
      6
      - Management's Discussion and Analysis of Financial Condition and Results of
      Operations" and "Item 1 - Description of Business." Generally, you can identify
      these statements because they use phrases like "anticipates," "believes,"
      "expects," "future," "intends," "plans," and similar terms. These statements
      are
      only predictions. Although we do not make forward-looking statements unless
      we
      believe we have a reasonable basis for doing so, we cannot guarantee their
      accuracy, and actual results may differ materially from those we anticipated
      due
      to a number of uncertainties, many of which are unforeseen. You should not
      place
      undue reliance on these forward-looking statements, which apply only as of
      the
      date of this Report. Our actual results could differ materially from those
      anticipated in these forward-looking statements for many reasons, including
      those stated in this Report.




We
      believe it is important to communicate our expectations to our investors. There
      may be events in the future, however, that we are unable to predict accurately
      or over which we have no control. Cautionary language in this Report provides
      examples of risks, uncertainties and events that may cause our actual results
      to
      differ materially from the expectations we describe in our forward-looking
      statements. Such factors include, among other things, risks and uncertainties
      discussed throughout Item 1 - Description of Business and Item 6 - Management's
      Discussion and Analysis of Financial Condition and Results of Operations. We
      are
      not obligated to publicly update or revise any forward-looking statement,
      whether as a result of new information, future events or otherwise, except
      as
      otherwise required by law.




In
      light
      of these risks, uncertainties and assumptions, the forward-looking events
      discussed in this filing and other statements made from time to time from us
      or
      our representatives might not occur. For these statements, we claim the
      protection of the safe harbor for forward-looking statements contained in the
      Private Securities Litigation Reform Act of 1995.







3


**PART
      I**





**ITEM
      1 -**  **DESCRIPTION
      OF BUSINESS**





**Business
      Development and Background:**





CoreCare
      Systems, Inc. (the “Company”) is a regional health care facility providing
      behavioral health services, clinical drug research, food services and real
      estate leasing, incorporated in the state of Delaware and operating in
      University City, Philadelphia, Pa. The Company's headquarters is located at
      111
      N. 49 th Street,
      Philadelphia, PA 19139. Its telephone number at this location is (215) 471-2358.





The
      Company conducts all of its operations through its subsidiary corporations.
      Unless the context indicates otherwise, the terms “Company”, “ours”, “its” and
“we” when used herein shall include the Company and the Company's subsidiaries,
      CoreCare Behavioral Health Management, Inc. d/b/a/ Kirkbride Center (the
“Kirkbride Center”), Westmeade Healthcare, Inc. d/b/a The Blackwell Center for
      Adolescent Treatment (the “Blackwell Center”), CoreCare Food Services, Inc.
      (“Food Services”), Kirkbride Realty Corporation d/b/a The Blackwell Human
      Services Campus (as of July 7, 2004) (“KirkBride Realty”), Quantum Managed
      Mental Health, Inc. d/b/a Quantum Clinical Services Group (“Quantum”), and
      CoreCare Realty Corporation.





The
      last
      10-KSB filed by the Company was for the year ended December 31, 1999, filed
      on
      October 31, 2000. Due to cash flow difficulties affecting the Company’s ability
      to produce timely reporting no further 10-KSB’s or 10-Q’s were filed. Several
      8-K’s however were filed as attached hereto in Exhibits. Because of financial
      difficulties, various judgments and liens were filed against our major real
      estate asset which hindered our ability to refinance our mortgage. Given the
      mortgage holder’s non-response to our request for extension of its expiring
      mortgage the Board of Directors decided that our major operating subsidiaries
      should file for bankruptcy to protect the equity in the real estate. In 1997
      when the Kirkbride property was purchased, the property had received an
      independent appraisal of $11,700,000 which by February 2002 had increased in
      value to $23,500,000. The property’s value at the time of bankruptcy exceeded
      its mortgage debt of $13,763,000.





Thus
      on
      May 6, 2002, our major subsidiaries, CoreCare Behavioral Health Management,
      Inc.
      d/b/a Kirkbride Center and CoreCare Realty Corporation filed for protection
      from
      creditors pursuant to Chapter 11 of the United States Bankruptcy Code (the
      “Bankruptcy Proceedings”). After 25 months in bankruptcy, on July 7, 2004, the
      United States Bankruptcy Court for the Eastern District of Pennsylvania,
      approved the reorganization plan of the Kirkbride Center and CoreCare Realty
      Corporation (the “Reorganization Plan”). CoreCare Behavioral health Management,
      Inc., operating as the Kirkbride Center, operates the behavioral health division
      of the Company and held title to the real estate until July 7, 2004. CoreCare
      Realty Corporation operated the real estate division of the Company and leased
      space to all third party tenants until July 7, 2004. Other Company operating
      subsidiaries including the Blackwell Center, Quantum, and the parent company,
      CoreCare Systems, Inc. did not file bankruptcy.





As
      part
      of the Kirkbride Center’s Reorganization Plan the ownership of the real estate
      was transferred to Kirkbride Realty, a newly formed subsidiary of CoreCare
      Systems, Inc. on July 7, 2004. At that time the Kirkbride Center became a tenant
      of Kirkbride Realty. Also on July 7, 2004 CoreCare Realty Corporation
      transferred ownership of its third party leases to Kirkbride Realty and became
      inactive.






4





During
      the course of the bankruptcy, in December 2003, the mortgage holder, WRH
      Mortgage, Inc. of St. Petersburg Florida sold the Kirkbride Center mortgage
      to
      Kirkbride Holdings, LLC, which is not affiliated with the Company. At that
      time
      WRH Mortgage, Inc., dropped its lawsuit against us and our officers. The
      Reorganization Plan reset the term of the mortgage to July 7, 2007.
      Additionally, Kirkbride Holdings, LLC increased the sum of the first mortgage
      from $13,763,000 to $14,025,000 (Tranche A) which was expanded to include
      $1,250,000 (Tranche B) for distribution to the IRS and State Taxing Authorities
      in July 2004. This additional financing was secured by the accounts receivables
      of the Hospital.





The
      new
      mortgage holder, Kirkbride Holdings LLC is a division of Allied Partners of
      New
      York. Kirkbride Holdings, LLC maintains first mortgage rights in the amount
      of
      $14,538,884 as of June 30, 2005 on the Kirkbride Center property which includes
      an assignment of rents agreement and certain accounts receivable. The Company
      continues to actively pursue parties interested in entering into a long term
      mortgage agreement that would extend beyond the July 2007 mortgage termination
      date. As part of the Kirkbride Holdings, LLC mortgage agreement, Kirkbride
      Realty was established to control our real estate operations. All leases and
      real estate agreements have been assigned from CoreCare Realty Corporation
      to
      Kirkbride Realty. However, this transfer of ownership of real estate did not
      release Kirkbride Center of any of the liability for the mortgage. On July
      7,
      2004 when the mortgage was re-documented CoreCare Systems, Inc and all its
      other
      operating subsidiaries became co-borrowers of the mortgage. The mortgage
      structure prohibits the future bankruptcy of Kirkbride Realty if the first
      mortgage is not refinanced before its expiration.





Despite
      the operational stress caused by the bankruptcy, we were able to maintain our
      behavioral services market share while growing our hospital services, real
      estate revenue and developing a food service revenue center. As of June 30,
      2005
      we maintained a 137 bed Drug and Alcohol Rehabilitation Program including a
      7
      bed detoxification unit. The Drug and Alcohol Rehabilitation Program has
      consistently maintained strong patient census operating in excess of 90%
      occupancy. Management continues to monitor the market in an effort to determine
      the proper time to request an increase of the licensed bed count.





The
      Psychiatric Unit is licensed for 74 psychiatric beds. Due however to an
      emergency lease with Travelers Aid on December 2002 to house approximately
      200
      homeless families, we operated only one psychiatric dual-diagnosis unit with
      a
      25 bed capacity until May 2004. Once other space could be renovated for
      Travelers Aid, the hospital operating capacity increased. In response to
      increased market demand, 24 additional psychiatric beds for a general psychiatry
      program were put into operation in May 2004 increasing the total psychiatric
      bed
      count to 49. The opening of a geriatric psychiatric unit occurred in December
      2004 to respond to favorable reimbursement changes in Medicare payments for
      independent psychiatric hospitals.





The
      Blackwell Center, a residential adolescent treatment program, continues to
      operate at the Kirkbride Center in Philadelphia. The Blackwell Center program
      is
      licensed for 32 residential beds. While the Company was able to maintain
      stability throughout the bankruptcy period, immediately post emergence Blackwell
      encountered deficiencies caused by staff turnover. These problems resulted
      in
      our being issued a Provisional State License for the Blackwell center, rather
      than a standard license, in September 2004. On October 1, 2004 the program
      was
      re-inspected but due to normal licensure procedures the standard license, while
      in effect, was not issued until January 2005. During this period, the Blackwell
      Center’s primary referral source, Philadelphia’ Department of Health and Human
      Services dramatically reduced its referrals to the program, leading to a
      negative spiral in the census through the fiscal year end June 30, 2005.
      Management struggled with several re-engineering efforts to recapture its
      historical market leading to the outsourcing of the program’s clinical
      management in November 2005. Census data for all clinical programs offered
      by
      the Company is presented herein.






5




In
      August
      of 2003, a new subsidiary was formed named CoreCare Food Services, Inc. The
      preparation and delivery of food to the tenants of the Kirkbride Center was
      initiated by the food service contract with the City of Philadelphia due to
      the
      Travelers Aid lease for a homeless family shelter. Food service continues to
      be
      a viable profit center for the Company. Food service availability to the
      residential programs operated by third party tenants converted the dietary
      department from a cost center to a revenue center. As we attract third party
      tenants with residential services we are able to increase both tenant revenue
      and its food service revenue.





We
      have
      maintained an active real estate division through our wholly-owned subsidiary
      Kirkbride Realty. Other than the behavioral services which occupied 53% of
      leaseable space, Travelers Aid Philadelphia is the largest tenant and continues
      to lease approximately 46,000 square feet of space at the Kirkbride Center.
      We
      have been able to relocate the Travelers Aid homeless programs from its two
      acute hospital units to contiguous space on the garden level of the North and
      Lawler Buildings. This space relocation has resulted in positive results for
      both companies. Travelers Aid has been able to consolidate their programs on
      one
      floor, while gaining more rental space with less supervision costs. We have
      maintained and added to rental income and reclaimed the North Building hospital
      space for expansion of clinical programs. As Travelers Aid increases its shelter
      capacity we benefit from growth in its food service revenue as well. The other
      significant tenant, Baptist Children Services became a tenant in August 2003
      leasing 24,000 square feet for an adolescent group home and shelter in the
      Lawler Building. Food Services also provides food service to this tenant as
      well. The Consortium, a City mental health base service unit, signed a lease
      for
      approximately 7,000 square feet in September 2003.




Additionally
      we continued to develop our clinical trials activity during the bankruptcy
      period. We have an experienced clinical trial team and, during the periods
      covered by this report, were implementing study protocols for major
      pharmaceutical companies. Subsequent to the period covered by this report,
      however we changed our strategy in this sector and executed an agreement whereby
      we provide beds and other space in our facility for an unrelated company to
      conduct these studies. At that time, Quantum ceased active
      operations.




**Business
      of the Issuer:**





We
      have
      four primary lines of business which are:





I.
            Behavioral
                Health Services


II.
            Leasing
                office space at the Kirkbride Center to third
                parties


III.
            Food
                Services


IV.
            Clinical
                Trial Services for Central Nervous System Disorders (discontinued
                after
                the period covered by this report}.





We
      operate our business through five (5) wholly owned subsidiaries including the
      following:





·
            CoreCare
                Behavioral Health Management, Inc. d/b/a/ Kirkbride
                Center


·
            Westmeade
                Healthcare, Inc. d/b/a The Blackwell Center for Adolescent
                Treatment


·
            CoreCare
                Food Services, Inc.


·
            Kirkbride
                Realty Corporation d/b/a The Blackwell Human Services Campus (as
                of July
                7, 2004)


·
            Quantum
                Clinical Services Group (Discontinued in August,
                2006)


·
            CoreCare
                Realty Corporation (inactive as of July 7,
                2004)






6





All
      of
      our subsidiaries are located and operate at The Blackwell Human Services Campus,
      111 North 49 th Street,
      Philadelphia, Pa 19139.





**I.**  **Behavioral
      Health Services**





***1.***
            ***Description***





We
      have
      undertaken a development campaign to create a behavioral health care campus
      which will provide a diverse continuum of services care to patients of our
      major
      payor who controls the Managed Medical Assistance patients in Philadelphia
      County. Our service spectrum primarily reflects the needs of our major payor,
      Community Behavioral Health, which is controlled by the City of Philadelphia.
      To
      this end, given the heroin epidemic in the City of Philadelphia, Kirkbride
      Center, (sometimes referred to as the Hospital), has shifted its service mix
      over time away from acute inpatient psychiatric services toward increasing
      its
      concentration in non-hospital drug & alcohol rehabilitation services to
      address these needs. In November 2001, we further diversified our service mix
      on
      the Blackwell Human Services Campus by relocating The Blackwell Center, an
      adolescent residential treatment program, from Bucks County to the Blackwell
      Human Services Campus.





The
      healthcare industry today is increasingly affected by Managed Care companies,
      i.e., companies that contract with the healthcare providers to provide services
      and products to the Managed Care companies' subscribers. Generally, Managed
      Care
      companies seek to contract products and services at a cost below the provider's
      customary fee schedule in exchange for the access to the larger patient-base
      which these organizations control. Health maintenance organizations ("HMOs")
      customarily pay each provider on a fee-for-service basis, usually at a lower
      rate than the provider would otherwise charge. The rates are negotiated per
      each
      individual contract and will vary by the different levels of service. With
      increasing frequency, HMOs may contract with providers on a "capitated" or
      "case
      rate" basis. Capitation means that the provider is paid a periodic fee based
      on
      the number of subscribers eligible to use that provider's services, without
      regard initially to the level of use. Case rate means that each provider is
      paid
      a set amount for each inpatient episode. We currently do not have any case
      rate
      contracts or capitated contracts.





Contracts
      that the Kirkbride Center and the Blackwell Center have permit them to seek
      payment for treatment of the patients who are subscribers or insureds of the
      payor companies, but do not ensure that the potential patients covered by these
      payors who seek behavioral health care will become patients of the Kirkbride
      Center or the Blackwell Center.





Management
      believes that Managed Care has been a catalyst for the consolidation of
      individual and small group health care providers into corporate delivery
      systems. Managed Care companies prefer to contract with multi-service providers
      who, with one call, can provide a variety of services to multiple patients.
      In
      addition, integration of services helps assure better clinical continuity,
      greater cost efficiency, greater protection of patient and insurer if a level
      of
      care needs to be upgraded for patient safety. We believe we are positioned
      to
      benefit from this trend in defined geographical and service areas. We have
      responded to the cost-effectiveness demands of Managed Care by:





·
            Creating
                a critical mass of services in a defined geographic
                area;






7





·
            Structuring
                services with clinical continuity such that clinicians follow patients
                through service levels;





·
            Focusing
                service development on chronic recidivist patients with a syndrome
                of
                complex clinical issues; and





·
            Continual
                improvement in the computerization of key administrative, financial,
                and
                clinical management functions.





The
      key
      to clinical success in a managed care environment is the ability of a healthcare
      provider to establish a good clinical outcome in a time-limited episode of
      care.
      To effect this, we are committed to a bio-psychiatric approach to treatment
      relying on the appropriate use of psychopharmacology. State of the art
      behavioral treatment changes with each new drug discovery, therefore, we are
      committed to conducting clinical research drug trials on central nervous system
      drugs through our activities in Quantum on both an inpatient and outpatient
      basis.





***2.
      Principal products and services:*** ** ******





During
      the fiscal years 2004 and 2005 our services provided and business activities
      fall within the following three categories: (A) Acute Psychiatric Inpatient
      Hospitalization; (B) Drug and Alcohol Rehabilitation Services and (C) Adolescent
      Residential Treatment Services.





A.
      Acute Psychiatric Inpatient Hospitalization





*Description*





The
      Kirkbride Center is our largest subsidiary. The Kirkbride Center, formerly
      known
      as the CareGroup of America, Inc., was acquired by the Company on March 24,
      1995, at which time, it was a management services organization.





On
      February 26, 1997, the Kirkbride Center acquired the assets and selected
      licenses of the Institute of Pennsylvania Hospital **** for
      $4.5
      million. The Kirkbride Center consists of five (5) buildings totaling 422,800
      square feet on a 21-acre site comprising an entire city block bounded by Market
      Street, Haverford Avenue, and 48 th and
      49 th Streets
      in Philadelphia, Pennsylvania. The Kirkbride Center provides behavioral health
      care in a freestanding hospital setting supported by a full continuum of
      step-down services. In July 2004, pursuant to the Reorganization Plan, the
      Kirkbride Center’s real estate holdings were transferred to its newly formed
      sister corporation, Kirkbride Realty Corporation, Inc.





We
      maintain an acute inpatient hospitalization Psychiatric Unit with full licensure
      for 74 psychiatric beds. We operated one psychiatric unit with a bed capacity
      of
      25 for our dual-diagnosis program until May 2004. At that time we were able
      to
      relocate our major tenant to reclaim operating space, and therefore, with an
      anticipated increase in market demand, 24 additional psychiatric beds were
      put
      back into operation for a general psychiatry program bringing the total
      psychiatric bed count to 49. In December 2004, we opened a 25 bed Geriatric
      Psychiatric unit to respond to favorable changes in Medicare reimbursement
      for
      freestanding psychiatric hospitals. The Kirkbride Center utilized all the beds
      permitted under the 74 bed psychiatric license.






8





Of
      the 74
      licensed beds at the Kirkbride Center, 25 beds hold dual licensure from both
      the
      Pennsylvania Department of Public Welfare and the Pennsylvania Department of
      Health to treat clients with co-occurring psychiatric and substance abuse
      disorders. The program services adults over the age of 18 offering group,
      individual, family or multi-family group therapy, psycho-educational services
      as
      well as methadone treatment.




*Market*





The
      Acute
      Psychiatric Inpatient market includes West and North Philadelphia. A total
      of
      75% of discharges in 2004 came from Philadelphia County compared to 92% in
      2005.
      While certified for Medicare and Medicaid recipients, the facility’s primary
      payor is Community Behavioral Health, a
      non-profit community-based managed care organization.





Effective
      February 1, 1997, each county in Pennsylvania assumed responsibility for
      managing its own medical assistance population under a state initiative called
      Health Choices. Philadelphia County, which has a Medicaid population of
      approximately 450,000 participants, has assigned the behavioral healthcare
      management of these individuals to Community Behavioral Health. The Kirkbride
      Center is located in the heart of Philadelphia’s Medicaid population, which is
      now controlled by Community Behavioral Health. We anticipate that Community
      Behavioral Health will continue to represent the predominant payor of services
      at the Kirkbride Center. With the establishment of its geriatric unit the
      Kirkbride Center has seen a decrease in Community Behavioral Health payor mix
      from 53% in June 30, 2004 to 48% in June 30, 2005 due to increased Medicare
      activity.





B.
      The
      Drug and Alcohol Rehabilitation Services





*Description*





We
      operate a non-hospital residential Drug and Alcohol Rehabilitation Program
      that
      holds licensure from the Pennsylvania Department of Drug and Alcohol Programs
      (DDAP) for 137 beds. The goal of the treatment program is to help each patient
      develop a sense of dignity and self-respect and to encourage a healthy,
      substance free lifestyle. Currently, the program’s 137 bed license includes a 7
      bed medically monitored detoxification unit. We have petitioned DDAP to increase
      the detoxification unit by 7 beds for a total of 14 beds. This request was
      still
      pending at the end of fiscal year 2005. The program serves an adult residential
      population between the ages of 18 and 60. We utilize Methadone for maintenance
      and detoxification of the opiate dependent population.





Two
      separate and distinct levels of care are offered in the Drug and Alcohol
      Rehabilitation Program. The first is a medically monitored detoxification unit
      (Level 3A) with an average length of stay for each patient of approximately
      3 to
      5 days. The objective of this unit is to stabilize and assess each patient
      and
      determine the appropriate level of care. A therapeutic milieu is provided in
      an
      open setting that provides chemical aversion therapy as indicated through
      established medical protocols, group and didactic therapies to enhance the
      individual’s ability to embrace personal recovery. The goal of the
      detoxification process is to support and motivate the patient to complete the
      entire treatment process that follows his detoxification.





The
      second service offered is a short-term rehabilitation intervention (Level 3B)
      with an average length of stay of approximately 28 to 30 days. Through the
      use
      of a multidisciplinary team, an individualized patient treatment plan is
      developed with the patient to engage all available social support systems,
      aversion therapy, mental health support (as indicated), education programs
      and
      various therapeutic modalities to bring about an improved level of
      function.







9




Within
      the Drug and Alcohol Rehabilitation Program there are three different
      programs including:





·
            Drug-Free
                Treatment Program


·
            Two
                Gender Specific Methadone Treatment Programs
                and


·
            Dual
                Diagnosis Program





Each
      program focuses on a specific profile of the patient and tailors the treatment
      content to the specific needs of that group.




*Market*





The
      Drug
      and Alcohol Rehabilitation Program serves West and North Philadelphia. 76%
      of
      discharges in 2004 came from Philadelphia County compared to 85% in 2005. The
      program’s primary payor, Community Behavioral Health, represented 94% of the
      program’s payor mix as of June 30, 2004 and 85% as of June 30, 2005. This shift
      in mix reflects increasing utilization by Magellan Behavioral Health which
      serves suburban residents.




C.
      The
      Blackwell Center Adolescent Residential Treatment Services (The Blackwell
      Center)





*Description*





The
      Blackwell Center was established to provide residential psychotherapeutic
      services to adolescents, ages 13 to 17, who are ambulatory and medically stable.
      The program, which operates 24 hours each day, offers intensive clinical
      treatment in a less restrictive residential setting while providing
      participation in an on-site educational program. The length of stay is
      approximately one year but may vary depending on the focus of treatment. These
      adolescents typically have mental health disorders as well as extreme behavior
      problems that have lead to interactions with the criminal or family court
      systems. Treatment is often mandated by the courts as an alternative to a youth
      detention center. Our goal is to enhance life skills and behavior management
      while reducing the barriers that prevent the patient from reintegrating into
      their family unit successfully.





The
      Blackwell Center provides a care alternative to acute inpatient psychiatric
      treatment. The Blackwell Center is also utilized as a step-down unit for those
      persons who still require 24-hour supervision but have benefited from
      hospitalization to the degree that a less restrictive setting can now meet
      their
      therapeutic needs.





Each
      patient’s unique strengths and weaknesses are assessed by a multi-disciplinary
      treatment team and as a result an individualized treatment plan is developed
      including an individualized educational program with the school staff. As part
      of the treatment planning process, objectives are established which are
      addressed through individual, group and family therapy focusing on impulse
      control, medication education, coping skills, etc.





The
      Blackwell Center’s patients suffer from a variety of psychiatric disorders
      including depression, bi-polar illness and anxiety disorders. The Blackwell
      Center’s core psychiatric programs are designed to accomplish stabilization of
      symptoms through an integration of clinical, educational, recreational and
      life
      skills development interventions by therapists, teachers, probation officers
      and
      family members.






10




*Market*




In
      November 2001, we relocated the Blackwell Center from Bucks County to the
      Blackwell Human Services Campus. This relocation shifted the program’s marketing
      focus to Philadelphia with its primary market areas being North and West
      Philadelphia. A total of 60% of discharges in 2004 came from Philadelphia County
      compared to 95% in 2005. Community Behavioral Health represented 75% of the
      program’s payor mix in 2004 and 85% in 2005.





***3.
      Marketing and Referral Sources***





We
      obtain
      patients primarily through referrals from physicians, hospitals, community
      based
      health care organizations, Managed Care plans and other third party payors.
      Therefore, the focus of our sales and marketing programs is direct marketing
      to
      physicians, hospitals, other health care institutions and third party payors.
      Our marketing focus is local, concentrating on establishing relationships with
      he local referral sources especially the Crisis Response Centers in Philadelphia
      County, which serves as behavioral health emergency centers.





Other
      specific referral sources include case managers, crisis workers, hospital
      emergency rooms, evaluation centers, private practitioners, clinics, etc. that
      have direct patient contact and a need or obligation to place the patient in
      a
      treatment setting. A referral source usually has a range of options of the
      best
      placement for a patient and weighs several factors including proximity to the
      patient, cost, appropriateness of service and responsiveness of provider.





Both
      payors and referral sources increasingly demonstrate a preference for providers
      which offer systems of care at various levels. Integration of services helps
      assure better clinical continuity of services and greater cost efficiency.
      In
      addition, Managed Care companies and other payors are continually trying to
      reduce the number of vendors with whom they must contract. We believe,
      therefore, that achieving a critical density of services in a defined
      geographical area, establishing and maintaining personal relationships with
      referral sources, a continued focus on quality, and increasing economies of
      scale all are important keys to its ability to compete effectively with smaller
      local competitors which may not offer a full range of services, as well as
      larger national providers which may not provide a full spectrum of integrated
      clinical services in the our market area.





We
      market
      our services to all types of payors, including insurance companies and Managed
      Care companies, but we primarily market to Managed Care companies on a
      negotiated fee basis.





***4.
      Services Development***




Our
      business strategy is to develop a continuum of integrated services which respond
      to niche market demand locally. Because of the uniqueness of our physical plant
      and the cost burden of vacant space, our management has sectored our property
      (adult vs. adolescent populations) to provide for mixed uses in a reasonable
      manner. Given our location in the highest density area for Medical Assistance,
      we have shaped our programs to the needs of the local residents in our immediate
      community.





Development
      of services at secondary locations or through acquisition has not been possible
      due to our limited working capital. Management is pursuing debt refinancing
      and
      potential sale of selected assets to improve working capital for
      development.









11





***5.
      Competition***





There
      is
      intense competition among providers in our existing markets. The behavioral
      health care industry, in general, is undergoing consolidation, and we will
      face
      intense competition in seeking to increase our market share. Many of our current
      and potential competitors have significantly greater financial and other
      resources than will be available to us. In addition, our national competitors
      benefit from contracting with Managed Care companies which themselves operate
      in
      more than one region and benefit from volume purchasing and name recognition.





Our
      management believes that our location and density of services provide a
      community oriented integrated continuum which meet our major payor’s needs.
      Additionally, our specialty services in treating adolescent, geriatric,
      dual-diagnosis and methadone patients provide services not readily available
      at
      other provider sites.





***6.
      Customers***





The
      largest payor for both the Kirkbride Center and the Blackwell Center is
      Community Behavioral Health (“CBH”), which contributed 86% of all patients for
      these programs during the year ended June 30, 2004 and 76% during the year
      ended
      June 30, 2005. CBH is a non-profit corporation sponsored by the City Of
      Philadelphia which acts as a managed care organization to provide behavioral
      health coverage for Philadelphia residents eligible for Medicaid. Magellan
      Behavioral Health contributed 3% of all patients for these programs during
      the
      year ended June 30, 2004 and 7% during the year ended June 30, 2005. Medicare
      contributed 1% of all patients for these programs during the year ended June
      30,
      2004 and 6% during the year ended June 30, 2005 primarily due to the opening
      of
      a gero-psychiatric program in December 2004.





For
      the
      year ended June 30, 2005, our inpatient payor mix was as follows:





**Adolescent**
            **Hospital**
            **Drug
                & Alcohol****Services**
            **Services**
            **Services**Medicare
            0%
            26%
            0%Medicaid
                and Medicaid Pending
            3%
            17%
            0%CBH,
                and Managed Care
            94%
            53%
            93%Other
            3%
            4%
            7%





We
      anticipate that in the future, the percentage of revenues derived from
      traditional Medicare and Medicaid will decrease, and the percentage of revenues
      derived from Managed Care arrangements will increase which is consistent with
      general health care industry trends,





During
      the periods covered by this report, Quantum provided services as a subcontractor
      to clinical research companies hired by pharmaceutical companies whose drugs
      are
      tested at facilities such as the Kirkbride Center. Quantum paid an inpatient
      rate equal to our Community Behavioral Health rate to utilize the Kirkbride
      Center’s beds for its clinical drug trials. Quantum began generating revenue in
      1999. Subsequent to the period covered by this report, however we changed our
      strategy in this sector and executed an agreement whereby we provide beds and
      other space in our facility for an unrelated company to conduct these studies.
      At that time, Quantum ceased active operations. The independent company pays
      an
      inpatient rate of $425 per patient day which is equivalent to the KirkBride
      Center’s Community Behavioral Health rate adjusted for services directly
      performed by the independent company’s staff.






12




***7.
      Governmental Approvals***





We
      do not
      have any patents or trademarks that are material to our operations. Various
      licenses are required for the operation of the Kirkbride Center and the
      Blackwell Centers, and other company operations.





The
      Kirkbride Center is licensed by the Department of Public Welfare, Office of
      Mental Health, for the Commonwealth of Pennsylvania for Inpatient Private
      Psychiatric Hospital, and by the Pennsylvania Department of Health as a drug
      and
      alcohol rehabilitation center or 137 beds, 7 of which are restricted for detox
      services. Additionally 25 of the hospital’s 74 inpatient psychiatric beds hold
      dual licenses with both Departments.





The
      Blackwell Center is licensed for 32 beds by the Pennsylvania Department of
      Public Welfare, Office of Children, Youth and Families, as a Residential
      Treatment Facility for Children and Adolescents.





The
      Kirkbride Center and Blackwell Center operate with a Certificate of
      Accreditation from the Joint Commission on the Accreditation of Health-Care
      Facilities (JCAHO). Both centers received a three-year accreditation in October
      2005.





***8.
      Governmental Regulations***





Health
      care is an area of extensive federal, state and local regulation. Changes in
      the
      law or new interpretations of existing laws can have a dramatic effect on
      methods of doing business, costs of doing business and amounts of reimbursement
      by government and private third party payors. The health care industry is
      subject to state laws governing certification, professional licensure,
      certificate of need requirements and physician and other health care provider
      self-referrals. In addition, state regulation of Medicaid reimbursement directly
      impacts the profitability of servicing Medicaid patients. Federal regulations
      covering fraud and abuse, and arrangements among health care providers that
      may
      be deemed under Medicare/Medicaid regulations as fraud and abuse or
      self-referral arrangements, can limit the ways in which the Company conducts
      business. No assurance can be given that federal and state regulations,
      administrative actions pursuant to such regulations, or changes in such
      regulations will not adversely affect our business.





In
      addition, numerous federal legislative proposals have been initiated which
      contemplate significant changes in the availability, delivery, pricing and
      payment for health medical products and services. Various states also have
      undertaken or are considering significant health care reform initiatives.
      Although it is not possible to predict the exact manner and the extent to which
      we will be affected by the passage of health care "reform" measures or other
      legislative or administrative initiatives, it is virtually certain that health
      care delivery, reimbursement of health care costs, and virtually every other
      aspect of the health care industry will be the subject of legislative and
      administrative initiatives in the future. It is likely that we will be affected
      in some fashion by any new legislative and administrative measures, which are
      adopted, and such effects could be material and adverse to our business.





Most
      states have laws, regulations and professional licensing board legal doctrines
      which prohibit the employment of physicians by corporations other than
      professional corporations with all stockholders being licensed persons. Certain
      states have legislation or regulations, or rulings or opinions of courts or
      state officials, suggesting that other health care professionals may not
      lawfully provide services as employees of business corporations. To the extent
      that such restrictions are or become applicable to our operations, we must
      structure our operations to be in compliance with such provisions. There is
      no
      assurance, however, that we will develop a satisfactory structure to deal with
      all such restrictions.






13





**II.**  **Real
      Estate Leasing Activities**





We
      have
      been developing and marketing space at the Kirkbride Center creating a community
      of complementary tenants that further enhance the value of the property.
      Additionally, the property has approximately 5 acres of excess land suitable
      for
      sale or lease. As of June 30, 2005, approximately 53% of the space at the
      Kirkbride Center was leased or occupied by our operations, consistent with
      our
      position at June 30, 2004.





Historically
      the property at 49 th and
      Market Streets, Philadelphia, Pa., was acquired in 1997 by the Kirkbride Center.
      As a result of Kirkbride Center’s bankruptcy, the reorganization plan called for
      the separation of the real estate and buildings from the healthcare operations.
      On July 7, 2004, in accordance with the Reorganization Plan ownership of the
      property was transferred from Kirkbride Center to a newly formed sister
      corporation, Kirkbride Realty. At that time, the Kirkbride Center became a
      tenant. Simultaneously, all third party tenant leases owned by CoreCare Realty
      Corporation were assigned to Kirkbride Realty and CoreCare Realty Corporation
      became inactive.





Kirkbride
      Realty is responsible for the real estate development and leasing of space
      at
      the Kirkbride Center. Kirkbride Realty has seen growth of 8.4% in third party
      tenant revenue for the year ended June 30, 2005 and compared to 2004. Of
      leaseable space Kirkbride had 7.4% vacant space as of June 30, 2004 and 7.4%
      as
      of June 30, 2005. Our entities occupied 198,213 square feet or 53% of space.
      Demand for space continues to be strong, with the costs of rehabilitation of
      the
      remaining vacant space being the only limiting factor.





New
      leases signed during the year ended June 30, 2004 were:





·
            Market
                Street Constructors - two and one half year lease of 1,350 Sq.
                Ft.


·
            Travelers
                Aid administration - three year lease of 11,530 Sq.
                Ft.





New
      leases signed during the year ended June 30, 2005 were:




·
            Children’s
                Service - three year lease of 2,000 Sq.
                Ft.


·
            West
                Philadelphia Charter School - one year lease of 3,400 Sq.
                Ft.





As
      a
      result of Kirkbride Center’s Reorganization Plan, Kirkbride Realty became a
      co-borrower on
      the
      first mortgage and a second mortgage guarantor to taxing authorities which
      have lien status on the property. The property’s first mortgage debt expires on
      July 7, 2007, thus we are seeking refinancing of this debt. Additionally we
      have
      identified 4 to 5 acres of excess land along Market Street which we have put
      up
      for sale. While we have received interest periodically, no current agreements
      of
      sale exist as of this time. We will continue to seek out prospective
      buyers.





Additional
      information on the property can be found in Item 2 below.







14





**III.**  **Food
      Services**





CoreCare
      Food Services, Inc. is a wholly-owned subsidiary of CoreCare Systems, Inc.
      incorporated in Commonwealth of Pennsylvania on August 18, 2003. CoreCare Food
      Services, Inc. was created to recognize a shift in our Dietary Department from
      a
      cost center to a revenue center caused by the Office of Emergency Shelter and
      Services (OESS) Food Service contract. In November 2002, the Blackwell Center
      which operated our Dietary Department signed the first Office of Emergency
      Shelter and Services (OESS) contract with the City of Philadelphia to produce
      meals for residents of a City of Philadelphia family shelter operated by
      Travelers Aid in space leased by Travelers Aid at the Kirkbride Center. The
      Blackwell Center signed the Office of Emergency Shelter and Services (OESS)
      contract with the City of Philadelphia due to the suddenness of these events
      and
      the belief that Travelers Aid would be a short term tenant. When it became
      clear
      that Travelers Aid would be a long term tenant, CoreCare Food Services, Inc.
      was
      formed and the Office of Emergency Shelter and Services (OESS) contract was
      assigned to CoreCare Food Services, Inc. As the Office of Emergency Shelter
      and
      Services (OESS) contract is re-established annually, subsequent contracts were
      signed directly with CoreCare Food Services, Inc.





CoreCare
      Food Services, Inc. also provides services to the Baptist Children’s Services
      which leases space from Kirkbride Realty for a adolescent group home/emergency
      shelter for approximately 40-50 residents. This contract is however limited
      for
      dinner only. Food Services also provides meal service to our
      patients.





CoreCare
      Food Services, Inc. operates in a dedicated building on the Kirkbride Center
      property referred to as West Services Building. The physical plant of the food
      service is currently underutilized. Historically these facilities provided
      food
      service for 245 beds on this property when it was the Institute of Pennsylvania
      Hospital and provided food service for two other non-campus Institutions by
      utilizing the cook chill equipment. For fiscal year 2005, Food Services prepared
      492,088 meals compared to 459,166 meals in fiscal year 2004. The 7% increase
      was
      caused by the growth of the homeless shelter and the Kirkbride
      Center.





For
      fiscal year June 30, 2005 we billed $609,086 in revenue to third party contracts
      as compared to $300,000 for fiscal year 2004. This increase in revenue in fiscal
      year 2005 reflects a full 12 months of activity as opposed to 9 months in fiscal
      year 2004 as well as increases in the homeless shelter census in 2005 and a
      new
      contract with the Baptist Children’s Services.





**IV.
      Clinical Research Trial Service**





The
      following paragraphs describe the clinical research operations conducted by
      Quantum Managed Mental Health, Inc. d/b/a Quantum Clinical Services Group during
      the periods covered by this report. Subsequent to that period, on
      August
      29, 2006, we signed a three year clinical research service agreement with an
      unaffiliated company, CRI-Worldwide (CRI-WW) whereby we agreed to provide up
      to
      24 inpatient psychiatric beds for CRI-WW activity in clinical research. In
      addition, we agreed to assign the space of Quantum to CRI-WW. Concurrent with
      this agreement, Quantum ceased operations.





***1.
      Description***





Through
      our wholly owned subsidiary, Quantum, we operated in the clinical research
      market as an independent research site. We utilized Quantum to provide
      investigative services for the pharmaceutical and contract research
      organizations in the area of psychiatric and neurological clinical trials.
      Quantum contracted with its related subsidiaries or other non-related third
      party companies to provide services in conducting clinical trials including
      local doctors, area nursing homes, assisted living facilities and boarding
      homes.






15





Quantum
      worked with 12 major pharmaceutical companies and 7 key contract research
      organizations. Such studies focused on a wide range of central nervous system
      disorders including: schizophrenia, mania, dementia, psychosis, alzheimer’s
      disease, depression, addiction and anxiety.





Quantum
      provided services in three of the four phases of drug trials involving human
      volunteers; which commence after the drugs have been approved for testing in
      humans by the FDA including:





Phase
      II:
      testing for safety and effectiveness in a small sample of afflicted
      patients,


Phase
      III: testing for safety and effectiveness in a large sample of afflicted
      patients for FDA approval and


Phase
      IV:
      long term monitoring tests of drugs post-FDA approval.





Quantum
      has been staffed with an experienced and accomplished team to perform clinical
      trials of psychopharmacological agents and products in these Trial Phases.
      These
      trials are to be conducted on the Kirkbride Center Campus using approximately
      1,000 square feet of space for outpatient research studies and on the Kirkbride
      Center’s acute bed hospital floors for inpatient studies. During fiscal year
      June 30, 2004, Quantum signed 6 revenue producing study contracts. During fiscal
      year June 30, 2005, Quantum signed 10 revenue producing study contracts. These
      contracts included Eli Lilly, Pfizer, AstraZeneca and Sumitomo Pharmaceuticals.
      Many of these contracts included both inpatient psychiatric services and
      outpatient services. Due to the nature of the business, from time to time
      Quantum may sign contracts which are not revenue producing due to difficulties
      in recruiting patients for such studies. Revenues for clinical trials grew
      from
      $250,000 for the year ended June 30, 2004 to $369,000 for the year ended June
      30, 2005.





Quantum
      marketed its services to United States and internationally based pharmaceutical
      companies that are seeking appropriate clinical trial sites for the testing
      of
      their drugs.





***2.
      Marketing and Referral Sources***





We
      have
      obtained contracts for clinical research through Contract Research Organizations
      (CRO’s) and Site Management Organizations (SMO’s) which are retained by
      Pharmaceutical and Bio-Tech Companies. We market our services to Pharmaceutical
      Companies, CRO’s and SMO’s. Our marketing is focused on established relationship
      between key staff and pharmaceutical firms and their representatives.





***3.
      Development***





Our
      focus
      is to integrate Clinical Research Trial Services into all of our behavioral
      services and establish a track record as a reliable, productive investigative
      site that performs according to protocols. We believe that the demographic
      composition of our behavioral customers would make it an attractive site for
      conducting clinical research on new drugs. We planned to leverage our
      relationships through our affiliations, referral sources, and Quantum’s growing
      patient data base which steadily increase its revenue line.







16





***4.
      Competition***





Clinical
      Research Trial Services for drug trials is a rapidly growing industry. The
      growth in demand for central nervous system disease has outpaced the
      availability of sites and investigators. We believe that demand will support
      many more competitors and that success will be a function of recruitment of
      patient volunteers and quality of performance.




**Employees**




As
      of
      June 30, 2005, we had 350 full-time and part-time employees. This number does
      not include mental health professionals (e.g., psychiatrists, psychologists,
      etc.) who provide services through our facilities and who may be deemed
      employees for federal tax and accounting purposes. The Kirkbride Center in
      Philadelphia, Pennsylvania is the employment location of all of our
      employees.





**Expenditures
      for Research and Development**





We
      do not
      incur any material expenses for research and development.





**Environmental**





We
      are
      not aware of any administrative or other costs that we may incur which are
      directly related to compliance with environmental laws, and we have not
      experienced any other significant effect from the impact of environmental
      laws. ******








**ITEM
      2 -**  **DESCRIPTION
      OF PROPERTY**





We
      own
      the following property and do not have any leased property.





**PROPERTY**
            **LOCATION**
            **OWN
                / LEASE**
            **DESCRIPTION**Blackwell
                Human
              Services
                Campus
            Philadelphia,
                PA
            Own
            422,800
                square feet on
              21
                acres





Kirkbride
      Realty Corporation d/b/a The Blackwell Human Services Campus **** consists
      of seven (7) buildings totaling 422,800 square feet on a 21 acre site comprising
      an entire city block bounded by Market Street, Haverford Avenue, and
      48 th and
      49 th Streets
      in Philadelphia, Pennsylvania. The buildings have been well maintained and
      continue to be good condition. In the opinion of our management, the property
      is
      adequately covered by insurance. The property is served by all major public
      utilities.





Kirkbride
      Holdings, LLC, a division of Allied Partners of New York, holds a mortgage
      on
      the property for $14,538,884 as of June 30, 2005. Interest on the mortgage
      is
      equal to LIBOR plus 1,000 basis points not to exceed 12.5% per annum.
      Additionally the property is encumbered by secondary liens associated with
      Kirkbride Center’s bankruptcy as described in Item 3.





17











Summary
      of the buildings on the site is as follows:





**Building
                Name**
            **Date**
            **Floors**
            **Total
                Sq. Ft.**
            
            **Uses**North/Activities
                Building
            1957
            5
            111,400
            
            Psychiatric
                Hospital, Drug & Alcohol
              Rehabilitation;
                Homeless Shelter for FamiliesLawler
                building
            1928
            4
            110,000
            
            Adolescent
                Group Home, Homeless Shelter for Families, Adolescent Residential
                Treatment Program; Drug & Alcohol Rehab; Admin; & Doctors Offices;
                Outpatient ClinicKirkbride
                Building
            1859
            3
            128,600
            
            College
                Vocational Program; Charter SchoolNorth
                Flats Building
            1859
            1
            14,100
            
            Mental
                Health ClinicWest
                Service Building
            1957
            2
            30,000
            
            Food
                Preparation/Cafeteria/LaundryEast
                Services Building
            1957
            1
            25,000
            
            Mechanical
                Systems/EngineeringChiller
                Plant
            1989
            1
            3,700
            
            Cooling
                System**Total**
            
            
            422,800





During
      the fiscal year June 30, 2005, occupancy of the property was 92% of available
      space; 53% occupied by our activities and 39% occupied by third party tenants.
      Tenants pay an average effective annual rental of $12.00 per square foot.





Lease
      terms vary from Travelers Aid, which is an annually renewing lease, to the
      typical lease term of five (5) years. While leases provide for annual
      adjustments according to increases in the consumer price index, leases do not
      provide for the pass-through of triple net charges. Our
      largest tenant in both 2004 and 2005, representing 28% and 35% of total tenant
      revenue respectively, was Travelers Aid. Travelers Aid rentals totaled $456,750
      in 2004 and $611,691 in 2005.





Rental
      Income increased by $137,321 or 8.4% from $1,626,950 in 2004 to $1,764,271
      in
      2005 due to  increased
      space leased to third parties at the Kirkbride Center and annual rental
      increases. Although no major new leases were signed in 2005, Travelers Aid
      did
      significantly increase its rental space.





Rental
      expense for the years ended June 30, 2004 and 2005 amounted to $32,064 and
      $20,363, respectively. Commitments for minimum rental income under noncancelable
      leases as of June 30, 2005 are as follows:





Years
                ending June 302006
            
            $
            1,988,5862007
            
            $
            1,025,8812008
            
            $
            658,8972009
            
            $
            24,000Total
            
            $
            3,697,364





The
      Federal tax basis for depreciation for the year ended June 30, 2004 is
      $12,019,789 using the straight line method of depreciation with a composite
      life
      of 28.72 years. The tax rate would be 0 due to the Company’s net loss
      carryforward. The Federal tax basis for depreciation for the year ended June
      30,
      2005 is $12,838,743, using the straight line method of depreciation with a
      composite life of 36.95 years. The tax rate would be 0 due to the net loss
      carryforward.






18





We
      have
      identified approximately four to five acres along Market Street that we have
      made available for real estate development. To date however no sale agreements
      have been executed.





**ITEM
      3 -**  **LEGAL
      PROCEEDINGS**





Our
      major
      subsidiaries, CoreCare Behavioral Health Management, Inc., operating as the
      Kirkbride Center, and CoreCare Realty Corporation (together, the “Debtors”)
      filed for protection under Chapter 11 of the United States Bankruptcy Code
      on
      May 6, 2002. On May 27, 2004, the Confirmation Order was signed approving the
      Reorganization Plan which allowed the Debtors to emerge from bankruptcy. The
      effective date of the Reorganization Plan was July 7, 2004.





Pursuant
      to the Reorganization Plan and except as otherwise expressly provided in the
      Reorganization Plan, on July 7, 2004, the Debtors, were vested with all of
      the
      property of their estate, free and clear of all claims, liens encumbrances,
      charges and other interests, which were extinguished except as specified in
      Article 3 and 4 of the Reorganization Plan. We retained our full equity
      ownership in the Debtors and no shares were issued under the Reorganization
      Plan.





As
      part
      of the Reorganization Plan, we created a new wholly-owned subsidiary, Kirkbride
      Realty. On July 7, 2004, pursuant to the Reorganization Plan, the Kirkbride
      Center real estate and tenant leases were transferred to Kirkbride Realty.
      The
      behavioral health care licenses and services were retained by the Kirkbride
      Center who signed a lease with Kirkbride Realty for the space needed for
      hospital and other affiliate operations. Pursuant to the Confirmation Order,
      the
      only liens remaining on the property are Class 1 - Kirkbride Holding LLC, the
      mortgage holder; Class 2 - Internal Revenue Service; Class 4 - Pennsylvania
      Department of Revenue; Class 5 - Pennsylvania Department of Labor and Industry;
      Class 8 - City of Philadelphia and Class 10 - Mortgage - Other Creditors. The
      Debtors also had an obligation to make monthly payments to an administrative
      claims fund. Details of amounts owed in each class, and the amounts to be paid
      to the administrative claims fund, are provided below.





Cash
      distributed under the Reorganization Plan was $2,250,000, $1,000,000 of such
      funds originating from Commonwealth of Pennsylvania Tobacco Funds and additional
      borrowings of $1,250,000 from the Debtor’s mortgage holder. This increase in
      debt was secured by the real estate now owned by Kirkbride Realty and the
      accounts receivable of the Kirkbride Center and its sister corporation The
      Blackwell Center. Such proceeds were distributed as follows:





IRS
            
            $
            1,325,000PA
                Department of Revenue
            
            $
            125,000PA
                Department of Labor & Industry
            
            $
            50,000Financing
                Fees
            
            $
            46,000Administrative
                Claims
            
            $
            350,000Principal
                Payments to Mortgage Holder
            
            $
            186,000Interest
            
            $
            31,000Debtor
                Working Capital
            
            $
            121,000Escrow
                Payment
            
            $
            16,000





Given
      the
      working capital available, we have established a $100,000 debt service reserve
      as added protection against any potential mortgage default. The remaining
      liabilities of each class and their respective payment plan are delineated
      herein.






19





The
      Kirkbride Holding LLC, Class 1, will be paid $15,275,000 with a mortgage term
      reset for 36 months from the Effective Date. The mortgage interest rate was
      also
      reset at 1000 basis points over Libor, an increase of 150 basis points from
      prior mortgage. Libor was capped at 2.5%. Tranche A of the mortgage,
      $14,025,000, has a 30 year amortization schedule. Should however Kirkbride
      Realty’s third party tenant revenue increase over revenue in existence on
      January 31, 2004, Kirkbride Realty will pay 30% of such increase to the mortgage
      holder as additional principal repayment with a balloon payment of remaining
      principal due on July 7, 2007. Tranche B, $1,250,000, will be repaid according
      to a variable schedule by early 2006. Fees earned by the mortgage holder for
      the
      additional borrowings were $175,000 plus 50% of cash collected on the Kirkbride
      Center and the Blackwell Center accounts receivable of March 31, 2004, up to
      $3,000,000 of collections, after which the fee is reduced to 25%. Such
      additional fees earned by the mortgage holder were $269,856 for fiscal year
      ending June 30, 2005. As an inducement for the additional financing all
      affiliate companies and officers have become co-borrowers with the Debtor on
      the
      full mortgage.





The
      IRS,
      Class 2, will receive $1,640,000 plus interest paid in equal monthly
      installments of principal and interest at the statutory interest rate for 72
      months. Administrative Claims of $200,000 including interest and penalty will
      be
      paid to the IRS over 12 months. The IRS was also paid $1,325,000 at
      closing.





Pennsylvania
      Department of Revenue, Class 4, will receive $602,207 plus interest payable
      in
      equally monthly installments of principal and interest at the statutory rate
      for
      72 months. In addition the Department’s unsecured claim of $84,659 will be paid
      with the Class 10 Mortgage and its Administrative Claim of $90,000 will be
      paid
      over twelve months. The Department was also paid $125,000 at
      closing.





Pennsylvania
      Department of Labor & Industry, Class 5, will receive $116,000 which will be
      paid in equal monthly installments of principal and interest for 72 months,
      and
      Administrative Claims of $35,199 a payment over 14 payments. The Department
      of
      Labor & Industry was paid $50,000 at closing.





The
      City
      of Philadelphia, Class 8, will receive $2,919,633, paid in equal monthly
      installments of principal and interest over 120 months, however $919,633 of
      this
      sum will be paid over the final 48 months of this term.





The
      other
      allowed Claims, Class 10, shall receive a Mortgage Note in the Kirkbride
      property subject to the rights of the First Mortgage holder as well as a
      security interests in Westmeade assets. Interest shall accrue at six (6%) per
      annum. Principal payments of $41,667 per month starting 90 days after the
      Effective Date will be paid to the Distribution Trustee who will distribute
      such
      funds every six months to the Creditors. This sum will increase to $42,592
      per
      month in year 2 and $62,094 per month in year 3; $75,000 per month in year
      4 and
      $100,000 per month in year 5 and thereafter. In addition to these scheduled
      payments, on or before February of each year the Debtor shall distribute to
      Class 10, 80% of Free Cash Flow of the Debtor, Kirkbride Realty, and the
      Blackwell Center over $100,000 pursuant to a specific definition of Free Cash
      Flow. The final amount of claims in Class 10 will be determined after the Court
      and we have finalized the Proof of Claim process.




Additionally
      the Debtor will pay $10,000 a month to the Administrative Claim Fund for the
      residual professional fees remaining after the initial payment of $350,000.
      The
      cost of the Bankruptcy for all professional fees was $830,000.






20




CoreCare
      Systems, Inc. is the sole stockholder of the Debtors, the Blackwell Center
      and
      the newly formed, Kirkbride Realty. CoreCare Systems, Inc. has made a capital
      contribution to the Debtors through past payments made by the Blackwell Center
      to pay off the Debtor's accounts receivable line of credit as well as the
      Blackwell Center's future contribution to the Class 10 claim holders. No shares
      of CoreCare Systems, Inc. stock were issued as part of the Reorganization Plan.





During
      the bankruptcy period we transferred our legal representation from Ciardi, Maschmeyer
      & Karalis, P.C. to Janssen Keenan & Ciardi P.C. and then to Ciardi &
Ciardi P.C. in order to maintain continuity of our chief council, Albert Ciardi
      III, Esq.




Legal
      proceedings related to the Kirkbride Center and CoreCare Realty Corporation
      are
      estopped by the Bankruptcy Proceedings. The nature of the legal proceedings
      related to these subsidiaries were to collect for services and/or supplies
      sold
      to the subsidiaries. These claims are covered by the Reorganization Plan that
      provides a lump sum or time pay out of the certified claim. The claims in excess
      of $50,000 are listed below.





PECO
                Energy
            $280,000Omnicare
            $750,000
                (Pharmaceutical supplier)Main
                Line Security
            $
                63,000Cuilinart
            $180,000Eliot
                Krems
            $150,000Kevin
                Parker
            $
                67,000Duffey
                & Sons
            $
                60,000BDO
                Seidman
            $425,000





The
      Plan
      of Reorganization for Kirkbride Center and CoreCare Realty Corporation became
      effective on July 7, 2004 without any loss of equity in these subsidiaries
      to
      CoreCare Systems, Inc.





In
      September 2003, 17 months after the bankruptcy filing, the mortgage holder
      sued
      CoreCare Systems, Inc and its officers as guarantors of the mortgage. This
      suit
      was withdrawn in December 2003, at which time WRH Mortgage, Inc. sold the
      mortgage to Kirkbride Holdings, LLC.





We
      are
      subject to professional malpractice and related claims from time to time in
      the
      ordinary course of business. We maintain insurance against such claims. Insurers
      are defending all such claims, and we are confident that the ultimate liability
      or settlement obligation in such claims will be within policy limits. Reserves
      of $75,000 and $90,000 have been booked to the financial statements at June
      30,
      2004 and June 30, 2005 to cover legal defense costs under the insurance
      deductible for each claim.





**ITEM
      4 -**  **SUBMISSION
      OF MATTERS TO VOTE OF SECURITY HOLDERS**





We
      have
      not held any shareholder meetings or submitted any matters to vote of
      shareholders since October 29, 1998. The members of the Board of Directors
      have
      not changed since our last 10-KSB filing in 2000 with the exception of the
      resignation of Thomas X. Flaherty on April 25, 2002 for personal
      reasons.








21








**PART
      II**





**ITEM
      5 - MARKET FOR COMMON EQUITY, AND RELATED SHAREHOLDER
      MATTERS**


**Market
      Information**





Our
      common stock is traded in the pink sheets under the symbol "CRCS.” We were
      delisted on December 17, 1999 from the electronic bulletin board operated by
      the
      National Association of Securities Dealers due to lack of timely reporting.





The
      following table sets forth the range of high and low bid prices per quarter
      quoted for our common stock as provided by the pink sheets during the periods.





HIGH
            LOW**Fiscal
                Year**
              **Ending**
              **June
                30, 2004**First
                Quarter  9/30/03
            $.04
            $.04Second
                Quarter  12/31/03
            $.04
            $.04Third
                Quarter 3/31/04
            $.04
            $.03Fourth
                Quarter   6/30/04
            $.09
            $.03**Fiscal
                Year**
              **Ending**
              **June
                30, 2005**First
                Quarter  9/30/04
            $.06
            $.03Second
                Quarter 12/31/04
            $.19
            $.06Third
                Quarter  3/31/05
            $.20
            $.19Fourth
                Quarter 6/30/05
            $.21
            $.20





**Holders**





As
      of
      June 30, 2005, there were approximately 592 record holders of our common
      stock.





**Dividends**





We
      have
      never declared or paid any cash dividends on our common stock. We currently
      anticipate that all future earnings will be retained by us to repay debt
      outstanding. Accordingly, we do not anticipate paying cash dividends on our
      common stock in the foreseeable future. In addition, dividends on common stock
      cannot be paid until all dividends in arrears on the preferred stock have been
      paid. The payment of dividends on common stock will be at the discretion of
      our
      Board of Directors and will depend upon, among other things, future earnings,
      operations, capital requirements, our general financial condition, contractual
      restrictions and general business conditions. Our term loan and revolving credit
      facility prohibits the payment of dividends without the consent of the
      lenders.





For
      information concerning dividend rights of holders of our preferred stock, see
      "Part I, Item 11 - Security
      Ownership Of Certain Beneficial Owners and Management and Related Stockholder
      Matters.”





22





**Recent
      Sales of Unregistered Securities**





There
      were no sales of our securities in fiscal years ending June 30, 2004 and June
      30, 2005. We did issues shares to our employees and directors. Such issuances
      were pursuant to transactions that were exempt from registration under the
      Securities Act pursuant to Section 4(2) of the Securities Act, and the shares
      of
      our common stock issued (or issuable in the case of warrants or options granted)
      were "restricted securities" as that term is defined in Rule 144 and may be
      resold only in compliance with registration provisions of the Securities Act
      or
      an exemption thereunder.





**Shares
      Issued for Services**





For
      the
      fiscal years ending June 30, 2004 and June 30, 2005, we issued a total of 55,000
      and 100,000 shares of common stock to our employees and directors, respectively,
      as incentives. Additionally, 1,175,000 shares of common stock were issued in
      lieu of interest on debt.





**Company
      Repurchases**





We
      did
      not purchase any shares of our common stock during the fiscal years ended June
      30, 2004 or June 30, 2005.





**ITEM
      6 -**  **MANAGEMENT
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:**





**Introduction**





The
      following is a discussion and analysis of the financial condition and results
      of
      operation of our business for the fiscal years ended June 30, 2005 and 2004.
      It
      should be read in conjunction with operating statistics and selected financial
      data and accompanying consolidated financial statements and related
      notes.





We
      provide behavioral health care services at one location through two legal
      entities, Core Care Behavioral Health Management, Inc. d/b/a Kirkbride Center
      and Westmeade Healthcare, Inc. d/b/a Blackwell Center for Adolescent
      Treatment.





The
      Kirkbride Center provides acute inpatient psychiatric hospital services and
      non
      hospital drug and alcohol rehabilitation services. The hospital services are
      certified by Medicare and both the hospital and non-hospital services are
      certified by Medical Assistance. Additionally, both services have contracts
      with
      various Managed Care companies. Kirkbride Center’s major payor is Community
      Behavioral Health.





The
      Blackwell Center provides adolescent residential services for males 13 to 17
      years of age. It is certified for Medical Assistance and its major payor is
      Community Behavioral Health. Our profitability is largely dependent on the
      level
      of patient census and the payor mix. Patient census is measured by the number
      of
      days a client remains overnight for inpatient care. Payor mix is determined
      by
      the source of payment to be received for each client being provided billable
      service.





The
      healthcare industry is subject to extensive federal, state and local regulatory
      governing among other things, licensure and certification, conduct of
      operations, audit and retroactive adjustment of prior government billings and
      reimbursement. Managed Care has had a profound impact on our operation, in
      the
      form of shorter lengths of stay, extensive certification of benefits
      requirements and, in some cases, reduced payment for services.




23





In
      addition to behavioral healthcare services, we lease space to third party
      tenants through Kirkbride Realty which owns the Blackwell Human Services Campus
      of 21 acres and approximately 372,790 Sq. Ft. leaseable space. While our
      entities utilize 53% of leaseable space and we have reserved 7% as vacant space
      for expansion of our healthcare services, there is no guarantee that we can
      utilize this vacant space or additional space that may become available if
      a
      significant third party tenant, such as Travelers Aid terminates its lease.
      Real
      estate revenues tend to be fixed based on the nature of signed leases. Lease
      terms vary from Travelers Aid, which is an annually renewing lease, to the
      typical lease term of five (5) years. While leases provide for annual
      adjustments according to increases in the consumer price index, leases do not
      provide for the pass-through of triple net charges. Thus, we are exposed to
      utility cost increases given the volatility of energy costs.





CoreCare
      Food Services, Inc. provides food services to our entities, Travelers Aid and
      Baptist Children Services. Food service for the residents of the homeless
      shelter operated by Travelers Aid is provided through a contract from the City
      of Philadelphia. This annual contract representing $606,537 in 2004 and $512,153
      in 2005 would be eliminated if Travelers Aid terminated its lease with Kirkbride
      Realty.





The
      table
      below provides certain information regarding licensed beds, occupancy rates
      and
      revenue mix:




Service
                ProfileLicensed
                Beds
            
            2005
            
            2004Hospital
            
            
            74
            
            
            74Drug
                & Alcohol Rehabilitation
            
            
            137
            
            
            137Adolescent
            
            
            32
            
            
            32Total
                Beds
            
            
            243
            
            
            243Occupancy
                RateHospital
            
            
            58%
            
            
            30%Drug
                & Alcohol Rehabilitation
            
            
            94%
            
            
            91%Adolescent
            
            
            45%
            
            
            72%Total
                Beds
            
            
            79%
            
            
            70%Revenue
                Mix - % of Total RevenueHospital
            
            
            31.4%
            
            
            19.2%Drug
                & Alcohol Rehabilitation
            
            
            49.2%
            
            
            56.2%Adolescent
            
            
            6.5%
            
            
            11.4%Total
                Patient Services
            
            
            87.1%
            
            
            86.8%Real
                Estate
            
            
            7.5%
            
            
            7.7%Other
            
            
            5.4%
            
            
            5.5%Source
                of RevenueMajor
                Payor
            
            
            76.2%
            
            
            86.3%





24





**Revenue
      recognition and accounts receivable**




Patient
          services revenues and accounts receivable are recorded at established billing
          rates or at a mount
          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
          normally
          recorded in operations in the year of settlement however as we had multiple
          fiscal years open, such adjustments are recorded in the year affected.
          Amounts
          due as a result of cost report settlement are recorded and listed separately
          on
          the consolidated balance sheets as “other receivables, third party”. The
          provision for contractual allowances is deducted directly from revenue.
          The
          allowance for doubtful accounts does not include the contractual
          allowances.





All
      revenues reported by us are shown net of estimated allowances 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”.





**Allowance
      for doubtful accounts**





The
      provision for bad debts is calculated based on the collection history of each
      payor by each line of service. Historical estimates are reviewed and adjusted
      quarterly. We compare this required reserve amount to the current “allowance for
      doubtful accounts” quarterly to determine if collection patterns warrant
      adjustments to prior periods or prospective estimates.





**Income
      Taxes**





Management
      estimates that we have federal and state net operating loss carry forwards
      aggregating in excess of $25,000,000 at June 30, 2005 expiring through 2020.
      In
      addition, there is approximately $11,600,000 in temporary timing differences
      between book and tax basis income and deductions. SFAS No. 109 requires the
      establishment of a deferred tax asset for all deductible temporary differences
      and operating loss carry forwards. Because of the uncertainty that, more likely
      than not, we will not generate income in the future sufficient to fully or
      partially utilize these carry forwards, the estimated deferred tax asset of
      approximately $14,640,000 as of June 30, 2005 is offset by a valuation allowance
      of the same amount. Accordingly, no deferred tax asset is reflected in the
      consolidated financial statements.





**Results
      of Operations 2005 versus 2004**





***Revenues***





Operating
      revenues in 2005 increased by $2,190,596, or 10.3%, from $21,216,047 in 2004
      to
      $23,406,643 in 2005. The increase was primarily due to improvements in Net
      Patient Service Revenues, which increased by $1,977,493 from $18,419,464 in
      2004
      to $20,396,957 in 2005, resulting from a 10.7% increase in total inpatient
      days
      in 2005. This increase was primarily due to expansion in acute inpatient
      psychiatric services.






25





Acute
      inpatient days at the Kirkbride Center increased by 14% to 62,754 in 2005 from
      55,187 in 2004 due primarily to:





1.
            The
                opening of a general psychiatry program in May 2004 and gero-psychiatry
                program in December 2004 increasing the hospital’s operating beds from 25
                to 74 Beds.


2.
            The
                geriatric program was instituted to take advantage of changes in
                Medicare
                reimbursement services favoring free-standing psychiatric
                hospitals.





The
      Hospital Services net patient revenue was $4,069,897 in 2004 and $7,351,379
      in
      2005 represented 22.1% and 36.0% respectively of Total Patient Service Revenue
      of consolidated CoreCare Systems, Inc.




Net
      patient revenue from the non-hospital drug & alcohol rehabilitation services
      remained stable at $11,921,178 in 2004 and $11,521,472 in 2005. However, the
      proportion of the rehabilitation program to Total Company Patient Services
      Revenue decreased from 64.7% in 2004 to 56.5% in 2005 due to growth of Hospital
      Services.





The
      Adolescent Program’s net patient revenue was $2,428,389 in 2004 and $1,524,106
      in 2005, decreasing 37.2%. The Adolescent Program decreased as a proportion
      of
      Total Company Patient Services Revenue from 13.2% to 7.5% respectively. The
      Adolescent Program, stable throughout the hospital’s bankruptcy, received a
      provisional state license in the Fall of 2004, a victim of management’s focus on
      the hospital. The provisional license, while corrected to a full license,
      created difficulties with the program’s major referral sources and payor leading
      to decreasing referrals. To develop clinical programming that better served
      the
      payor’s needs Alternative Behavioral Services was hired as Clinical Managers in
      November 2005. This contract provides an incentive fee of 50% of the program’s
      profits. As of June 30, 2006 the program’s average daily census had returned to
      normal 2004 levels of census.





**INPATIENT
      ACTIVITY STATISTICS**





**I.**  **Acute
      Inpatient Psychiatric Program (Hospital):**





QUARTER
            1st
            2nd
            3rd
            4th
            Total2004
            2005
            2004
            2005
            2004
            2005
            2004
            2005
            2004
            2005Admissions
            302
            449
            331
            421
            367
            482
            386
            583
            1,386
            1,935Average
                Length of Stay
            6.01
            8.01
            5.39
            8.43
            5.51
            8.74
            6.24
            7.66
            5.80
            8.18Patient
                Days
            2,009
            3,515
            1,796
            3,573
            1,957
            4,194
            2,341
            4,407
            8,103
            15,689Average
                Daily Census
            21.8
            38.2
            19.5
            38.8
            21.7
            46.6
            25.7
            48.4
            22.2
            43.0





**II.**  **Drug
      & Alcohol Rehabilitation Program (non-hospital):**





QUARTER
            1st
            2nd
            3rd
            4th
            Total2004
            2005
            2004
            2005
            2004
            2005
            2004
            2005
            2004
            2005Admissions
            452
            489
            408
            476
            462
            481
            491
            514
            1,813
            1,960Average
                Length of Stay
            25.50
            23.64
            28.38
            24.47
            25.79
            24.60
            24.27
            22.88
            25.91
            23.88Patient
                Days
            11,449
            11,891
            11,919
            11,574
            12,043
            11,908
            11,673
            11,692
            47,084
            47,065Average
                Daily Census
            124.4
            129.3
            129.6
            125.8
            133.8
            132.3
            128.27
            128.5
            129.0
            129.0






26





**III.**  **Adolescent
      Program (non-hospital):**





QUARTER
            1st
            2nd
            3rd
            4th
            Total2004
            2005
            2004
            2005
            2004
            2005
            2004
            2005
            2004
            2005Admissions
            25
            23
            15
            10
            20
            7
            16
            7
            76
            47Average
                Length of Stay
            89.67
            72.45
            110.76
            83.76
            126.69
            109.88
            146.56
            106.5
            115.16
            84.77Patient
                Days
            2,152
            2,101
            1,883
            1,424
            2,027
            879
            2,345
            852
            8,407
            5,256Average
                Daily Census
            23.39
            22.84
            20.47
            15.48
            22.52
            9.77
            25.77
            9.36
            23.03
            14.4








***Terms
      Defined***





Admissions


-
      A
      patient which a doctor has diagnosed as requiring program
      treatment.





Average
      Length of Stay


-Total
      inpatient days, divided by the total number of discharges during the
      period





Average
      Daily Census


-The
      average number of patients in the program.





Patient
      Days


-
      Each
      patient that is in an inpatient program bed at midnight is counted as one
      patient day.





Total
      inpatient days for all our programs increased 7% from 63,594 patient days in
      2004 to 68,010 patient days in 2005. The acute inpatient psychiatric program
      grew by 94% while the non-hospital drug & alcohol rehabilitation program
      remained stable and the adolescent program decreased by 37.5%.





Rental
      Income increased by $137,321 or 8.4% from $1,626,950 in 2004 to $1,764,271
      in
      2005 due to  increased
      space leased to third parties at the Kirkbride Center and annual rental
      increases. Although no major new leases were signed in 2005, Travelers Aid
      did
      significantly increase its rental space. Our largest tenant in both 2004 and
      2005, representing 28% and 35% of total tenant revenue respectively, was
      Travelers Aid. Travelers Aid rentals totaled $456,750 in 2004 and $611,691
      in
      2005





Other
      revenue increased $75,782 or 6.5% in 2005 primarily due to an increase in food
      sales to tenants and malpractice premium refunds.





***Operating
      Expenses***





Provision
      for Bad Debt Expense increased by $470,568 or 63% due to increased hospital
      operations. Bad debt increased from 4.0% of Net Patient Service Revenues in
      2004
      to 6.0% in 2005 due to the shift in our service mix.





Income
      from Operations decreased $1,444,572 or 37% from $3,870,168 in 2004 to
      $2,425,596 in 2005. This represented 18% of total revenues in 2004 and 10%
      in
      2005. This decrease is due to higher costs associated with starting up two
      hospital programs; increased utility costs and decreased income associated
      with
      census declines in the adolescent program.






27





Interest
      Expense increased $167,086 or 6% in 2005 as we refinanced our first mortgage
      debt obligations on the Kirkbride Center property where the interest rate
      increased from 750 basis points over libor in 2004 to 1,000 basis points over
      libor (cap @ 12.5%) in 2005. Additionally the first mortgage was expanded by
      an
      additional $1,250,000 to enable Kirkbride Center to reduce its IRS pre-petition
      liabilities. Reorganization costs were $913,938 in 2004 and $ 0 in 2005. Such
      costs are related to the emergence of Kirkbride Center from bankruptcy and
      its
      transfer of its real estate to Kirkbride Realty. Additionally while Kirkbride
      Center achieved approval of its Reorganization Plan from the bankruptcy courts,
      we have elected not to request dismissal from court supervision until we achieve
      refinancing of its first mortgage.





Extraordinary
      gain on forgiveness of indebtness of $1,140,672 in 2005 is due to the extension
      of the Mentor debt and the decrease of payroll tax liabilities net of related
      expenses.





We
      generated Earnings Before Interest, Taxes, Depreciation and Amortization
      (EBITDA) of $3,748,199 in 2005 compared to $3,109,608 in 2004 and primarily
      resulted from increased volumes and the $1,140,672 Extraordinary Gain on debt
      forgiveness recorded in 2005.




Our
      net
      income was $259,622 in 2005 compared to a net loss of $(326,381) in 2004. The
      net change of $586,003 was due to a 10.3% improvement of our net revenues in
      2005 and the aforementioned Extraordinary Gain.





***Liquidity
      and Capital Resources***





As
      of
      June 30, 2005, the Company had a working capital deficit of $(13,516,917)
      including cash and cash equivalents of $123,980, compared to a working capital
      deficit of $(12,136,273), including cash and cash equivalents of $1,031,878
      at
      June 30, 2004. As of June 30, 2003 we had a working capital deficit of
      $(34,843,282) including cash and cash equivalents of $2,339 because all debt
      was
      considered current.





Cash
      provided by operating activities was $274,790 for the year ended June 30, 2005
      compared to $629,950 for the year ended June 30, 2004. Net income from
      continuing operations was $77,691 in 2005 versus a loss of $(421,222) for 2004.
      During 2005 a $3,288,660 reduction in payroll taxes payable and a $142,245
      increase in prepaid expenses were the most significant uses of cash. A $900,000
      decrease in restricted cash and a $915,548 increase in accounts
      payable were the largest sources of operating cash. Net cash provided by
      discontinued operations totaled $380,563 and $254,603 for the years ended June
      30, 2005 and 2004 respectively.





Cash
      used
      in investing activities in fiscal 2005 consisted of $834,340 in capital
      expenditures for the acquisition of property and equipment specifically $123,000
      for roof replacement and $387,000 for major renovations to tenants occupied
      space and $77,000 for carpeting among others. Capital expenditures during fiscal
      2004 totaled $564,195. Major items included $200,000 in major building
      renovations and $14,000 for roof replacements, among others.





Cash
      provided by financing activities totaled $551,652 and $42,658 for the years
      ended June 30, 2005 and 2004, respectively. Net advances from
      officers/stockholders totaled $338,697 and $199,634 for 2005 and 2004,
      respectively. Proceeds from long term debt totaled $395,973 and $567,349 for
      2005 and 2004, respectively.






28





A
      significant factor in our liquidity and cash flow is the timely collection of
      our accounts receivable. As of June 30, 2005 accounts receivable from patient
      care, net of allowance for doubtful accounts, was $1,462,397 a decrease of
      35%
      from $2,245,876 as of June 30, 2004. Our goal is to maintain receivables at
      their current levels or to have any increases result from higher revenues.
      At
      the same time, we continue to closely monitor reserves for bad debts based
      on
      potential insurance denials and past difficulty in collections.





**Change
      in Fiscal Year End**





On
      July
      15, 2004, our Board of Directors voted to change our fiscal year end.
      Historically, we had operated on a calendar year basis with a December 31,
      year
      end. The Board adopted a fiscal year end of June 30, with the transition year
      of
      July 1, 2003 through June 30, 2004.





The
      Board
      elected this change to synchronize our fiscal year end with the Medical
      Assistance Cost Report requirements for a period ending June 30 as is customary
      with many healthcare companies. Additionally, CoreCare Behavioral Health
      Management, Inc.’s emergence from bankruptcy and simultaneous asset
      restructuring provided a natural transition point to a new reporting format
      post-confirmation.





**Outlook-Liquidity
      And Capital Resources**





Interest
      payments on the notes, maturity of certain debt obligations, and liabilities
      associated with accrued payroll taxes, Medicare, and bankruptcy payments
      represent significant liquidity requirements for us currently and for the
      foreseeable future. We believe that the revenue increases and operating results
      realized from improvements in average daily census and operational efficiencies
      will permit it to refinance many of our debt and liability obligations with
      a
      medium term or long term structured debt financing. The appraised values of
      our
      real estate and buildings far exceed the current book value and debt level
      on
      our balance sheet. We are highly confident that our short-term liabilities
      can
      be restructured into long-term mortgage debt.





Our
      independent Registered Public Accounting Firm has added an explanatory paragraph
      to their audit opinion issued in connection with our fiscal year 2004 and 2005
      consolidated financial statements, which states that our working capital
      deficiencies, stockholders’ deficiencies and noncompliance with certain loan
      covenants with certain lenders raise substantial doubt regarding our ability
      to
      continue as a going concern. Our consolidated financial statements do not
      include any adjustments that might result from the outcome of this
      uncertainty.





**Critical
      Accounting Policies**





Our
      discussion and analysis of our financial condition and results of operations
      is
      based on our consolidated financial statements which have been prepared in
      conformity with accounting principles generally accepted in the United States
      of
      America. It requires management to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the date of the financial statements and the reported
      amounts of revenues and expenses during the reporting period. Actual results
      could differ from those estimates. Among such estimates made by management
      in
      the preparation of our financial statements are the determinations for the
      allowance of doubtful accounts, revenue recognition as it relates to third
      party
      payors, rental income and food service.






29





Certain
      accounting policies have a significant impact on amounts reported in financial
      statements. A summary of those significant accounting policies can be found
      in
      Note 3 to our financial statements.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements that have or are reasonably likely to have
      a
      current or future effect on our financial condition, changes in financial
      condition, revenue or expenses, results of operations, liquidity capital
      expenditures or capital resources that is material to investors, and we do
      not
      have any non-consolidated special purpose entities.





**ITEM
      7:**  **CONSOLIDATED
      FINANCIAL STATEMENTS**





Financial
      information required in response to this item of Form 10-KSB is set forth in
      the
      Exhibits of this report.





**ITEM
      8 -**  **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS**


**ON
                ACCOUNTING AND FINANCIAL
                DISCLOSURE**





On
      July
      27, 2005, BDO Seidman, LLP (“BDO Seidman”) sent a letter to the Company
      confirming its resignation as the auditor for the Company. BDO Seidman has
      not
      issued an audit opinion to the Company for any period subsequent to our fiscal
      year ended December 31, 1999.




Since
      BDO
      Seidman has not provided the Company with any audit services in the past two
      fiscal years or in the interim period through October 26, 2005, BDO Seidman
      has
      not issued any report on the Company’s financial statements for such period
      containing an adverse opinion or disclaimer of opinion, nor have they issued
      a
      report that was modified as to uncertainty, audit scope, or accounting
      principles.




During
      our past two fiscal years and the interim period through October 26, 2005,
      we
      had no disagreements with BDO Seidman on any matter of accounting principles
      or
      practices, financial statement disclosure, or auditing scope or procedure,
      which, if not resolved to BDO Seidman’s satisfaction, would have caused BDO
      Seidman to make reference to the subject matter of the disagreement in
      connection with its report. During the last two fiscal years and the interim
      period through October 26, 2005, BDO Seidman did not advise us of any of the
      matters specified in Item 304(a)(1)(B) of Regulation S-B.




The
      Company has engaged Mayer Hoffman McCann P.C. (“Mayer Hoffman”) as its
      independent Registered Public Accounting Firm to audit the Company’s financial
      statements for the fiscal year ended June 30, 2004 and the fiscal year ended
      June 30, 2005, as well as the Company’s balance sheet as of June 30, 2003. The
      appointment of Mayer Hoffman as independent Registered Public Accounting Firm
      replacing BDO Seidman was approved by the Board of Directors, including all
      of
      the independent directors.





**ITEM
      8A -**  **CONTROLS
      AND PROCEDURES**





**Evaluation
      of Internal Controls**




Based
      on
      our management's evaluation (with the participation of our principal executive
      officer and principal financial officer), as of the end of the period covered
      by
      this Annual Report on Form 10-KSB, our chief executive officer and chief
      financial officer have concluded that our disclosure controls and procedures
      (as
      defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
      Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure
      that information required to be disclosed by us in the reports that we file
      or
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the SEC’s rules and forms.






30





**Changes
      in internal controls**





There
      was
      no change in our internal controls over financial reporting (as defined in
      Rules
      13a-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered
      by
      this Annual Report on Form 10-KSB that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.





**ITEM
      8B -**  **OTHER
      INFORMATION**





None.





**PART
      III**





**ITEM
      9 -**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL**  **PERSONS;
      COMPLIANCE WITH SECTION (16)A OF THE EXCHANGE ACT**




As
      of
      June 30, 2005, t he
      directors, executive officers, and senior managers of the Company are as
      follows:





**DIRECTORS
                  & OFFICERS:**
              ****
              ********
              ****
              ******NAME**
              **AGE**
              **POSITION**Thomas
                  T. Fleming
              79
              Chairman
                  of the Board of Directors and CEORose
                  S. DiOttavio
              56
              President,
                  Treasurer and a DirectorGeorge
                  P. Stasen
              60
              DirectorCharles
                  A. Burton
              61
              DirectorGardner
                  Kahoe
              53
              Corporate
                  SecretaryJohn
                  Gill
              57
              Chief
                  Financial OfficerMark
                  Novitsky, M.D.
              53
              Senior
                  Vice President &Corporate
                  Medical DirectorFred
                  Baurer, M.D.
              49
              Senior
                  Vice President &Medical
                  Director, Kirkbride CenterScott
                  Weisenberger
              50
              Administrator
                and
                Executive Director
 31





All
      directors hold office until the next meeting of stockholders and until their
      successors have been elected and qualified. No director receives any cash
      compensation for serving as a director, however each earns an option on 20,000
      shares exercisable at $.10 a share for every year served on the Board of
      Directors. During the bankruptcy period of May 2002 through June 2004 each
      Director received pro-rata options which, value was increased temporarily to
      40,000 shares at $.10 a share to maintain a stable directorship during
      bankruptcy.





**BOARD
      OF DIRECTORS**





***Thomas
      T. Fleming*** has been
      Chairman of the Board of Directors and Chief Executive Officer of the Company
      since January 31, 1995, and has served in comparable positions with present
      subsidiaries of the Company since 1991.





Mr.
      Fleming has over 25 years experience in health care operations, financing,
      manufacturing, marketing and real estate development. Specifically, he was
      the
      founder in 1973 of Horsham Clinic and Horsham Psychiatric Group (includes
      Wyoming Valley Clinic, The Meadows, The Cloisters at Pine Island); Senior Vice
      President of Howmet Corporation; a former Financial Consultant for Envirodyne,
      Inc.; Chairman of Capital Home Care Group; Managing Director of UMS Communities,
      Inc.; and a General Partner of Holmstead Properties; and has been Chairman
      of
      Health Ventures Limited, a consulting firm specializing in the health field
      since 1986. Mr. Fleming also has served as a consultant on various third-party
      acquisition transactions including the sale of developed properties for
      construction of two personal care homes (JAD Development), acquisition of
      Retirement Centers of America from Avon (UMS Corporation), acquisition of Park
      Avenue Manor (AmeriCare Partners), financing of Renewal Centers, acquisition
      and
      financing of Whitemarsh Professional Center, acquisition of St. Mary's Hospital
      by Neumann Medical Center, and financial restructuring of Senior Lifestyles,
      Inc.





Mr.
      Fleming also has served on numerous civic and corporate Boards of Directors,
      including most recently Quality Health Services, Inc.; Renewal Centers, Inc.;
      Lifequest; and Chestnut Hill Community Association. Mr. Fleming also was founder
      and chairman of the Christmas Revels, is a former Commissioner of Higher
      Education of the City of Philadelphia, is a former Chairman of Chestnut Hill
      Academy, and a former Chairman of The Philadelphia Council for Performing Arts.
      Mr. Fleming received a BA from Haverford College in 1949 and also attended
      Georgetown Foreign Service School. He is a fellow in the American Institute
      of
      Management.





***Rose
      S. DiOttavio*** ** has
      been
      President and a Director of the Company since January 31, 1995 and Treasurer
      since August 1998, and has served in comparable positions with present
      subsidiaries of the Company since 1991.





Ms.
      DiOttavio has served in a variety of management positions in the health care
      industry, including operations troubleshooter, needs assessment, regulatory
      compliance, financial feasibility, project development, financial consulting,
      operations and fiscal management, expert witness and acquisition due diligence.
      Specifically, she has been President of Health Ventures Limited since 1986,
      and
      currently serves as a consultant to Senior Lifestyles, Inc. Formerly, she has
      served as President and Chairperson of Neumann Medical Center; Vice President
      of
      Strategic Planning for Neumann Medical Center; Development Consultant for UMS
      Communities, Inc.; Director and Executive Vice President of Capital Home Care
      Group; Vice President of Planning and Development for Horsham Psychiatric Group;
      Vice President of Operations for Medical Management Institute;
      Consultant--Strategic Planning for Plante & Moran (CPA/Consulting Firm,
      Michigan); Deputy Director for Health Systems Agency of Southeastern
      Pennsylvania; Senior Planning Associate for Regional Comprehensive Health
      Planning Council, Inc.; and Chairperson, Metropolitan Home Health Services,
      Inc.






32





Ms.
      DiOttavio holds a BS and M.S.H. from the University of Pittsburgh and its
      Graduate School of Public Health. She has been noted for distinction in
      Outstanding Young Women of America and Who's Who of American Women. She also
      serves currently as a Director and former Vice Chairperson of Horizon House,
      a
      non-profit organization serving the mentally ill, homeless and
      disadvantaged.





***George
      P. Stasen*** has
      served as a director and/or advisor to government units, foundations and public
      corporations. He has structured and provided financing and investment guidance
      to major corporations, investment companies, developing enterprises and
      municipalities. Mr. Stasen co-founded Mentor Capital Partners, Ltd., a prominent
      Philadelphia based Merchant Banking firm in 1993.





Prior
      to
      returning to the Philadelphia area, Mr. Stasen was Chief Operating Officer
      from
      1987 of the Rushmore Group of Bethesda, Maryland a diversified financial
      services firm engaged in the management of mutual funds, institutional money
      management, financial advisory services and securities brokerage. From 1984
      to
      1987, Mr. Stasen was President and Chief Operating Officer of American &
European Investment Corporation, an international financial and investment
      advisor headquartered in Washington, D.C. From 1978 to 1984, Mr. Stasen served
      Provident Institutional Management Corporation (PIMC) as Vice President
      responsible for investment strategy and product development. PIMC the advisory
      subsidiary of Provident National Bank of Philadelphia, Pennsylvania (PNC)
      provided institutional investment management services principally to banks,
      at
      which time assets under management increased from $50 million to $15
      billion.





Mr.
      Stasen also serves as Chairman of Declaration Holdings a mutual fund management
      and administration company as well as a director of several private Delaware
      Valley based corporations. Mr. Stasen has been a lecturer on investment and
      economic trends throughout the United States and Europe. Mr. Stasen earned
      his
      BS from Drexel University in 1968 with a concentration in Economics and was
      subsequently awarded a fellowship and earned an MBA from Drexel.





***Charles
      A. Burton*** currently serves as Director of this Company as well as others, such as
      Anadigics, Inc., Microsource, Inc., Sherpa Corporation, and Visual Edge
      Technologies. From 1984 to the present, Mr. Burton has served as President
      and
      Managing Director of Philadelphia Ventures, Inc. Since 1973, Mr. Burton has
      served in several positions, including Vice President of CIGNA Corporation,
      President of Venture Capital Corporation, and Chairman of the Board and Founder
      of Devon Systems Group, Inc., which was eventually sold to Citicorp Venture
      Capital.





Mr.
      Burton’s Professional and Civic Activities have included that of Former
      President and Trustee of the Delaware Valley Venture Group, Director of the
      Philadelphia Chamber of Commerce and Trustee for Gettysburg College. Mr. Burton
      earned his AB from Gettysburg College in 1967 and an MBA from the Wharton
      Graduate School, University of Pennsylvania. Mr. Burton also served his country
      as a Line Officer in the United States Navy from 1967 to 1972.





33




**OFFICERS
      OF THE COMPANY**





***John
      Gill,*** **** ***Chief
      Financial Officer (CFO)*** joined
      CoreCare Systems in June of 2005.  He brings to CoreCare Systems 30 years
      of hospital financial experience primarily with for profit hospital companies
      including American Medicorp, Universal Health Services and Tenet Healthcare
      Corp. where he served as Chief Financial Officer of Graduate Hospital. 
Most recently, in consulting roles, advised a start-up rehabilitation hospital,
      a psychiatric/behavioral health facility in the process of re-structuring and
      a
      tertiary care medical center.  John holds a Master Degree in Business
      Administration from St. Joseph’s University and resides in Broomall, Pa with his
      wife and daughter.





***Gardner
      Kahoe, Esquire*** *,* **** ***Corporate
      Counsel*** **** joined
      CoreCare Systems in January 2000. Along with fielding day-to-day legal issues,
      his duties currently involve various aspects of corporate environment, which
      includes but is not limited to such items as litigation, insurance, contract
      and
      lease negotiations and shareholder issues. Prior to joining the Company, Mr.
      Kahoe has worked as a Senior Executive Attorney with 13 years general management
      and direct operations experience in the commodities distribution industry.
      From
      1976 to 1978, he worked as Assistant District Attorney in Philadelphia and
      was
      involved with preliminary hearings, research, appeals and criminal
      trials.





He
      is
      currently a member of the Pennsylvania Bar Association, Delaware County Bar
      Association, and the Florida Bar Association. Mr. Kahoe received his BA in
      1972
      from the University of Delaware and his JD in 1976 from the John Marshall Law
      School in Chicago, Illinois.





***Dr.
      Mark Novitsky, M.D.*** joined
      Kirkbride Center in August 1998 as Director of Clinical Improvement and senior
      psychiatrist and has since been named the Psychiatrist in Chief at Kirkbride
      Center and the Corporate Medical Director of CoreCare Systems, Inc. He was
      Chief
      of Psychiatry at Presbyterian Medical Center and is recognized for his work
      in
      geriatric psychiatry. During his ten years at Presbyterian as Chief, Dr.
      Novitsky was instrumental in the successful growth and expansion of the
      psychiatric department. During that time, he assisted in the development of
      a
      24-bed acute inpatient psychiatric unit, an 18-bed LTSR, and a 20-bed managed
      care sub-acute unit. Dr. Novitsky headed the consultation liaison services
      and
      led to the formation of an emergency psychiatric assessment service in their
      emergency room. He was also active in the evolution of day programs and
      psychiatric care provided at ten local nursing homes. Dr. Novitsky earned his
      M.D. from the Bowman Gray School of Medicine of Wake Forest University and
      is
      Board Certified in Psychiatry. Dr. Novitsky has gained a reputation of
      developing excellent relationships with area community leaders, the Philadelphia
      Office of Mental Health and payor representatives such as Community Behavioral
      Health (CBH).





***Dr.
      Fred Baurer, M.D.*** graduated from Wesleyan University and Temple University School of Medicine.
      He
      completed Residency Training at the Institute of Pennsylvania Hospital and
      Psychoanalytic Training at the Philadelphia Psychoanalytic Institute and the
      Philadelphia Psychotherapy Training Program. He is Board Certified in Psychiatry
      with added qualifications in Addiction Psychiatry. Dr. Baurer served as Director
      of the Strecker Partial Hospital Program from its inception in 1989 until 1997,
      and a Co-director of Strecker Hall in 1996-1997. He also has been Director
      of
      the OATS Program (Outpatient Addiction Treatment Service) since 1992. Dr. Baurer
      is the Regional Chairperson of the America Academy of Addiction Psychiatry.
      Since the inception of the Kirkbride Center in February 1997, Dr. Baurer has
      served as Medical Director of Substance Abuse Services, and he has also been
      appointed Assistant Medical Director.






34





***Scott
      Weisenberger*** **,** ***Administrator/Executive
      Director,*** came
      to
      Kirkbride in October 2004 as Administrator/Executive Director. He is licensed
      in
      Pennsylvania as a professional counselor and holds certification as an
      addictions counselor. Scott’s career in the behavioral health field has spanned
      both sides of the aisle: He has been a direct-service Clinician and Supervisor
      as well as a Network Director for a major Managed Care Organization. He
      completed his graduate training at Arcadia University, graduating in 1991 with
      a
      Master’s Degree in Counseling Psychology.




Scott
      spent eight years as clinical supervisor of a substance-abuse outpatient program
      and then later as clinical director of an outpatient mental-health provider.
      It
      was from there that he made the leap to Network Director for Pennsylvania,
      New
      Jersey and Delaware for Magellan Behavioral Health, supervising provider
      networks for about 18 million members whose behavioral health benefits are
      managed by Magellan. From Magellan, he became clinical director of Mirmont
      Treatment Center in Delaware County, where he introduced a two-track system
      for
      dually diagnosed patients. Within three years, he moved to the role of Chief
      Operating Officer at Eugenia Hospital, which closed its doors due to a
      development plan for the property in the fall of 2004.




**Family
      Relationships**




There
      are
      no family relationships among our directors and executive officers.




**Involvement
      in Certain Legal Proceedings**




No
      director, executive officer, promoter or control person has been involved in
      any
      legal proceeding during the past five years that is required to be disclosed
      pursuant to Item 401(f) of Regulation S-K.





**Board
      Committees**





Our
      auditors have been engaged by our Audit Committee consisting of two independent
      Directors, Charles A. Burton and George P. Stasen. The Board of Directors has
      not determined whether either of the members of the audit committee is an “audit
      committee financial expert,” as such term is defined in Item 401(h) of
      Regulation S-K.





**Compliance
      with Section 16 (a) of the Exchange Act**





Section
      16(a) of the Exchange Act of 1934, as amended (the “Exchange Act”), requires our
      officers and directors, and persons who own more than 10% of a registered class
      of our equity securities, to file initial reports of ownership and reports
      of
      changes in ownership with the Securities and Exchange Commission (the “SEC”).
      Such persons are required by the SEC regulation to furnish us with copies of
      all
      Section 16(a) forms they file. During the fiscal years ended June 30, 2004
      and
      June 30, 2005, we do not believe our officers and directors filed reports
      required by Section 16(a) of the Exchange Ace in connection with the issuance
      of
      options discussed below under “Executive Compensation."




**Code
      of Ethics**





Historically
      the Company’s Code of Ethics was oriented to its principal healthcare business
      and did not fully address issues required by Sarbanes Oxley. Effective on
      December 5, 2006 the Board of Directors adopted a new Code of Ethics described
      in Exhibit 14.




35




**ITEM
      10 -**  **EXECUTIVE
      COMPENSATION**





**** **General:**





For
      the
      fiscal years ended June 30, 2004 and 2005 our Chief Executive Officer and
      President received compensation from the Company consisting of salary,
      compensation accrued but not paid, and options in their capacity as managing
      directors. Chairman of the Board, Thomas T. Fleming, charged operations with
      $157,392 in 2004 and $285,612 in 2005; of these sums $54,000 and $128,612
      respectively were accrued and not paid. The President, Rose S. DiOttavio charged
      operations with $161,091 in 2004 and $285,212 in 2005; of these sums $54,000
      and
      $155,612 respectively were accrued. Mr. Fleming and Ms. DiOttavio have each
      received options of 20,000 shares with an exercise price of $.10 per share
      yearly for services as Directors of which this sum was doubled to 40,000 shares
      per year prorated during the period we were in bankruptcy.





On
      June
      30, 2004, the Board of Directors reaffirmed the respective employment and
      indemnification contracts with Mr. Fleming and Ms. DiOttavio. The contracts
      will
      continue until all debt, interest, compensation and any personal assets damaged
      due to Company defaults have been fully paid to the officers. In event of
      termination Company is required to provide severance of two year’s compensation.
      Contracts also provide for a commission structure in the event of a sale of
      assets or stock of the Company. We believe such compensation levels are below
      industry standards.





**Summary
      Compensation Table**





The
      following summary compensation table sets forth information concerning
      compensation for services rendered in all capacities awarded to, earned by
      or
      paid to our Chief Executive Officer and the next three most highly compensated
      executive officers during the years ended June 30, 2003, ****** June
      30,
      2004 and June 30, 2005.


**Summary
      Compensation Table**


**Long
      Term Compensation**


**Annual
      Compensation**


Name
                and
              Principal
              Position
            Salary
            All
                Other
              Annual
              Compensation
            Restricted
              Stock
            Securities
              Underlying
              Options2003
            2004
            2005
            2003
            2004
            2005
            2003
            2004
            2005
            2003
            2004
            2005Thomas
                T. Fleming,
              Chairman
                of the
              Board
                and Chief
              Executive
              Officer
            $156,000
            $156,000
            $206,000
            0
            $1,392
            $79,612
            0
            0
            0
            40,000
            40,000
            20,000Rose
                S. DiOttavio,
              President
            $156,000
            $156,000
            $206,000
            0
            $5,091
            $79,212
            0
            0
            0
            40,000
            40,000
            20,000Mark
                A. Novitsky, MD
            $244,004
            $250,726
            $244,474
            0
            $27,300
            $166,468
            0
            20,000
            25,000
            0
            0
            0Fred
                Baurer, MD
            $230,173
            $227,747
            $242,207
            0
            0
            0
            0
            20,000
            25,000
            0
            0
            0






36




The
      following table sets forth certain information regarding options granted during
      the fiscal year ended June 30, 2005:





**OPTION/SAR
      GRANTS IN LAST FISCAL YEAR**


**Individual
      Grants**


Number
                of SecuritiesUnderlying
            
            %
                of Total Options/SARsOptions/SARs
            
            Granted
                to Employees in
            
            Exercise
                or Base
            
            ExpirationName
            
            Granted
                (#)
            
            Fiscal
                Year
            
            Price
                ($/Sh)
            
            DateThomas
                T. Fleming
            
            
            20,000
            
            
            
            25
            
            
            
            $0.10
            
            
            
            2010R
                Rose S. DiOttavio
            
            
            20,000
            
            
            
            25
            
            
            
            $0.10
            
            
            
            2010George
                P. Stasen
            
            
            20,000
            
            
            
            25
            
            
            
            $0.10
            
            
            
            2010Charles
                A. Burton
            
            
            20,000
            
            
            
            25
            
            
            
            $0.10
            
            
            
            2010




**Aggregated
      Option/SAR Exercises and Fiscal Year-End Option/SAR**





The
      following table presents information with respect to the number of unexercised
      options and the value of unexercised options and the value of unexercised
“in-the-money” options held by members of our Board of Directors at June 30,
      2005.





**AGGREGATED
      OPTION/SAR EXERCISES IN LAST FISCAL YEAR**


**AND
      FY END OPTION/SAR VALUES**





Shares
                Acquired on Exercise
              (#)
            Value
                Realized
              ($)
            Number
                of Securities Underlying Unexercised Option/SARS at FY End
              (#)
              Exercisable/unexercisable
            Value
                of Unexercisable In-the-Money Option/SARS at FY End
              ($)
              Exercisable/unexercisableNameThomas
                T. Fleming
            0
            -
            20,000/0
            2,200/0Rose
                S. DiOttavio
            0
            -
            20,000/0
            2,200/0Charles
                A. Burton
            0
            -
            20,000/0
            2,200/0George
                P. Stasen
            0
            -
            20,000/0
            2,200/0





For
      the
      purposes of computing the value of “in-the-money” options at June 30, 2005 in
      the above table, the fair market value of our common stock at such date is
      deemed to be $0.21 per share, the quoted price for our common stock on such
      date
      as reported by Pink Sheets.





During
      the fiscal year ended June 30, 2004 each member of the Board of Directors
      exercised all options held by each Director as follows:





·
            Thomas
                T. Fleming exercised all outstanding options for 231,666 shares on
                6/30/04
                at an exercise price of $0.10 per
                share.


·
            Rose
                S. DiOttavio exercised all outstanding options 231,666 shares on
                6/30/04
                at an exercise price of $0.10 per
                share.


·
            Charles
                A. Burton exercised all outstanding options 216,666 shares on 6/30/04
                at
                an exercise price of $0.10 per
                share.


·
            George
                P. Stasen exercised all outstanding options 205,000 shares on 6/30/04
                at
                an exercise price of $0.10 per
                share.






37





**Long-Term
      Incentive Plan**





The
      Senior Officers of the Company hold rights to earn a commission upon the sale
      of
      any Company assets and/or stock at the following rate:





·
            Upon
                the sale of the asset/stock the collective Incentive Compensation
                to the
                Senior Officers will be 1% on the first $30 Million of purchase price;
                and


·
            2%
                on the next $20 Million of purchase price;
                and


·
            3%
                on any additional purchase price
                and


·
            Such
                fees are to be prorated in the event of a piece meal sale of assets.
                Such
                fees will be divided on a 50% - 50% between Thomas T. Fleming and
                Rose S.
                DiOttavio








**Compensation
      of Directors:**





During
      the fiscal years ended June 30, 2004 and June 30, 2005, no director of the
      Company received any cash compensation for serving as a Board Director. Each
      Director received an annual option of 20,000 shares at $.10/share with a term
      of
      five years. During the bankruptcy period this sum was increased to 40,000 shares
      prorated due to increased risk caused by bankruptcy. Our directors are
      reimbursed for expenses incurred by them in connection with their activities
      on
      behalf of the Company.




In
      June
      2004 all Directors exercised all such options received as Board compensation
      up
      to that date. Options were exercised with the issuance of a promissory note
      from
      each Director to the Company for the required funds as noted below:





Amount
                of NoteThomas
                T. Fleming
            $23,166Rose
                S. DiOttavio
            $23,166Charles
                A. Burton
            $21,666George
                P. Stasen
            $20,500


Subsequently
      it was determined that such promissory notes were not compliant with Sarbanes
      Oxley or the new Code of Ethics adopted by the Board of Directors in December
      2006. At that time Mr. Fleming and Ms. DiOttavio paid off their notes by
      offsetting loan amounts due from the Company to Officers. Both Mr. Stasen and
      Mr. Burton paid off their promissory notes at this time as well so that the
      Company could be fully compliant.





**Employment
      Contracts and Termination of Employment and Change in Control
      Arrangements:** ****





We
      have
      employment and indemnification agreements with two of our executive officers
      such that the contracts terminate only after we have repaid the officers’
outstanding debt, interest, compensation or damages to officers’ personal assets
      due to our defaults. Such contracts provide a severance provision of two years
      of compensation.





**Report
      on Repricing of Options/SARS:** **** Not
      Applicable.









38





**ITEM
      11 -**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**





The
      following table sets forth information as of June 30, 2005, with respect to
      the
      beneficial ownership of CRCS **** securities
      by officers and directors, individually and as a group, and all holders of
      more
      than five (5) percent of the shares of any class of CRCS **** voting
      securities. Unless otherwise indicated, all shares are beneficially owned and
      sole investment and voting power is held by the beneficial owners indicated.





**Principal
      Shareholders**


**Number
      of Shares Beneficially Owned** **1**


**June
      30, 2005**





**Name
                and Address of Beneficial Owner**
            **Common
                Stock****2**
            **Series
                A**
              **Preferred***
            **Series
                C**
              **Preferred****3**
            **Series
                F**
              **Preferred****4**
            **Options**
            **Total**
              **Beneficial
                Common**
              **Shares**Officers
                and Directors:Thomas
                T. Fleming
            2,122,229
            3,000
            121,583
            63,530
            20,000
            2,327,342
              (11.1%)Rose
                S. DiOttavio
            2,027,259
            3,000
            121,583
            17,500
            20,000
            2,186,342
              (10.4%)Charles
                A. Burton
            262,329
            -0-
            -0-
            -0-
            20,000
            282,329
              (1.3%)George
                P. Stasen
            318,750
            -0-
            -0-
            -0-
            20,000
            338,750
              (1.6%)Total
                Officers and Directors
            4,730,567
            6,000
            243,166
            81,030
            80,000
            5,134,763
              (24.5%)


*NOTE:
      SERIES A PREFERRED SHARES ARE NOT CONVERTIBLE THEREFORE EXCLUDED FROM
      TOTAL





**Name
                and Address of Beneficial Owner**
            **Common
                Stock****2**
            **Series
                A**
              **Preferred**
            **Series
                C**
              **Preferred****3**
            **Series
                F**
              **Preferred****4**
            **Options**
            **Total**
              **Beneficial
                Common**
              **Shares**(b)
                Other Beneficial Owners:Phila.
                Ventures, 11, L.P.
              Phila.
                Ventures-Japan 1, L.P.
              Phila.
                Ventures-Japan, 11-L.P.
              
              200
                S. Broad Street 8thFloor
              Philadelphia,
                Pas. 19102
            1,180,697
            -0-
            -0-
            -0-
            -0-
            1,180,697
              (5.6%)Mentor
                Special Situation Fund
              
              570
                Nottingham Drive
              P.O.
                Box 560
              Yardley,
                PA 19067
            1,000,000
            -0-
            -0-
            -0-
            -0-
            1,000,000
              (4.8%)**Total
                Beneficial Owners**
            6,911,264
            6,000
            243,166
            81,030
            80,000
            7,315,460
              (34.9%)


(*)
      less
      than 5%








39


(1)
            A
                person is deemed to be the beneficial owner of securities that can
                be
                acquired by such person within 60 days from the date as to which
                this
                information is provided. In computing the number of shares and the
                percentage of outstanding shares of each class of securities held
                by each
                person or group of persons above, any security which such person
                or
                persons has or have a right to acquire within 60 days from the date
                of
                this Memorandum is deemed outstanding, but is not deemed to be outstanding
                for the purpose of computing the percentage ownership of any other
                person.





(2)
            In
                computing the number of shares and the percentage of outstanding
                Common
                Stock "beneficially owned" by a person who owns any shares of any
                series
                of Convertible Preferred Stock, the shares issuable upon exercise
                of such
                rights to acquire Common Stock owned by such persons, but no other
                person,
                are deemed to be outstanding.





(3)
            Series
                C Convertible Preferred Stock is convertible into Common Stock on
                the
                basis of 66.67 share of Common Stock per share of Series C Convertible
                Preferred Stock.





(4)
            Series
                F Convertible Preferred Stock is convertible into Common Stock on
                the
                basis of 50 shares of Common Stock per share of Series F Convertible
                Preferred Stock.





(5)
            Charles
                A. Burton, a Company Director, is also the Director of Philadelphia
                Ventures, and General Partner in each of the above Philadelphia Venture
                funds. Mr. Burton also holds Common Stock personally.


(6)
            George
                P. Stasen, a Company Director, is also General Partner of Mentor
                Special
                Situation Fund. Mr. Stasen also holds Common Stock
                personally.








**Securities
      Authorized for Issuance under Equity Compensation
      Plans**




**Equity
      Compensation Plan Information**




**Plan
                category**
            **Number
                of**
              **securities
                to**
              **be
                issued**
              **upon**
              **exercise
                of**
              **outstanding**
              **options,**
              **warrants
                and**
              **rights**
              **(a)**
            **Weighted-average**
              **exercise
                price of**
              **outstanding**
              **options,
                warrants**
              **and
                rights**
              **(b)**
            **Number
                of securities**
              **remaining**
              **available
                for**
              **future
                issuance**
              **under
                equity**
              **compensation**
              **plans**
              **(excluding**
              **securities**
              **reflected
                in**
              **column
                (a))**
              **(c)****Equity
                compensation plans approved by security holders**
            0
            -
            0**Equity
                compensation plans not approved by security holder**
              **(included
                in Employee Stock Plan)**
            80,000
            $0.10
            80,000***Total**
            80,000
            $0.10
            80,000*


***
      Reflects Options earned by all Board Directors for service in the Fiscal Year
      Ended 6/30/05**








40


***1996
      Employee Stock Plan***





In
      July
      1996, the Company’s Board of Directors and Stockholders approved and adopted the
      Company’s 1996 Stock Plan (the “Plan”). The Plan, as amended in October 1998,
      provides for the granting of options to purchase up to 3,000,000 shares of
      common stock, at a price per share as shall be determined by the Company’s Board
      of Directors from time to time. The Plan provides for the granting of options
      that do not qualify under Section 422 of the Code. Therefore, the Company will
      recognize compensation expense for all options issued at less than fair market
      value on the date of grant equal to the difference between fair market value
      on
      the date of grant less the option exercise price multiplied by the number of
      options granted. No option may have a term longer than five years. Options
      under
      the Plan are nontransferable, except in the event of death and are only
      exercisable by the holder while employed by the Company or until such time
      as
      determined by the Board of Directors at is sole discretion. The Plan was
      extended through January 7, 2008 and the maximum number of shares was increased
      to 5,000,000.





The
      majority of the options issued under the Plan were fully vested upon grant.
      Any
      options that did not vest upon grant vested within twelve months of grant
      date.





***Outstanding
      Warrants/Options***





During
      fiscal 2004 and fiscal 2005 no new warrants were issued. At June 30, 2005,
      there
      were 1,058,003 warrants outstanding for the purchase of common stock with an
      exercise price range of $1.00-$3.00.


In
      January 2005 1,046,119 outstanding warrants issued to Mentor Special Situation
      fund (MSSF) were cancelled with the issuance of 1,000,000 shares of common
      stock. Mentor held a subordinated note bearing interest at the rate of 12%
      per
      annum. The note required interest payments quarterly and principal payments
      of
      $166,666 on December 31, 1998, 1999 and 2000. Associated with the note was
      a
      warrant to purchase 333,000 shares of common stock at an exercise price of
      $1.50
      per share expiring August 2001. In 2000 and prior years, the Company issued
      Mentor additional warrants to purchase 713,119 shares of common stock at an
      exercise price of $1 per share expiring in August 2006 in exchange for principal
      and some interest payments that were not paid when due in these years. Due
      to
      unpaid interest and principal that were not paid when due in 2000 and prior
      years, the Company executed an agreement with the note holder on April 4, 2001,
      which reduced the exercise price on all outstanding warrants held by the note
      holder from $1.00 to $0.50. In January, 2005 the note was extended to, and
      all
      penalty interest was waived through December 31, 2006. Concurrently, the
      warrants for all shares were cancelled with the issuance of 1,000,000 shares
      of
      common stock to Mentor plus 175,000 shares to principals of Mentor for the
      cancellation of their associated warrants.





During
      fiscal 2004 and fiscal year 2005 the only new options issued by the Company
      were
      to its four Directors. Each Director earns an option to purchase 20,000 shares
      at an exercise price of $0.10 per share for one year’s service as a member of
      the Board for each year served. During the Company’s bankruptcy period May 2002
      through June 2003 this option amount was increased to 40,000 shares at an
      exercise price of $0.10 per share prorated for one year of service.





During
      the fiscal year ended June 30, 2004 each member of the Board of Directors
      exercised all options held by each Director as follows:





·
            Thomas
                T. Fleming exercised all outstanding options for 231,666 shares on
                6/30/04


·
            Rose
                S. DiOttavio exercised all outstanding options 231,666 shares on
                6/30/04


·
            Charles
                A. Burton exercised all outstanding options 216,666 shares on
                6/30/04


·
            George
                P. Stasen exercised all outstanding options 205,000 shares on
                6/30/04







41


Options
      were exercised with the issuance of a promissory note from each Director to
      the
      Company for the required funds as noted below:





Amount
                of NoteThomas
                T. Fleming
            $23,166Rose
                S. DiOttavio
            $23,166Charles
                A. Burton
            $21,666George
                P. Stasen
            $20,500


Subsequently
      it was determined that such promissory notes were not compliant with Sarbanes
      Oxley or the new Code of Ethics adopted by the Board of Directors in December
      2006. At that time Mr. Fleming and Ms. DiOttavio paid off their notes by
      offsetting loan amounts due from the Company to Officers. Both Mr. Stasen and
      Mr. Burton paid off their promissory notes at this time as well so that the
      Company could be fully compliant.





While
      new
      options of 20,000 shares @ $0.10 per share were issued to each director for
      Board service for the year ended June 30, 2005 no further options were
      exercised.





A
      summary
      of the Company’s stock option activity, and related information for the years
      ended June 30, 2005 and 2004 follows:





*Number*
              *Of
                Shares*
            
            *Weighted-Average*
              *Exercise
                Price*Outstanding,
                June 30, 2003
            
            
            1,754,438
            
            $
            0.69Granted
            
            
            293,332
            
            $
            0.10Canceled
            
            
            (1,162,772
            )
            $
            0.99Exercised
            
            
            (
                884,998
            )
            $
            0.10Outstanding,
                June 30, 2004
            
            
            -
            
            
            -Granted
            
            
            80,000
            
            $
            0.10Canceled
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Outstanding,
                June 30, 2005
            
            
            80,000
            
            $
            0.10





As
      of
      June 30, 2005, 2004 and 2003, exercisable stock options totaled 80,000, 0 and
      1,754,438 and had weighted-average exercise prices of $0.10, $0 and $0.69,
      respectively.






42





**Description
      of Securities**





***Common
      Stock***





The
      Company is authorized to issue 50,000,000 shares of Common Stock, $.001 par
      value per share. As of June 30, 2005, 20,535,941 shares were issued and
      outstanding. Holders of Common Stock are entitled to one vote for each share
      of
      Common Stock owned of record on all matters to be voted on by stockholders,
      including the election of directors. The holders of Common Stock are entitled
      to
      receive such dividends, if any, as may be declared from time to time by the
      Board of Directors, in its discretion, from funds legally available therefor.





The
      rights of holders of Common Stock to receive dividends are subject to the
      dividend rights of the holders of Preferred Stock, as described below.
      Similarly, the rights of holders of Common Stock, upon liquidation or
      dissolution of the Company, are subject to the preferences afforded to holders
      of the Company's Preferred Stock.





The
      Common Stock has no preemptive or other subscription rights, no cumulative
      voting rights, and there are no conversion rights or redemption provisions.
      All
      outstanding shares of Common Stock are validly issued and
      nonassessable.





***Preferred
      Stock***





Holders
      of Preferred Stock vote as a class with holders of Common Stock, except that
      without the vote or consent of the holder of at least 67% of the respective
      Preferred Stock then outstanding, the Company may not (i) create or issue any
      class or series of capital stock ranking, either as to payment of dividends,
      distribution of assets or redemptions, prior to the Preferred Stock, (ii) alter
      or change the designations, powers, preferences, or rights, or the
      qualifications, limitations or restrictions of the Preferred Stock.





Holders
      of all classes and series of Preferred Stock are entitled to vote in the
      election of directors and on all other matters submitted to stockholders for
      their approval or consent. None of the Preferred Stock has any cumulative voting
      rights. The number of votes is equal to the number of shares of Common Stock
      into which their Preferred Stock is convertible at the time of the meeting
      at
      which the vote is cast or, in the case of an action of stockholders taken
      without a formal meeting, on the date of such action, except that each Preferred
      A and D shares, which have no conversion rights, are entitled to 65 and 50
      votes, respectively, per share. Stockholders owning Series G Preferred are
      entitled to 2 votes per share.





***Series
      A Preferred Stock***





The
      Company has authorized 10,000 shares of Series A Preferred Stock, $.001 par
      value per share, of which 6,000 shares are issued and outstanding as of June
      30,
      2005. The Company's Series A Preferred Stock has a liquidation value of $100.00
      per share ($600,000 in the aggregate) in liquidation of the Company; a
      preference over Common Stock to the extent of its liquidation value; and is
      entitled to annual dividends in the amount of $4.00 per share (i.e., an annual
      rate of four (4%) percent) payable semi-annually in arrears unless and until
      a
      "Dividend Reset Event" occurs. After a Dividend Reset Event, the annual dividend
      rate on Series A Preferred will be increased from four (4%) percent to a rate
      equal to the "prime rate" as published in the Wall
      Street Journal as of
      the last business day preceding the Dividend Reset Event plus six (6%) percent.
      The Series A Preferred is redeemable by the Company, at liquidation value,
      in
      whole or in part, at any time after a Dividend Reset Event, upon not less than
      thirty (30) days written notice.






43





The
      term
      "Dividend Reset Event" is defined to mean either (a) a public offering of equity
      securities by the Company or any corporation which owns 50% or more of all
      classes of the Company's common stock then outstanding (hereinafter, a "Parent
      of the Company") which results in the Company's receipt (or receipt by the
      Parent of the Company) of not less than $5,000,000 net of offering underwriting
      discounts and commissions, or (b) either the Company and/or the Parent of the
      Company, on a consolidated basis, having as of any fiscal year-end stockholders'
      equity of $12,000,000 or more.





The
      Company has the right to redeem the Series A Preferred Stock after the Dividend
      Reset Date and upon not less than 30 days notice at $100.00 per share plus
      accrued dividends.





***Series
      B Convertible Preferred Stock***





The
      Company has authorized 7,000 shares of Series B Convertible Preferred Stock,
      $.001 par value per share. All previously outstanding shares of Series B
      Preferred were converted on June 30, 1996. There were no shares of Series B
      Preferred outstanding.





Holders
      of Series B Preferred are entitled to receive annual dividends equal to the
      dividends payable on Series A Preferred Stock, and to convert shares of Series
      B
      Preferred into Common Stock on the basis of 92 shares of Common Stock per share
      of Series B Preferred Stock. Conversion prices/ratios will be adjusted in the
      event of any stock splits, dividends on Common Stock payable in Common Stock
      or
      similar events. Series B Preferred Stock has a liquidation value of $100.00
      per
      share in liquidation of the Company.





The
      Company has the right to redeem the Series B Shares at $100 per share plus
      accrued dividends upon not less than thirty-(30) days written
      notice.




***Series
      C Convertible Preferred Stock***





The
      Company has authorized 25,000 shares of Series C Convertible Preferred Stock,
      $.001 par value per share, of which 8,147.3 shares are issued and outstanding
      as
      of June 30, 2005. Holders of shares of Series C Convertible Preferred Stock
      (the
      "Series C Preferred") are entitled to annual dividends of $6.00 per share,
      payable semi-annually.





Each
      share of Series C Preferred are convertible at the option of its holder into
      66.67 shares of Common Stock. Conversion prices/ratios will be adjusted in
      the
      event of any stock splits, dividends on Common Stock payable in Common Stock
      or
      similar events. Series C Preferred Stock has a liquidation value of $100.00
      per
      share and is senior in rank to all other stock of the Company except for
      Preferred Series E which shares the same rank and for Preferred Series G which
      is superior in rank.





The
      Company has the right to redeem the Series C Shares at $100 per share plus
      accrued dividends upon not less than thirty (30) days written
      notice.






44





***Series
      D Preferred Stock***





The
      Company's Board of Directors has designated 15,000 shares of its Preferred
      Stock
      as Series D Preferred Stock, $.001 par value per share of which no shares are
      issued and outstanding. Holders of shares of Series D Preferred Stock (the
      "Series D Preferred") will be entitled to annual dividends of $6.00 per share,
      payable semi-annually. Series D Preferred Stock has a liquidation value of
      $100.00 per share in liquidation of the Company and is equal in rank to the
      Series A Preferred.


The
      Company has the right to redeem the Series D Shares at $100.00 per share plus
      accrued dividends upon not less than thirty (30) days written
      notice.





***Series
      E Convertible Preferred Stock***





The
      Company's Board of Directors has designated 13,250 shares of its Preferred
      Stock
      as Series E Preferred Stock, $.001 par value per share, of which there are
      no
      shares issued and outstanding. Holders of shares of Series E Preferred Stock
      (the "Series E Preferred") are entitled to annual dividends of $6.00 per share
      payable semi-annually.





Prior
      to
      the Series E Redemption Date, each share of Series E Preferred is convertible
      at
      the option of its holder into 100 shares of Common Stock. Conversion
      prices/ratios will be adjusted in the event of any stock splits, dividends
      on
      Common Stock payable in Common Stock or similar events. Series E Preferred
      Stock
      has a liquidation value of $100.00 per share and is senior in rank to all stock
      of the Company except for Preferred Series C that shares the same rank and
      for
      Preferred Series G which is superior in rank.





After
      October 26, 2000, the Company has the right to redeem the Series E Shares upon
      not less than 30 days written notice at $100.00 per share plus accrued
      dividends. On or after October 26, 2005, holders of Series E Shares have the
      right to require the Company to redeem shares not previously converted or
      redeemed.





***Series
      F Convertible Preferred Stock***





The
      Company's Board of Directors has designated 6,000 shares of its Preferred Stock
      as Series F Convertible Preferred Stock, $.001 par value per share of which
      2,870.6 shares are issued and outstanding. Holders of shares of Series F
      Convertible Preferred Stock (the "Series F Preferred") are entitled to annual
      dividends of $6.00 per share, payable semi-annually.





Each
      share of Series F Preferred is convertible at the option of its holder into
      50.00 shares of Common Stock. Conversion prices/ratios will be adjusted in
      the
      event of any stock splits, dividends on Common Stock payable in Common Stock
      or
      similar events. Series F Preferred has a liquidation value of $100.00 per share
      in liquidation of the Company, and is equal in rank to Series A Preferred.





The
      Company has the right to redeem the Series F Shares upon not less than thirty
      (30) days written notice at $100.00 per share plus accrued
      dividends.





***Series
      G Convertible Preferred Stock***





The
      Company’s Board of Directors has designated 1,000,000 Shares of Preferred Stock
      as Series G Convertible Preferred Stock, $.001 par value per share. No shares
      of
      Series G were ever issued. Holders of shares of Series G Convertible Preferred
      Stock (the “Series G Preferred”) are entitled to annual dividends of $0.18 per
      share, payable semi-annually.






45





Each
      share of Series G Preferred is convertible at the option of its holder into
      2.00
      shares of Common Stock. Conversion prices/ratios will be adjusted in the event
      of any stock splits, dividends on Common Stock payable in Common Stock or
      similar events. Series G Preferred has a liquidation value of $2.20 per share
      and is senior in rank to all other stock of the Company.





The
      Company has the right to redeem the Series G Shares upon no less than thirty
      (30) days written notice at $2.20 per share plus accrued dividends.




***Undesignated
      Preferred Stock***





The
      Company's Board of Directors presently has the authority by resolution to issue
      up to **** 3,923,750 **** shares
      of
      preferred stock in one or more series and fix the number of shares constituting
      any such series, the voting powers, designations, preferences and relative,
      participating, optional or other special rights and qualifications, limitations,
      or restrictions thereof, including the dividend rights, dividend rate, terms
      of
      redemption (including sinking fund provisions), redemption price or prices,
      conversion rights and liquidation preferences of the shares constituting any
      series, without any further vote or action by the stockholders. For example,
      the
      Board of Directors is authorized to issue a series of preferred stock that
      would
      have the right to vote, separately or with any other series of preferred stock,
      on any proposed amendment to the Company's Articles of Incorporation or any
      other proposed corporate action, including business combinations and other
      transactions.





**Transfer
      Agent**





The
      Company's transfer agent is StockTrans, Inc., 7 East Lancaster Avenue, Ardmore,
      PA 19003-2318.





**Anti-Takeover
      Provisions**





Although
      the Board of Directors is not presently aware of any takeover attempts, the
      Certificate of Incorporation and Bylaws of the Company contain certain
      provisions which may be deemed to be "anti-takeover" in nature in that such
      provisions may deter, discourage or make more difficult the assumption of
      control of the Company by another corporation or person through a tender offer,
      merger, proxy contest or similar transaction or series of
      transactions.





Authorized
      but Unissued Shares :
      The
      authorized capital stock of the Company includes 50,000,000 shares of Common
      Stock and 5,000,000 shares of Preferred Stock. These shares of capital stock
      were authorized for the purpose of providing the Board of Directors of the
      Company with as much flexibility as possible to issue additional shares for
      proper corporate purposes, including equity financing, acquisitions, stock
      dividends, stock splits, employee stock option plans, and other similar purposes
      which could include public offerings or private placements. Shares of Preferred
      Stock could be issued quickly with terms calculated to delay or prevent a change
      in control of the Company without any further action by the
      stockholders.






46





No
      Cumulative Voting :
      Neither
      the Company's Articles of Incorporation nor its Bylaws contain provisions for
      cumulative voting. Cumulative voting entitles each stockholder to as many votes
      as equal the number of shares owned by him multiplied by the number of directors
      to be elected. With cumulative voting, a stockholder may cast all these votes
      for one candidate or distribute them among any two or more candidates. Thus,
      cumulative voting for the election of directors allows a stockholder or group
      of
      stockholders who hold less than 50% of the outstanding shares voting to elect
      one or more members of a board of directors. Without cumulative voting for
      the
      election of directors, the vote of holders of a plurality of the shares voting
      is required to elect any member of a board of directors and would be sufficient
      to elect all the members of the board being elected.





**ITEM
      12 -**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




We
      believe that the terms of the transactions described below were as favorable
      to
      us as would have been obtained by us in arms-length negotiation with
      non-affiliated entities.





From
      time
      to time Thomas Fleming and Rose DiOttavio have made advances to the Company.
      A
      substantial portion of these advances consisted of funds from bank financings
      obtained by Mr. Fleming and Ms. DiOttavio personally, or the Fleming Family
      Trust. For the fiscal years ended June 30, 2004 and 2005 the Company's Chief
      Executive Officer and President received compensation from the Company
      consisting of salary, compensation accrued but not paid, and options in their
      capacity as managing directors. Chairman of the Board, Thomas T. Fleming,
      charged operations with $157,392 in 2004 and $285,612 in 2005; of these sums
      $54,000 and $128,612 respectively were accrued and not paid. The President,
      Rose
      S. DiOttavio charged operations with $161,091 in 2004 and $285,212 in 2005;
      of
      these sums $54,000 and $155,612 respectively were accrued and not paid. Mr.
      Fleming and Ms. DiOttavio have each received options of 20,000 shares at $.10
      yearly for services as Directors of which this sum was doubled to 40,000 shares
      at $.10 per year prorated during the period the Company was in
      bankruptcy.





A
      principal of Mentor, who serves as a member of our Board of Directors, was
      issued 113,750 shares of our common stock concurrent with the January 2005
      extension of the note payable to Mentor. He held a total of 318,750 and 205,000
      shares of common stock as of June 30, 2005 and 2004, respectively.





**Personal
      Guarantees by Principal Stockholders**





Our
      subsidiaries have various debt instruments such as mortgage loans, lines of
      credit, and term loans which either are loans made directly to the Company
      or
      directly to the officers and are secured by personal guarantees and collateral
      of Thomas Fleming, the Fleming Family Trust, Rose DiOttavio, in various
      combinations. Such collective debt elements total $17,904,692 at June 30,
      2005





**ITEM
      13 -**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





**Audit
      Fees.** The
      aggregate fees billed for professional services rendered by the Company’s
      Independent Registered Public Accounting Firm were $166,013 for the audit of
      the
      Company’s annual financial statements for the fiscal years ended June 30, 2005
      and 2004.





**Audit-Related
      Fees.** No fees
      were billed in each of the last two fiscal years for assurance and related
      services by the Independent Registered Public Accounting firm that are
      reasonably related to the performance of the audit or review of the Company’s
      financial statements and not reported under the caption “Audit
      Fees.”






47





**Tax
      Fees** . No
      fees were billed in each of the last two fiscal years for professional services
      rendered by the Independent Registered Public Accounting Firm for tax
      compliance, tax advice and tax planning services.





**All
      Other Fees.**  ****** Other
      than the services described above, no other fees were billed by the Independent
      Registered Public Accounting Firm for the fiscal years ended June 30, 2005
      and
      2004.





**ITEM
      14 -**  **EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES AND** **REPORTS
      ON FORM 8-K**





A
      list of
      exhibits filed as part of this report is set forth in the Exhibit Index starting
      on page 50 hereof.

















48


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned; thereunto duly authorized, in the City of Philadelphia, State
      of Pennsylvania, on January 29, 2007.





**CoreCare
      Systems, Inc.**





By:
      /s/ Thomas T. Fleming


Name:  Thomas
      T.
      Fleming


Title:
      Chief Executive Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of registrant and in the
      capacities indicated on January 29, 2007.





**Signature**
            **Title**
            **Date**/s/
                Thomas T. Fleming
            Chairman
                of the Board
            January
                29, 2007Thomas
                T. Fleming
            and
                Chief ExecutiveOfficer/s/
                Rose S. DiOttavio
            President
                and Director
            January
                29, 2007Rose
                S. DiOttavio/s/
                George P. Stasen
            Director
            January
                29, 2007George
                P. Stasen/s/
                Charles A. Burton
            Director
            January
                29, 2007Charles
                A. Burton/s/
                Gardner Kahoe
            Corporate
                Secretary
            January
                29, 2007Gardner
                Kahoe/s/
                John Gill
            Chief
                Financial Officer
            January
                26, 2007John
                Gill


49


**EXHIBIT
      INDEX**








**Exhibit**
              **Number**
            
            **Description
                of Exhibit**F-1
            
            Report
                of Independent Registered Public Accounting
                FirmF-2,
                3
            
            Consolidated
                Balance Sheets as of June 30, 2005, 2004 and
                2003F-4
            
            Consolidated
                Statements of Operations for the years
                ended June 30, 2005 and 2004F-5
            
            Consolidated
                Statements of Changes in Stockholders
                Deficiency for the years ended June 30, 2005 and 2004F-6
            
            Consolidated
                Statements of Cash Flows for the years
                ended June 30, 2005 and 2004F-7
                - F-35
            
            Notes
                to Consolidated Financial Statements2.1
            
            Reorganization
                Plan (1)2.2
            
            Confirmation
                Plan (1)2.3
            
            Disclosure
                Plan (1)2.4
            
            Financial
                Summary of Reorganization Plan (1)3(I)
            
            Certificate
                of Incorporation of Corecare Systems, Inc. (2)3(II)
            
            Bylaws
                of Corecare Systems, Inc. (3)14
            
            Code
                of Ethics21
            
            Subsidiaries
                of the Registrant31.1
            
            Certification
                of Chief Executive Officer pursuant to
                Section 302 of the Sarbanes-Oxley Act of 200231.2
            
            Certification
                of Chief Financial Officer pursuant to
                Section 302 of the Sarbanes-Oxley Act of 200232
            
            Certification
                of Chief Executive Officer and Chief
                Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                200299
            
            Press
                Release(1)
                Incorporated herein by reference to the Registrant’s Current Report on
                Form 8K, dated June 24, 2004 and filed July 27, 2004.
              (2)
                Incorporated herein by reference to Form 10-SB, Exhibits 2.1, 2.2
                and 3.2
                filed August 13, 1998
              (3)
                Incorporated herein by reference to Form 10-SB, Exhibit 2.3 filed
                August
                13, 1998





50











**CORECARE
      SYSTEMS, INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**JUNE
      30, 2005, 2004 AND 2003**













**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        30, 2005, 2004 AND 2003**


**TABLE
      OF CONTENTS**








EXHIBIT
              PAGEREPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                  FIRM
              1CONSOLIDATED
                  FINANCIAL STATEMENTSBalance
                  Sheets
              2
                  - 3Statements
                  of Operations
              4Statements
                  of Changes in Stockholders’
                  Deficiency
              5Statements
                  of Cash Flows
              6Notes
                  to Financial Statements
              7
                  - 35








F-i











**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**











To
      the
      Board of Directors


CoreCare
      Systems, Inc.


Philadelphia,
      Pennsylvania








We
      have
      audited the accompanying consolidated balance sheets of CoreCare Systems, Inc.
      and Subsidiaries as of June 30, 2005, 2004 and 2003, and the related
      consolidated statements of operations, changes in stockholders' deficiency,
      and
      cash flows for the years ended June 30, 2005 and 2004. These consolidated
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of CoreCare Systems, Inc.
      and
      Subsidiaries as of June 30, 2005, 2004 and 2003, and the results of their
      operations and their cash flows for the years ended June 30, 2005 and 2004,
      in
      conformity with U.S. generally accepted accounting principles.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, the Company is not in compliance with certain
      loan covenants with certain lenders. Additionally, the Company has substantial
      working capital deficiencies of $13,516,917, $12,136,273 and $34,843,282 as
      of
      June 30, 2005, 2004 and 2003, respectively and stockholders’ deficiencies
      of $26,065,569, $26,056,691 and $25,288,103 as of June 30, 2005, 2004 and 2003,
      respectively. The aforementioned items raise substantial doubt about its ability
      to continue as a going concern. Management’s plans in regard to these matters
      are also described in Note 2. The consolidated financial statements do not
      include any adjustments that might result from the outcome of these
      uncertainties.














Mayer
      Hoffman McCann P.C.


Plymouth
      Meeting, Pennsylvania


December
      4, 2006














F-1




**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 **JUNE
        30, 2005, 2004 AND 2003**




2005
              
              2004
              
              2003**ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              123,980
              
              $
              131,878
              
              $
              2,339Restricted
                  cash
              
              
              -
              
              
              900,000
              
              
              -Accounts
                  receivable, net of allowance fordoubtful
                  accounts
              
              
              2,236,178
              
              
              4,246,294
              
              
              3,632,481Prepaid
                  expenses and other current assets
              
              
              451,119
              
              
              308,874
              
              
              373,834**TOTAL
                  CURRENT ASSETS**
              
              
              2,811,277
              
              
              5,587,046
              
              
              4,008,654**PROPERTY
                  AND EQUIPMENT,**net
                  ofaccumulated
                  depreciation and amortization
              
              
              9,717,576
              
              
              9,214,839
              
              
              9,096,745**OTHER
                  ASSETS**Other
              
              
              168,517
              
              
              128,434
              
              
              458,434**TOTAL
                  OTHER ASSETS**
              
              
              168,517
              
              
              128,434
              
              
              458,434**TOTAL
                  ASSETS**
              
              $
              12,697,370
              
              $
              14,930,319
              
              $
              13,563,833








See
        Notes
        to Consolidated Financial Statements


F-2





**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 **JUNE
        30, 2005, 2004 AND 2003**
 2005
              
              2004
              
              2003**LIABILITIES
                  AND STOCKHOLDERS' DEFICIENCY****CURRENT
                  LIABILITIES**Lines
                  of credit
              
              $
              2,174,175
              
              $
              2,147,452
              
              $
              2,722,015Current
                  portion of long-term debt
              
              
              4,023,650
              
              
              3,113,375
              
              
              16,766,236Current
                  portion of obligations under capital leases
              
              
              13,333
              
              
              11,109
              
              
              75,000Accounts
                  payable - bankruptcy, current portion
              
              
              310,921
              
              
              417,716
              
              
              4,501,764Accounts
                  payable
              
              
              2,770,631
              
              
              2,304,679
              
              
              2,184,700Advances
                  from officers/stockholders
              
              
              1,603,519
              
              
              1,264,822
              
              
              1,065,188Accrued
                  salaries and expenses
              
              
              3,512,967
              
              
              3,452,133
              
              
              2,358,513Payroll
                  taxes payable - bankruptcy, current portion
              
              
              1,216,863
              
              
              3,126,256
              
              
              -Payroll
                  taxes payable, current portion
              
              
              200,986
              
              
              1,478,459
              
              
              8,524,227Obligations
                  due to Medicare
              
              
              501,149
              
              
              407,318
              
              
              654,293**TOTAL
                  CURRENT LIABILITIES**
              
              
              16,328,194
              
              
              17,723,319
              
              
              38,851,936**LONG-TERM
                  LIABILITIES**Obligations
                  under capital leases, net of current portion
              
              
              50,558
              
              
              63,891
              
              
              -Accounts
                  payable - bankruptcy, net of current portion
              
              
              4,194,717
              
              
              4,394,234
              
              
              -Payroll
                  taxes - bankruptcy, net of current portion
              
              
              3,756,333
              
              
              4,585,356
              
              
              -Payroll
                  taxes payable, net of current portion
              
              
              727,229
              
              
              -
              
              
              -Long-term
                  debt, net of current portion
              
              
              13,705,908
              
              
              14,220,210
              
              
              -**TOTAL
                  LONG-TERM LIABILITIES**
              
              
              22,434,745
              
              
              23,263,691
              
              
              -**TOTAL
                  LIABILITIES**
              
              
              38,762,939
              
              
              40,987,010
              
              
              38,851,936**COMMITMENTS
                  AND CONTINGENCIES****STOCKHOLDERS'
                  DEFICIENCY**Preferred
                  stock, $.001 par value5,000,000
                  shares authorized,17,018
                  shares issued and outstanding
              
              
              17
              
              
              17
              
              
              17Common
                  stock, $.001 par value50,000,000
                  shares authorized, 20,535,941,
                19,260,941
                  and 18,320,943 shares issued andoutstanding
              
              
              20,536
              
              
              19,261
              
              
              18,321Additional
                  paid-in capital
              
              
              17,917,541
              
              
              18,187,316
              
              
              18,541,963Stock
                  subscriptions receivable
              
              
              (88,500
              )
              
              (88,500
              )
              
              -Accumulated
                  deficit
              
              
              (43,915,163
              )
              
              (44,174,785
              )
              
              (43,848,404
              )**TOTAL
                  STOCKHOLDERS' DEFICIENCY**
              
              
              (26,065,569
              )
              
              (26,056,691
              )
              
              (25,288,103
              )**TOTAL
                  LIABILITIES AND****STOCKHOLDERS'
                  DEFICIENCY**
              
              $
              12,697,370
              
              $
              14,930,319
              
              $
              13,563,833


See
        Notes
        to Consolidated Financial Statements


F-3




**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **YEARS
        ENDED JUNE 30, 2005 AND 2004**




2005
              
              2004**REVENUES**Patient
                  services, net
              
              $
              20,396,957
              
              $
              18,419,464Rental
                  income
              
              
              1,764,271
              
              
              1,626,950Other
                  income
              
              
              1,245,415
              
              
              1,169,633**TOTAL
                  REVENUES**
              
              
              23,406,643
              
              
              21,216,047**OPERATING
                  EXPENSES**Salaries
              
              
              10,665,665
              
              
              9,384,026Payroll
                  taxes
              
              
              966,208
              
              
              844,560Employee
                  benefits
              
              
              936,680
              
              
              816,408Contract
                  labor
              
              
              1,447,669
              
              
              403,812Selling
                  and administrative
              
              
              5,742,727
              
              
              5,145,543Bad
                  debt expense
              
              
              1,222,098
              
              
              751,530**TOTAL
                  OPERATING EXPENSES**
              
              
              20,981,047
              
              
              17,345,879**INCOME
                  FROM OPERATIONS**
              
              
              2,425,596
              
              
              3,870,168**OTHER
                  INCOME (EXPENSES)**Miscellaneous
              
              
              -
              
              
              48,537Reorganizational
                  expenses
              
              
              -
              
              
              (913,938
              )Depreciation
                  and amortization
              
              
              (331,603
              )
              
              (446,101
              )Interest
              
              
              (3,156,974
              )
              
              (2,989,888
              )**TOTAL
                  OTHER INCOME (EXPENSES)**
              
              
              (3,488,577
              )
              
              (4,301,390
              )**LOSS
                  FROM CONTINUING OPERATIONS BEFORE****EXTRAORDINARY
                  GAIN AND DISCONTINUED OPERATIONS**
              
              
              (1,062,981
              )
              
              (431,222
              )**PROVISION
                  FOR INCOME TAXES**
              
              
              -
              
              
              -**EXTRAORDINARY
                  GAIN ON THE FORGIVENESS OF DEBT, net****of
                  income tax of zero**
              
              
              1,140,672
              
              
              -**INCOME
                  (LOSS) FROM CONTINUING OPERATIONS BEFORE****DISCONTINUED
                  OPERATIONS**
              
              
              77,691
              
              
              (431,222
              )**DISCONTINUED
                  OPERATIONS, net of income tax of zero**
              
              
              181,931
              
              
              104,841**NET
                  INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS**
              
              **$**
              259,622
              
              **$**
              (326,381
              )Basic
                  income (loss) per share:Loss
                  from continuing operations
              
              $
              (0.05
              )
              $
              (0.02
              )Income
                  from discontinued operations
              
              $
              0.01
              
              $
              0.01Income
                  from extraordinary gain on forgiveness of debt
              
              $
              0.06
              
              $
              -Total
              
              $
              0.02
              
              $
              (0.01
              )Weighted
                  average shares used to compute basic net income (loss) available
                  to
                common
                  stockholders per common share:Basic
              
              
              19,843,886
              
              
              18,350,861Fully
                  diluted income (loss) per share:Loss
                  from continuing operations
              
              $
              (0.05
              )
              $
              (0.02
              )Income
                  from discontinued operations
              
              $
              0.01
              
              $
              0.01Income
                  from extraordinary gain on forgiveness of debt
              
              $
              0.05
              
              $
              -Total
              
              $
              0.01
              
              $
              (0.01
              )Weighted
                  average shares used to compute fully diluted net income (loss)
                available
                  to common stockholders per common share:Fully
                  diluted
              
              
              21,668,599
              
              
              18,350,861




See
        Notes
        to Consolidated Financial Statements


F-4




**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY**
 **YEARS
        ENDED JUNE 30, 2005 AND 2004**


Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
              
              StockNumber
                  of
              
              
              
              Number
                  of
              
              
              
              Paid-in
              
              Subscriptions
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Receivable
              
              Deficit
              
              TotalBalances,
                  June 30, 2003
              
              
              17,018
              
              $
              17
              
              
              18,320,943
              
              $
              18,321
              
              $
              18,541,963
              
              $
              -
              
              $
              (43,848,404
              )
              $
              (25,288,103
              )Shares
                  issued as employee compensation
              
              
              -
              
              
              -
              
              
              55,000
              
              
              55
              
              
              2,145
              
              
              -
              
              
              -
              
              
              2,200Shares
                  issued in conjunction with exercise of options
              
              
              -
              
              
              -
              
              
              884,998
              
              
              885
              
              
              87,615
              
              
              (88,500
              )
              
              -
              
              
              -Return
                  of additional paid-in capital
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (330,000
              )
              
              -
              
              
              -
              
              
              (330,000
              )Cancellation
                  of warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (114,407
              )
              
              -
              
              
              -
              
              
              (114,407
              )Net
                  (loss) for the year ended June 30, 2004
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (326,381
              )
              
              (326,381
              )Balances,
                  June 30, 2004
              
              
              17,018
              
              $
              17
              
              
              19,260,941
              
              $
              19,261
              
              $
              18,187,316
              
              $
              (88,500
              )
              $
              (44,174,785
              )
              $
              (26,056,691
              )Shares
                  issued as employee compensation
              
              
              -
              
              
              -
              
              
              100,000
              
              
              100
              
              
              5,900
              
              
              -
              
              
              -
              
              
              6,000Shares
                  issued in lieu of interest on debt
              
              
              -
              
              
              -
              
              
              1,175,000
              
              
              1,175
              
              
              69,325
              
              
              -
              
              
              -
              
              
              70,500Cancellation
                  of warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (345,000
              )
              
              -
              
              
              -
              
              
              (345,000
              )Net
                  income for the year ended June 30, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              259,622
              
              
              259,622Balances,
                  June 30, 2005
              
              
              17,018
              
              $
              17
              
              
              20,535,941
              
              $
              20,536
              
              $
              17,917,541
              
              $
              (88,500
              )
              $
              (43,915,163
              )
              $
              (26,065,569
              )


See
        Notes
        to Consolidated Financial Statements


F-5


**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **YEARS
        ENDED JUNE 30, 2005 AND 2004**


2005
              
              2004CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income (loss) from continuing operations
              
              $
              77,691
              
              $
              (431,222
              )Noncash
                  adjustments to reconcile net income (loss) from continuingoperations
                  to net cash provided by operating activitiesCommon
                  stock issued for compensation for services providedand
                  interest expense
              
              
              76,500
              
              
              (112,207
              )Depreciation
                  and amortization
              
              
              331,603
              
              
              446,101Bad
                  debt expense
              
              
              1,222,098
              
              
              751,530Forgiveness
                  of debt
              
              
              (1,140,672
              )
              
              -Gain
                  on asset disposals
              
              
              -
              
              
              (21,126
              )Changes
                  in assets and liabilities(Increase)
                  decrease in operating assetsRestricted
                  cash
              
              
              900,000
              
              
              (900,000
              )Accounts
                  receivable
              
              
              788,018
              
              
              (1,365,343
              )Prepaid
                  expenses and other current assets
              
              
              (142,245
              )
              
              64,960Other
                  assets
              
              
              (40,083
              )
              
              -Increase
                  (decrease) in operating liabilitiesAccounts
                  payable
              
              
              915,548
              
              
              430,165Accrued
                  salaries and expenses
              
              
              100,598
              
              
              1,093,620Payroll
                  taxes payable
              
              
              (3,288,660
              )
              
              665,844Obligations
                  due to Medicare
              
              
              93,831
              
              
              (246,975
              )**NET
                  CASH PROVIDED BY (USED IN) CONTINUING****OPERATIONS**
              
              
              (105,773
              )
              
              375,347**NET
                  CASH PROVIDED BY DISCONTINUED OPERATIONS**
              
              
              380,563
              
              
              254,603**NET
                  CASH PROVIDED BY OPERATING ACTIVITIES**
              
              
              274,790
              
              
              629,950CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of property and equipment
              
              
              (834,340
              )
              
              (564,195
              )Proceeds
                  from asset disposals
              
              
              -
              
              
              21,126**NET
                  CASH USED IN INVESTING ACTIVITIES**
              
              
              (834,340
              )
              
              (543,069
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESAdvances
                  from officers/stockholders
              
              
              338,697
              
              
              199,634Repayment
                  of capital lease obligations
              
              
              (11,109
              )
              
              -Proceeds
                  from long-term debt
              
              
              395,973
              
              
              567,349Proceeds
                  from (repayment of) lines of credit
              
              
              26,723
              
              
              (574,563
              )**NET
                  CASH PROVIDED BY CONTINUING OPERATIONS**
              
              
              750,284
              
              
              192,420**NET
                  CASH USED IN DISCONTINUED OPERATIONS**
              
              
              (198,632
              )
              
              (149,762
              )**NET
                  CASH PROVIDED BY FINANCING ACTIVITIES**
              
              
              551,652
              
              
              42,658**NET
                  INCREASE (DECREASE) IN CASH**
              
              
              (7,898
              )
              
              129,539CASH,
                  BEGINNING
              
              
              131,878
              
              
              2,339CASH,
                  ENDING
              
              $
              123,980
              
              $
              131,878




See
        Notes
        to Consolidated Financial Statements


F-6


**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**


NOTE
      1
      COMPANY AND ORGANIZATION





On
      February 27, 1997, CoreCare Systems, Inc. through its wholly-owned
      subsidiary, CoreCare Behavioral Health Management, Inc., (“CCBHM”) acquired the
      property of the Institute of Pennsylvania Hospital and renamed it Kirkbride
      Center (“Kirkbride”). Kirkbride is comprised of approximately 420,000 square
      feet of commercial real estate on 21 acres of land in Philadelphia, Pennsylvania
      where CoreCare Systems, Inc. and Subsidiaries (the “Company”)
      operates.





Kirkbride
      is licensed for 74 acute inpatient psychiatric beds, 7 drug and alcohol
      detoxification beds, and 130 drug and alcohol rehabilitation beds. Additionally,
      Westmeade Healthcare, Inc., (“WHI”) referred to as the “Blackwell Center”in the
      Community is licensed as an adolescent residential treatment facility with
      32
      licensed beds. The Company also operates a food service company.





The
      Company is utilizing approximately 53% of Kirkbride for its psychiatric and
      rehabilitation services and leases the balance for medical offices, several
      schools, a food processing plant, university related vocational programs and
      to
      various other social service agencies.





A
      description of the subsidiary companies included in the Consolidated Financial
      Statements follows:





**CoreCare
      Behavioral Health Management, Inc. (“CCBHM”)**





This
      company operates the inpatient psychiatric hospital and the drug and alcohol
      rehabilitation program.





**Westmeade
      Healthcare, Inc. (“WHI”)** ****





This
      company operates a 32-bed adolescent residential treatment facility known as
      The
      Blackwell Center.





**Kirkbride
      Realty Corporation, Inc. (“KRC”)**





This
      Company owns, operates and maintains the six principal buildings totaling
      approximately 325,000 net rentable square feet and the 21-acre campus in
      Philadelphia, Pennsylvania. KRC also acts as rental agent for the unaffiliated
      tenants. This company was formed in 2004 as part of the Chapter 11
      Reorganization Plan for CCBHM (See Note 2)





**CoreCare
      Food Services, Inc. (“CCFS”)**





This
      company provides food services to CCBHM, WHI and several tenants under
      contract.





**Quantum
      Managed Mental Health, Inc. (“Quantum”)**





This
      company conducts clinical drug trials for the pharmaceutical industry (See
      Note
      22).







F-7


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      2  GOING
      CONCERN/OPERATIONS





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern, which contemplates the realization
      of
      assets and the satisfaction of liabilities in the normal course of business.
      The
      Company has working capital deficiencies of $13,516,917, $12,136,273 and
      $34,843,282, as of June 30, 2005, 2004 and 2003, respectively and stockholders’
deficiencies of $26,065,569, $26,056,691 and $25,288,103 as of June 30,
      2005, 2004 and 2003, respectively. Additionally, the Company is not in
      compliance with certain loan covenants and is delinquent with certain lenders.
      As a result, payment of the debt could be demanded immediately. The Company
      is
      pursuing debt refinancing and the possible sale of selected assets as well
      as
      continuing discussions with certain lenders regarding covenant waivers,
      deferrals or other remedies that could be reached in connection with its debt
      obligations. The Company has retained Lewis J. Kaufman and BB&T Capital
      Markets as investment bankers to assist in debt restructuring and maximizing
      stockholder value. As discussed in “Financial Restructuring”, on May 6, 2002
      (the “petition date”), CoreCare Systems, Inc.’s major subsidiary, CCBHM, doing
      business as the Kirkbride Center, and its then active affiliate, CoreCare Realty
      Corporation filed a voluntary petition under Chapter 11 of the Bankruptcy Code
      with the United States Bankruptcy Court for the Eastern District of
      Pennsylvania. The Company’s Plan of Reorganization was approved on May 27, 2004,
      and was effective July 7, 2004, without any changes in the Company’s equity
      structure.





The
      Company believes it will be able to resolve its liquidity problems given its
      improving cash flow and due to other improvements initiated by the Plan of
      Reorganization.





Although
      management believes the Company will continue to operate, the financial
      condition of the Company at June 30, 2005, raises a substantial doubt about
      the
      Company’s ability to continue as a going concern. The consolidated financial
      statements do not include any adjustments relating to the recoverability and
      classification of asset carrying amounts or the amount and classification of
      liabilities that might be necessary should the Company be unable to continue
      as
      a going concern.





Financial
      Restructuring





On
      July
      7, 2004 (the “Emergence Date”), the Company emerged from Chapter 11, pursuant to
      the Plan of Reorganization (the “Plan”) confirmed by the bankruptcy court.
      Pursuant to the Plan and the mortgage loan re- financing,
      all real property was transferred to KRC, a newly formed subsidiary in July
      2004.





The
      accompanying consolidated statements of operations include certain restructuring
      and reorganizational expenses directly related to debt restructuring and
      reorganization.





On
      December 17, 1999, the common stock of the Company was de-listed from the OTC
      Electronic Bulletin Board and now trades on the “Pink Sheets.” The liquidity of
      the Company’s common stock was adversely affected.





NOTE
      3  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Principles
      of Consolidation





The
      consolidated financial statements of the Company include the accounts of
      CoreCare Systems, Inc. and its wholly-owned subsidiaries.





All
      significant intercompany accounts and transactions have been eliminated in
      consolidation.








F-8


**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**


NOTE
      3  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Use
      of
      Estimates





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the consolidated financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. The Company reviews all
      significant estimates affecting the consolidated financial statements on a
      recurring basis and records the effect of any adjustments when
      necessary.





Concentration
      of Credit Risk





Financial
      instruments, which subject the Company to concentration of credit risk, consist
      principally of trade receivables from government health care systems, such
      as
      Medicare, Medicaid and Community Behavioral Health. The Company establishes
      a
      provision for doubtful accounts based upon factors surrounding the credit risk
      of nongovernmental health system payors, historical trends and other
      information.





Property
      and Equipment





Property
      and equipment are stated at cost less accumulated depreciation. Certain
      furniture and equipment have been acquired at cost under capital lease
      obligations and are stated at cost less accumulated amortization. Additions
      are
      capitalized and maintenance and repairs are charged to current operations as
      incurred. The cost of assets retired or otherwise disposed of and the related
      accumulated depreciation and amortization are removed from the accounts and
      the
      gain or loss on such dispositions is included in current operations.
      Depreciation and amortization are provided using the straight-line method over
      the estimated useful lives of the respective assets.





Revenue
      Recognition





CCBHM
      has
      agreements with third-party payors that provide for payments to CCBHM at amounts
      different from its established rates. Net patient service revenue is reported
      at
      the estimated net realizable amounts from patients, third-party payors and
      others for services rendered. Retroactive adjustments are accrued on an
      estimated basis in the period in which the services are rendered and adjusted
      in
      future periods as final settlements are determined. On January 1, 2005, the
      Medicare Program began a three (3) year transition to a fully prospective
      payment system for inpatient psychiatric hospitals. During the transition
      period, reimbursement to psychiatric hospitals will be a blend of a national
      rate and historic hospital reimbursable cost. CCBHM submits an annual cost
      report and is subject to audit by the Medicare fiscal intermediary.





Residential
      and rehabilitative program income is based on daily rates contracted with
      third-party payors and private individuals. Resident and program revenue is
      reported net of contractual allowances from residents and third-party
      payors.





Rental
      income is recorded on a monthly basis per contractual agreements. Food service
      revenue is recorded based on agreed-upon amounts per meals served and additional
      costs incurred. Revenue for Quantum was recognized in the month in which the
      clinical drug trial is conducted and is reported in discontinued
      operations.





F-9


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**


NOTE
      3  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Income
      Taxes





The
      Company has adopted the provisions of Statement of Financial Accounting
      Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109
      requires a company to recognize deferred tax liabilities and assets for the
      expected future tax consequences of events that have been recognized in its
      financial statements or tax returns. Under this method, deferred tax assets
      and
      liabilities are determined based on the differences between the financial
      statement carrying amounts and tax bases of assets and liabilities using enacted
      tax rates in effect in the years in which the differences are expected to
      reverse. Valuation reserves have been recorded to offset deferred tax assets
      (see Note 14).





Fair
      Value of Financial Instruments





In
      assessing the fair value of financial instruments, the Company has used a
      variety of methods and assumptions, which were based on estimates of market
      conditions and loan risks existing at that time. For certain instruments,
      including accounts receivable, accounts payable and short-term debt, it was
      estimated that the carrying amount approximated fair value for these instruments
      because of their short-term maturity. The carrying amounts of long-term debt
      approximate fair value since the Company’s interest rates approximated interest
      rates existing at the time the debt was incurred.





Allowance
      For Doubtful Accounts





The
      Company’s allowance for doubtful accounts is estimated utilizing current aging
      of accounts receivable, historical collections data and other factors.
      Management monitors these factors and determines the estimated provision for
      doubtful accounts. Historical bad debts have generally resulted from
      uncollectible private balances, some uncollectible coinsurance and deductibles
      and other receivables deemed to be uncollectible.





The
      Company’s bad debt expense totaled $1,222,098 and $751,530 for the years ended
      June 30, 2005 and 2004, respectively.





NOTE
      4  RESTRICTED
      CASH





Restricted
      cash, as of June 30, 2004, consisted of $900,000 received in June 2004 from
      tobacco revenues, held, maintained and paid in accordance with the Plan of
      Reorganization. Those funds were used to pay certain bankruptcy creditors at
      the
      refinancing of the mortgage on July 7, 2004, in accordance with the related
      restrictions.





NOTE
      5  ACCOUNTS
      RECEIVABLE





As
      of
      June 30, 2005, 2004 and 2003, accounts receivable and allowance for doubtful
      accounts are as follows:


**2005**
              
              **2004**
              
              **2003**Patient
                  accounts receivable
              
              $
              9,968,954
              
              $
              9,695,394
              
              $
              8,374,532Less
                  allowance for doubtful accounts
              
              
              8,506,557
              
              
              7,449,518
              
              
              6,661,403Net
                  patient accounts receivable
              
              
              1,462,397
              
              
              2,245,876
              
              
              1,713,129Pennsylvania
                  Tobacco Settlement Funds
              
              
              577,229
              
              
              1,260,468
              
              
              1,533,674Pennsylvania
                  disproportionate share revenue
              
              
              -
              
              
              400,000
              
              
              200,000Other
              
              
              196,552
              
              
              339,950
              
              
              185,678Total
                  accounts receivable, net
              
              $
              2,236,178
              
              $
              4,246,294
              
              $
              3,632,481




As
      of
      June 30, 2005, 2004 and 2003, the Company’s three largest payers represented
      83%, 86% and 87%, respectively, of the net patient receivables outstanding.


F-10


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      6  PROPERTY
      AND EQUIPMENT





As
      of
      June 30, 2005, 2004 and 2003, property and equipment consisted of the
      following:


EstimatedUseful
                  LivesIn
                  Years
              
              **2005**
              
              **2004**
              
              **2003**Land
              
              
              
              
              $
              1,640,271
              
              $
              1,640,271
              
              $
              1,640,271Buildings
              
              
              31.5
                  to 40.0
              
              
              6,281,701
              
              
              6,254,100
              
              
              6,254,100Building
                  improvements
              
              
              31.5
                  to 40.0
              
              
              3,258,492
              
              
              2,563,538
              
              
              2,111,282Furniture
                  and equipment
              
              
              5.0
                  to 7.0
              
              
              1,266,919
              
              
              1,171,447
              
              
              1,080,634Automobiles
              
              
              3.0
                  to 5.0
              
              
              93,049
              
              
              76,736
              
              
              76,736Furniture
                  and equipment under capital leases
              
              
              3.0
                  to 5.0
              
              
              945,536
              
              
              945,536
              
              
              945,53613,485,968
              
              
              12,651,628
              
              
              12,108,559Less
                  accumulated depreciation and amortization
              
              
              
              
              
              3,768,392
              
              
              3,436,789
              
              
              3,011,814$
              9,717,576
              
              $
              9,214,839
              
              $
              9,096,745




Depreciation
      and amortization expenses for the years ended June 30, 2005 and 2004 was
      $331,603 and $446,101, respectively.





NOTE
      7  LINES
      OF
      CREDIT





Outstanding
      balances under various line of credit facilities are as follows:


Interest
                  %
              
              **June
                  30,**Per
                  Annum
              
              **2005**
              
              **2004**
              
              **2003**Fleming
                  Family Trust
              
              
              (A
              )
              
              10%
              
              $
              1,409,000
              
              $
              1,379,000
              
              $
              1,379,000Madison
                  Bank
              
              
              (B
              )
              
              Prime
                  plus 1.5%
              
              
              468,500
              
              
              468,500
              
              
              468,500Madison
                  Bank
              
              
              (C
              )
              
              Prime
                  plus 1.5%
              
              
              296,675
              
              
              299,952
              
              
              299,952GE
                  Capital Commercial Finance, Inc.
              
              
              (D
              )
              
              Prime
                  plus 1.5%
              
              
              -
              
              
              -
              
              
              574,563$
              2,174,175
              
              $
              2,147,452
              
              $
              2,722,015




(A)
            On
                June 4, 2003, Phyllys B. Fleming, on behalf of Fleming Family Trust,
                a
                related party (see Note 16), paid off the original promissory note
                of
                $1,100,000 to United States Trust Company of New York. Effective
                on that
                date, a note was issued to Fleming Family Trust in the amount of
                $1,379,000, representing principal and interest accrued on the original
                note to United States Trust Company of New York. Interest on principal
                accrues at a rate of 10% per annum. No payment of principal or interest
                was due on the note until June 5, 2005, when full payment of interest
                accrued to date was due with interest thereafter to be paid on a
                monthly
                basis. Additionally, four annual principal payments of $344,750 were
                due
                beginning on June 4, 2005 and ending with the final principal payment
                on
                June 4, 2008. During the year ended June 30, 2005 an additional $200,000
                was borrowed of which $170,000 was repaid. The Company is currently
                in
                default and negotiating repayment terms. Interest expense for the
                years
                ended June 30, 2005 and 2004, was $142,567 and $113,075, respectively.
                Accrued interest expense as of June 30, 2005, 2004 and 2003, were
                $255,642, $113,075 and $0,
                respectively.








F-11


**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**


NOTE
      7  LINES
      OF
      CREDIT (continued)





(B)
            The
                Company borrowed $468,500 under its May 1998, line of credit facility
                agreement with Madison Bank, which is collateralized by an irrevocable
                letter of credit in the amount of $475,000 secured by assets of the
                Fleming Family Trust. Interest on outstanding balances accrues at
                the rate
                of prime plus 1.5% (7.50% as of June 30, 2005). The facility is payable
                upon demand with no maturity date.





(C)
            Line
                of credit payable to Madison Bank for $300,000 and was secured by
                an
                expanded letter of credit on September 20, 2000. Interest is accrued
                at a
                rate of prime plus 1.5% (7.50% as of June 30, 2005). The facility
                is
                payable upon demand with no maturity
                date.





(D)
            This
                line of credit was paid off in May 2004.





NOTE
      8  LONG-TERM
      DEBT





Notes
      and Mortgage Loans Payable


Interest
                  %
              
              **June
                  30,**Per
                  Annum
              
              **2005**
              
              **2004**
              
              **2003****CoreCare
                  Behavioral Health****Management,
                  Inc. (CCBHM)**WRH
                  Mortgage, Inc.
              
              
              (A
              )
              
              LIBOR
                  plus 750 basis points
              
              $
              -
              
              $
              -
              
              $
              13,751,723Kirkbride
                  Holdings, LLC (Allied Partners)
              
              
              (B
              )
              
              LIBOR
                  plus 1,000 basis points not to exceed 12.5%
              
              
              14,538,884
              
              
              14,025,000
              
              
              -Directors'
                  and Officers' insurance
              
              
              (C
              )
              
              0.00%
              
              
              -
              
              
              56,583
              
              
              -**Westmeade
                  Healthcare, Inc.**Finova
                  Capital Corporation (Finova)
              
              
              (D
              )
              
              11.00%
              
              
              115,129
              
              
              143,333
              
              
              175,116**CoreCare
                  Systems, Inc.**Merrill
                  Lynch
              
              
              (E
              )
              
              Base
                  lending rate plus .625%
              
              
              767,257
              
              
              767,257
              
              
              752,756Mentor
                  Special Situation Fund, L.P. (Mentor)
              
              
              (F
              )
              
              12%
              
              
              499,667
              
              
              499,667
              
              
              499,667Steve
                  Guarino
              
              
              (G
              )
              
              20%
              
              
              243,799
              
              
              243,799
              
              
              243,799Don
                  Won Kang
              
              
              (H
              )
              
              20%
              
              
              250,000
              
              
              250,000
              
              
              250,000Tak
                  Soon Yun
              
              
              (I
              )
              
              20%
              
              
              235,000
              
              
              235,000
              
              
              235,000Jung
                  & Eun Lee
              
              
              (J
              )
              
              20%
              
              
              215,000
              
              
              215,000
              
              
              215,000Health
                  Horizon
              
              
              (K
              )
              
              0%
              
              
              -
              
              
              -
              
              
              43,535Mark
                  Wachs
              
              
              (L
              )
              
              10%
              
              
              12,949
              
              
              12,949
              
              
              12,949Senior
                  Lifestyles, Inc.
              
              
              (M
              )
              
              0%
              
              
              31,969
              
              
              31,969
              
              
              31,969Blue
                  Bell Capital
              
              
              (N
              )
              
              6%
              
              
              150,000
              
              
              150,000
              
              
              150,000First
                  Capital
              
              
              (O
              )
              
              12%
              
              
              180,000
              
              
              180,000
              
              
              185,000Donald
                  Camplese
              
              
              (P
              )
              
              12%
              
              
              219,722
              
              
              219,722
              
              
              219,722Baptist
                  Children's Services
              
              
              (Q
              )
              
              5%
              
              
              270,182
              
              
              303,306
              
              
              -17,729,558
              
              
              17,333,585
              
              
              16,766,236Less
                  current portion
              
              
              
              
              
              
              
              
              4,023,650
              
              
              3,113,375
              
              
              16,766,236$
              13,705,908
              
              $
              14,220,210
              
              $
              -




F-12


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**


NOTE
      8  LONG-TERM
      DEBT (continued)





(A)
            This
                note was sold by WRH Mortgage, Inc. to Kirkbride Holdings, LLC on
                December
                19, 2003.





(B)
            This
                note was purchased from WRH Mortgage, Inc. in December 2003. Based
                upon
                the Bankruptcy Reorganization Plan, a new agreement was enacted with
                a
                principal balance of $14,025,000 (Tranche A). The first mortgage
                note is
                being amortized over a 30-year straight-line amortization schedule.
                Principal payments of $38,958 together with accrued and unpaid interest
                on
                the outstanding balance were due beginning April 1, 2004. Interest
                on
                principal accrues monthly at the rate of 1,000 basis points over
                LIBOR,
                which is capped at the maximum amount of 250 basis points. Additional
                principal payments are due monthly based on a percentage of rental
                revenue. The note matures on July 7, 2007, three years from the effective
                date, when the entire unpaid principal and all accrued interest,
                late
                charges, escrow shortages and other fees if applicable will be due
                and
                payable in full.





In
      July
      2004, the Company borrowed an additional $1,250,000 (Tranche B). Interest on
      principal accrues at the same rate as Tranche A. $100,000 of the proceeds funded
      a Debt Service Reserve Fund maintained by the Mortgagee. This fund is included
      in prepaid assets. Monthly principal payments were due beginning July 1, 2004,
      at varying amounts until September 2004, when the payment was fixed at $100,000.
      The principal amount is subject to increase based upon the actual collection
      of
      accounts receivable as of March 31, 2004. In May 2006, the terms were
      amended.





(C)
            An
                interest free loan of the down payment for the Directors and Officers
                insurance policy. This was paid off in the year ended June 30,
                2005.





(D)
            The
                Company obtained a Promissory Note in May 2002, after the sale of
                its
                Warwick, Pennsylvania facility. This note bore interest at 11% and
                matured
                on May 30, 2006. In May 2006, the note was assigned to Steamboat
                Capital
                VII, LLC and the maturity date extended to May 30, 2007. At that
                time the
                interest rate was changed to prime plus
                8%.





(E)
            Note
                payable in monthly installments of $10,000 until December 31, 1999,
                at which time the balance and all accrued interest was payable on
                demand.
                This note was not paid off and remains unpaid despite periodic principal
                payments. The rate of interest charged monthly on the balance is
                the
                Merrill Lynch “Base Lending Rate” plus 0.625% not to exceed 2.625% based
                on the outstanding loan balance (combined 5.89% as of June 30, 2005).
                This
                note is guaranteed by a corporate officer and the pledge of certain
                of
                that officer’s personal assets.





(F)
            Subordinated
                note bearing interest at the rate of 12% per annum. The note required
                interest payments quarterly and principal payments of $166,666 on
                December 31, 1998, 1999 and 2000. Associated with the note was a
                warrant to purchase 333,000 shares of common stock at an exercise
                price of
                $1.50 per share expiring August 2001. In 2000 and prior years, the
                Company
                issued Mentor additional warrants to purchase 713,119 shares of common
                stock at an exercise price of $1 per share expiring in August 2006,
                in
                exchange for principal and some interest payments that were not paid
                when
                due in these years. Due to unpaid interest and principal that were
                not
                paid when due in 2000 and prior years, the Company executed an agreement
                with the noteholder on April 4, 2001, which reduced the exercise
                price on all outstanding warrants held by the noteholder from $1.00
                to
                $0.50. In January 2005, the note was extended to, and all penalty
                interest
                was waived through December 31, 2006. The Company is currently
                renegotiating repayment terms. Concurrently, the warrants for all
                shares
                were cancelled with the issuance of 1,000,000 shares of common stock
                to
                Mentor plus 175,000 shares to principals of Mentor (See Note
                16).





(G)
            Investor
                note payable bearing interest at 20%. This note matured during 1997
                and
                the Company is currently in default and negotiating repayment terms.








F-13


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      8  LONG-TERM
      DEBT (continued)





(H)
            Investor
                note, interest payable monthly at the rate of 20% per annum. The
                entire
                principal and any unpaid interest matured in October 2001. The Company
                is
                currently in default and negotiating repayment terms.





(I)
            Investor
                notes, interest payable monthly at the rate of 20% per annum. The
                entire
                principal and any unpaid interest matured in December 2001. The Company
                is
                currently in default and negotiating repayment terms.





(J)
            Investor
                note, interest payable monthly at the rate of 20% per annum. The
                entire
                principal and any unpaid interest matured in October 2001. The Company
                is
                currently in default and negotiating repayment
                terms.





(K)
            Pursuant
                to a court order this claim was repaid in 24 consecutive
                payments.





(L)
            Convertible
                promissory note, originally due January 31, 1998, bearing interest
                at the
                rate of 10% per annum. The note is convertible into common stock
                of the
                Company at the rate of one share of common stock for each $1.50 of
                debt
                converted. The note also carries a warrant to purchase 400 shares
                of
                common stock at an exercise price of $3.00 per share for each $1,000
                of
                debt converted.





(M)
            Non-interest
                bearing demand note payable to an organization of which the Chairman
                and
                the President serve as Board members. The note was repaid in October
                2005.





(N)
            Promissory
                note, interest payable monthly at the rate of 6% per annum. The Company
                has defaulted on interest payments on the note since 2001. On December
                8,
                2000, the Company signed a settlement agreement making the note due
                upon
                substantive refinancing of the existing mortgage note if net proceeds
                are
                available.





(O)
            Promissory
                note, interest payable monthly at the rate of 12% per annum. The
                note
                matured in 2002 and the Company has defaulted on principal and interest
                payments. The note is guaranteed by an open ended mortgage on the
                property
                and personal guarantees of the
                directors.





(P)
            Judgment
                order on May 11, 1999, in the amount of $250,000. Interest accrues
                at the
                default rate of 12% per annum. The Company is currently in default
                with
                the terms of the note. ($30,278 is included in accounts payable -
                bankruptcy to be paid over a 10-year
                period).





(Q)
            Note
                payable for tenant financed building improvements payable in monthly
                installments at a rate of 5%. The note is amortized by reduced rent
                payments. All principal and interest will become due in July 2008,
                if the
                lease is not renewed.





The
      annual maturities on long-term debt as of June 30, 2005, 2004 and 2003 are
      as
      follows:


Years
                  ending June 30,
              
              **2005**
              
              **2004**
              
              **2003**2004
              
              
              
              
              
              
              
              $
              16,766,2362005
              
              
              
              
              $
              3,113,375
              
              
              -2006
              
              $
              4,023,650
              
              
              514,302
              
              
              -2007
              
              
              1,013,459
              
              
              1,013,459
              
              
              -2008
              
              
              12,564,249
              
              
              12,564,249
              
              
              -2009
              
              
              128,200
              
              
              128,200
              
              
              -17,729,558
              
              
              17,333,585
              
              
              16,766,236Less
                  current portion
              
              
              4,023,650
              
              
              3,113,375
              
              
              16,766,236$
              13,705,908
              
              $
              14,220,210
              
              $
              -





F-14


**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**




NOTE
      8  LONG-TERM
      DEBT (continued)





Obligations
      Under Capital Leases





The
      future minimum lease payments under capital leases as of June 30, 2005, 2004
      and
      2003 are as follows:


Years
                  ending June 30,
              
              **2005**
              
              **2004**
              
              **2003**2004
              
              
              
              
              
              
              
              $
              95,6112005
              
              
              
              
              $
              17,529
              
              
              -2006
              
              $
              19,122
              
              
              19,122
              
              
              -2007
              
              
              19,122
              
              
              19,122
              
              
              -2008
              
              
              19,122
              
              
              19,122
              
              
              -2009
              
              
              20,716
              
              
              20,716
              
              
              -Total
                  minimum lease payments
              
              
              78,082
              
              
              95,611
              
              
              95,611Less
                  amount representing interest (10%)
              
              
              14,191
              
              
              20,611
              
              
              20,611Present
                  value of net minimum lease payments
              
              
              63,891
              
              
              75,000
              
              
              75,000Less
                  current portion of capital lease obligations
              
              
              13,333
              
              
              11,109
              
              
              75,000$
              50,558
              
              $
              63,891
              
              $
              -




The
      assets and liabilities under capital leases are recorded at the lower of the
      present value of the minimum lease payment or the fair value of the assets.
      The
      assets are amortized over their estimated useful lives.





Amortization
      of the equipment acquired under capital leases was $-0- and $117,200 for the
      years ended June 30, 2005 and 2004, respectively. The net book value of
      equipment under capital leases as of June 30, 2005, 2004 and 2003 amounted
      to $-0-, $-0- and $117,200, respectively.





NOTE
      9  ACCOUNTS
      PAYABLE - BANKRUPTCY





Below
      is
      a summary of the annual maturities of the unsecured creditors’ liability as of
      June 30, 2005 and 2004, per the confirmed Plan of Reorganization:




Years
                  ending June 30,
              
              **2005**
              
              **2004**2005
              
              
              
              
              $
              417,7162006
              
              $
              310,921
              
              
              252,4202007
              
              
              469,405
              
              
              469,4052008
              
              
              671,461
              
              
              671,4612009
              
              
              995,776
              
              
              995,7762010
              
              
              1,109,882
              
              
              1,109,882Thereafter
              
              
              948,193
              
              
              895,2904,505,638
              
              
              4,811,950Less:
                  short-term portion
              
              
              310,921
              
              
              417,716$
              4,194,717
              
              $
              4,394,234








F-15


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      10  ADVANCES
      FROM OFFICERS/STOCKHOLDERS





Amounts
      are payable to two officers/stockholders totaling $1,603,519, $1,264,822 and
      $1,065,188 as of June 30, 2005, 2004 and 2003, respectively. These amounts
      reflect both direct advances to the Company as well as monies advanced to cover
      expenses paid on behalf of the Company. These advances bear interest at the
      rates of 8.5%, 6.5% and 6.5% as of June 30, 2005, 2004 and 2003, respectively.
      During the years ended June 30, 2005 and 2004, the Company also repaid $60,731
      and $120,050, respectively, to financial institutions for loans on behalf of
      the
      officers/stockholders. Interest expense for the years ended June 30, 2005 and
      2004 was $9,844 and $15,028, respectively (See Note 16).





NOTE
      11  PAYROLL
      TAXES PAYABLE - NON-BANKRUPTCY





In
      November 1999, WHI filed installment agreements to repay past due payroll taxes.
      The Company agreed to pay the federal taxes owed plus penalties and interest
      in
      then monthly payments of $5,000 due on the 15 th of each
      month, until July 1, 2000, whereby the monthly amount increased to $10,000
      due on the 15 th of each
      month until the total liability of approximately $438,000 is paid in full.
      In
      October 2000, the Company ceased paying these sums. In April 2004, a new
      installment agreement was made whereby the Company agreed to monthly payments
      of
      $15,000 which includes interest at 6.4%.





In
      April
      2006, the Company agreed to a $154,547 Judgment with the City of Philadelphia
      concerning unpaid taxes owed by Managed Careware, Inc., a long inactive
      subsidiary. The Judgment requires an initial payment of $15,000 and 36 payments
      of $4,300 which includes interest at 8.5%.





Below
      is
      a summary of the annual maturities of the non-bankruptcy related payroll taxes
      payable as of June 30, 2005:


Years
                  ending June 30,
              
              **City
                  of Phila. (CMI)**
              
              **Westmeade
                  (IRS)**
              
              **Other**
              
              **Total**2005
              
              $
              -
              
              $
              125,470
              
              $
              75,516
              
              $
              200,9862006
              
              
              18,502
              
              
              136,561
              
              
              -
              
              
              155,0632007
              
              
              43,622
              
              
              148,632
              
              
              -
              
              
              192,2542008
              
              
              46,710
              
              
              161,769
              
              
              -
              
              
              208,4792009
              
              
              45,713
              
              
              125,720
              
              
              -
              
              
              171,433Therafter
              
              
              -
              
              
              -
              
              
              -
              
              
              -$
              154,547
              
              $
              698,152
              
              $
              75,516
              
              $
              928,215


F-16





**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**





NOTE
      12  PAYROLL
      TAXES PAYABLE - BANKRUPTCY





Below
      is
      a summary of payroll taxes payable as of June 30, 2005 and 2004 per confirmed
      Plan of Reorganization:


Interest
                  %
              
              **June
                  30,**Per
                  Annum
              
              **2005**
              
              **2004****Internal
                  Revenue Service**Secured
                  Claim - Class 2
              
              
              (A
              )
              
              5%
              
              $
              212,386
              
              $
              1,067,696Secured
                  Claim - Class 2
              
              
              (B
              )
              
              N/A
              
              
              -
              
              
              900,000Administrative
                  Claim - Class 2
              
              
              (C
              )
              
              N/A
              
              
              100,000
              
              
              200,000Secured
                  Claim - Class 2
              
              
              (D
              )
              
              N/A
              
              
              -
              
              
              425,000Priority
                  Claim - Class 2
              
              
              (E
              )
              
              5%
              
              
              999,306
              
              
              1,074,989**City
                  of Philadelphia**Secured
                  Claim - Class 8
              
              
              (F
              )
              
              7%
              
              
              2,018,507
              
              
              2,100,000Secured
                  Claim - Class 8
              
              
              (G
              )
              
              7%
              
              
              919,633
              
              
              919,633**Pennsylvania
                  Department of Revenue**Administrative
                  Claim - Class 4
              
              
              (H
              )
              
              7%
              
              
              89,559
              
              
              184,558Priority
                  Claim - Class 4
              
              
              (I
              )
              
              7%
              
              
              234,065
              
              
              249,462Secured
                  Claim - Class 4
              
              
              (J
              )
              
              7%
              
              
              330,974
              
              
              427,745**Commonwealth
                  of Pennsylvania****Department
                  of Labor and Industry**Secured
                  Claim - Class 5
              
              
              (K
              )
              
              7%
              
              
              68,766
              
              
              73,360Priority
                  Claim - Class 5
              
              
              (L
              )
              
              7%
              
              
              -
              
              
              89,1694,973,196
              
              
              7,711,612Less
                  current portion
              
              
              
              
              
              
              
              
              1,216,863
              
              
              3,126,256$
              3,756,333
              
              $
              4,585,356






F-17


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      12  PAYROLL
      TAXES PAYABLE - BANKRUPTCY (continued)





(A)
            Amount
                due pursuant to the confirmed Plan of Reorganization is payable in
                72
                equal monthly installments of principal and interest (5% per annum),
                in
                the amount of $17,195. Initial payment was due August 2004, and will
                mature in 2010.





(B)
            Amount
                due pursuant to the confirmed Plan of Reorganization was paid off
                in July
                2004, on the Effective Date from the proceeds of the CCBHM financing
                of
                Tranche B note with Kirkbride Holdings, LLC (Allied Partners) (See
                Note
                8).





(C)
            Amount
                due pursuant to the confirmed Plan of Reorganization is fixed at
                $200,000
                including interest and penalty through the third quarter 2003. The
                balance
                was payable in twelve monthly installments of $16,667 which commenced
                June
                2004. As of June 30, 2005, the Company has repaid
                $100,000.





(D)
            Amount
                due pursuant to the confirmed Plan of Reorganization was paid off
                in July
                2004 from the Tobacco Settlement Funds
                distribution.





(E)
            Amount
                due pursuant to the confirmed Plan of Reorganization is payable in
                72
                equal monthly installments of principal and interest (5% per annum),
                in
                the amount of $17,313. Initial payment was due August 2004, and will
                mature in 2010.





(F)
            Amount
                due pursuant to the confirmed Plan of Reorganization secured claim
                of
                $3,019,633, represents all claims, including administrative wage
                tax
                claims, of the City of Philadelphia through the effective date, except
                for
                real estate taxes. This claim is segregated into two separate payment
                terms. $2,100,000 of this amount is payable in 120 equal monthly
                installments of principal and interest (7% per annum), in the amount
                of
                $24,383. Initial payment was due August 2004, and will mature in
                2014. See
                (G) below for the terms of the balance of this
                claim.





(G)
            Amount
                due pursuant to the confirmed Plan of Reorganization secured claim
                of
                $3,019,633, represents the balance due on note (F) of $919,633. The
                balance is payable during the final 48 months of the payment schedule
                from
                (F) above, in monthly installments of principal and interest (7%
                per
                annum), in the amount of $22,022. Initial payment is due August 2010,
                and
                will mature in 2014.





(H)
            Amount
                due pursuant to the confirmed Plan of Reorganization represents penalty
                and interest on unpaid payroll taxes. The balance is payable in 72
                equal
                monthly installments of principal and interest (7% per annum), in
                the
                amount of $3,147. Initial payment was due August 2004, and will mature
                in
                2010.





(I)
            Amount
                due pursuant to the confirmed Plan of Reorganization is payable in
                72
                equal monthly installments of principal and interest (7% per annum),
                in
                the amount of $4,253. Initial payment was due August 2004, and will
                mature
                2010.





(J)
            Amount
                due pursuant to the confirmed Plan of Reorganization is payable in
                72
                equal monthly installments of principal and interest (7% per annum),
                in
                the amount of $7,293. Initial payment was due August 2004, and will
                mature
                2010.





(K)
            Amount
                due pursuant to the confirmed Plan of Reorganization is payable in
                72
                equal monthly installments of principal and interest (7% per annum),
                in
                the amount of $1,251. Initial payment was due August 2004, and will
                mature
                2010.





F-18


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      12  PAYROLL
      TAXES PAYABLE - BANKRUPTCY (continued)





(L)
            Amount
                due pursuant to the confirmed Plan of Reorganization priority claim
                of
                $162,083, less $72,914 paid in May 2004, is payable in 72 equal monthly
                installments of principal and interest (7% per annum), in the amount
                of
                $2,763. Initial payment was due August 2004, and will mature 2010.
                Amount
                was paid off in April 2005.





Below
      is
      a summary of the annual maturities of the payroll taxes payable as of June
      30,
      2005 and 2004, per the confirmed Plan of Reorganization:


Years
                  ending June 30,
              
              **2005**
              
              **2004**2005
              
              
              
              
              $
              3,126,2562006
              
              $
              1,216,863
              
              
              829,0242007
              
              
              367,921
              
              
              367,9212008
              
              
              386,790
              
              
              386,7902009
              
              
              410,908
              
              
              410,9082010
              
              
              436,571
              
              
              436,571Therafter
              
              
              2,154,143
              
              
              2,154,142$
              4,973,196
              
              $
              7,711,612




NOTE
      13  DUE
      TO
      MEDICARE





The
      Company is required to file a “Hospital and Hospital Health Care Complex Cost
      Report Certification and Settlement Summary” (cost report) with Medicare
      annually. The cost report reconciles allowable reimbursable expenditures to
      actual reimbursements from Medicare. If the Company was underreimbursed during
      the period, additional reimbursements would be made by Medicare. Conversely,
      if
      the Company had been overreimbursed, during the period, the overreimbursement
      would be required to be repaid with the annual filing of the cost
      report.





A
      proof
      of claim was submitted by Medicare, reconciling the amounts due at confirmation
      of the Plan, and waiving interest for the period during bankruptcy. Final cost
      reports have been submitted and credit has been applied to the outstanding
      balance due. In August 2005, all cost reports through 2003 were settled with
      amounts due to the Company used to completely repay 1999 and prior liabilities
      due to the Medicare Program.





NOTE
      14  INCOME
      TAXES





The
      Company is delinquent in filing its federal and state income tax returns with
      the last tax returns filed being for the year ended December 31, 2000.
      Management estimates that the Company has federal and state net operating loss
      carryforwards in excess of **$** 25,000,000
      at June 30, 2005, 2004 and 2003, expiring through 2020. In addition, there
      is
      approximately $11,600,000 in temporary timing differences between book and
      tax
      basis income and deductions at June 30, 2005, 2004 and 2003. SFAS No. 109
      requires the establishment of a deferred tax asset for all deductible temporary
      differences and operating loss carryforwards. Because of the uncertainty that
      the Company more likely than not will not generate income in the future
      sufficient to fully or partially utilize these carryforwards, the estimated
      deferred net tax asset of approximately $14,640,000 at June 30, 2005, 2004
      and
      2003, is offset by a valuation allowance of the same amount. Accordingly, no
      deferred tax asset is reflected in these consolidated financial statements.
      Certain amounts of the net operating loss carryforwards may be limited due
      to
      possible changes in the Company’s stock ownership. No provision for income taxes
      was made for the years ended June 30, 2005 and 2004 in as much as the net
      operating loss carryforwards exceeded the taxable income.











F-19


**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**





NOTE
      14  INCOME
      TAXES (continued)





The
      provision (benefit) for income taxes is composed of the following
      components:


Years
                    ended June 30,
                
                **2005**
                
                **2004**Current
                    payable (benefit)Federal
                
                $
                79,000
                
                $
                (99,500
                )State
                
                
                26,000
                
                
                (32,500
                )105,000
                
                
                (132,000
                )Deferred
                    tax provision (benefit)Federal
                
                
                (79,000
                )
                
                99,500State
                
                
                (26,000
                )
                
                32,500(105,000
                )
                
                132,000Provision
                    (benefit) for income taxes
                
                $
                -
                
                $
                -




A
      reconciliation of taxes computed at statutory income tax rates on income is
      as
      follows:


Years
                    ended June 30,
                
                **2005**
                
                **2004**Provision
                    (benefit) for federal income taxes at statutory rates
                
                $
                79,000
                
                $
                (99,500
                )Provision
                    (benefit) for state income taxes at statutory rates, net of federal
                    benefit
                
                
                26,000
                
                
                (32,500
                )Valuation
                    allowance changes affecting the provision (benefit) for income
                    taxes
                
                
                (105,000
                )
                
                132,000Provision
                    (benefit) for income taxes
                
                $
                -
                
                $
                -





The
      net
      deferred tax assets and liabilities, at the respective income tax rates, are
      as
      follows:


June
                  30,
              
              **2005**
              
              **2004**
              
              **2003**Current
                  deferred assets:Allowance
                  for doubtful accounts
              
              $
              3,400,000
              
              $
              2,980,000
              
              $
              2,665,000Accrued
                  liabilities
              
              
              1,405,000
              
              
              1,519,000
              
              
              943,0004,805,000
              
              
              4,499,000
              
              
              3,608,000Less
                  valuation allowance
              
              
              (4,624,000
              )
              
              (4,375,000
              )
              
              (3,458,000
              )181,000
              
              
              124,000
              
              
              150,000Current
                  deferred liabilities:Prepaid
                  expenses
              
              
              (181,000
              )
              
              (124,000
              )
              
              (150,000
              )$
              -
              
              $
              -
              
              $
              -Noncurrent
                  deferred assets:Net
                  operating loss carryforwards
              
              $
              10,000,000
              
              $
              10,130,500
              
              $
              10,544,000Deferred
                  lease costs
              
              
              100,000
              
              
              110,000
              
              
              120,00010,100,000
              
              
              10,240,500
              
              
              10,664,000Less
                  valuation allowance
              
              
              (10,033,000
              )
              
              (10,188,500
              )
              
              (10,481,000
              )67,000
              
              
              52,000
              
              
              183,000Noncurrent
                  deferred tax liabilities:Other
                  noncurrent assets
              
              
              (67,000
              )
              
              (52,000
              )
              
              (183,000
              )$
              -
              
              $
              -
              
              $
              -





F-20


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      15  STOCK
      OPTIONS AND WARRANTS





The
      Company has elected to adopt SFAS No. 123(R), “Share-Based Payment,” issued by
      the FASB in December 2004, which revised SFAS No. 123, “Accounting for
      Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for
      Stock Issued to Employees.” This statement requires all share-based payments to
      employees be recognized in the statement of operations based on their fair
      values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) is
      effective for all Companies effective January 1, 2006.





The
      Company recognizes compensation cost beginning with the effective date (a)
      for
      all share-based payments granted after the effective date and (b) based on
      the
      requirements of SFAS No. 123 for all awards granted to employees prior to the
      effective date of SFAS No. 123(R) that remained unvested on the effective date.
      The Company had no unvested awards granted to employees on the effective date.





Options
      for 80,000 common stock shares were granted during the year ended June 30,
      2005.
      In the year ended June 30, 2004, options for 293,332 common stock shares were
      granted, options for 884,998 common stock shares were exercised and options
      for
      1,162,772 common stock shares expired, unexercised.





The
      fair
      value for these options was estimated at the date of the grant using a
      Black-Scholes option pricing model with the following weighted-average
      assumptions:


**June
                  30,****2005**
              
              **2004**Expected
                  volatility
              
              
              1.00%
              
              
              1.00%Expected
                  dividend yield
              
              
              0%
              
              
              0%Expected
                  life (term)
              
              
              5
                  years
              
              
              5
                  yearsRisk
                  Free Interest Rate
              
              
              3.63%
              
              
              3.28%




The
      Black-Scholes option valuation model was developed for use in estimating the
      fair value of traded options which have no vesting restrictions and are fully
      transferable. In addition, option valuation models require the input of highly
      subjective assumptions, including the expected stock price volatility. Because
      the Company’s employee stock options have characteristics significantly
      different from those of traded options, and because changes in the subjective
      input assumptions can materially affect the fair value estimate, in management’s
      opinion, the existing models do not necessarily provide a reliable single
      measure of the fair value of its employee stock options.





The
      weighted-average fair value of options granted (at their grant date) during
      the
      year ended June 30, 2005 and 2004, was $0.10 and $0.04, respectively. The
      market price of common stock at the dates the options were granted in the years
      ended June 30, 2005 and 2004 were $0.09 and $0.04 per share, respectively.
      Consequently, no compensation expense was recognized.





F-21


**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**


NOTE
      15  STOCK
      OPTIONS AND WARRANTS (continued)





In
      July
      1996, the Company’s Board of Directors and Stockholders approved and adopted the
      Company’s 1996 Stock Plan (the “Plan”). The Plan, as amended in October 1998,
      provides for the granting of options to purchase up to 3,000,000 shares of
      common stock, at a price per share as shall be determined by the Company’s Board
      of Directors from time to time. The Plan provides for the granting of options
      that do not qualify under Section 422 of the Code. Therefore, the Company will
      recognize compensation expense for all options issued at less than fair market
      value on the date of grant equal to the difference between fair market value
      on
      the date of grant less the option exercise price multiplied by the number of
      options granted. No option may have a term longer than five years. Options
      under
      the Plan are nontransferable, except in the event of death and are only
      exercisable by the holder while employed by the Company or until such time
      as
      determined by the Board of Directors at its sole discretion. The Plan was
      extended through January 7, 2008, and the maximum number of common shares was
      increased to 5,000,000.





The
      options issued under the Plan were fully vested at the grant date.





A
      summary
      of the Company’s stock options activity and related information for the years
      ended June 30, 2005 and 2004, follows:


Number
                  of
                Common
                  Shares
              
              Weighted
                Average
                Exercise
                  PriceOutstanding,
                  June 30, 2003
              
              
              1,754,438
              
              $
              0.69Granted
              
              
              293,332
              
              $
              0.10Canceled
              
              
              (1,162,772
              )
              $
              0.99Exercised
              
              
              (884,998
              )
              $
              0.10Outstanding
                  June 30, 2004
              
              
              -
              
              
              -Granted
              
              
              80,000
              
              $
              0.10Canceled
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Outstanding
                  June 30, 2005
              
              
              80,000
              
              $
              0.10





As
      of
      June 30, 2005, 2004 and 2003, exercisable stock options totaled 80,000, -0-
      and
      1,754,438 and had weighted-average exercise prices of $ 0.10, $-0- and $0.69,
      respectively.





Options
      outstanding and exercisable as of June 30, 2005, were as follows:


Range
                  of
                Exercise
                Prices
              
              Number
                Outstanding
              
              Weighted
                Average
                Remaining
                Contractual
                Life
              
              Weighted
                Average
                Exercise
                Price$0.10
              
              80,000
              
              4.5
                  Years
              
              $0.10








F-22


**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**


NOTE
      15  STOCK
      OPTIONS AND WARRANTS (continued)





A
      summary
      of the Company’s warrants activity and related information for the years ended
      June 30, 2005 and 2004, follows:


ExerciseNumber
              
              Priceof
              
              RangeCommon
              
              PerShares
              
              ShareOutstanding,
                  June 30, 2003
              
              
              3,296,622
              
              
              $0.50-$3.00Granted
              
              
              -
              
              
              -Canceled
              
              
              (950,000
              )
              
              $0.50-$3.00Outstanding,
                  June 30, 2004
              
              
              2,346,622
              
              
              $0.50-$3.00Granted
              
              
              -
              
              
              -Canceled
              
              
              (1,288,619
              )
              
              $0.50-$1.50Outstanding,
                  June 30, 2005
              
              
              1,058,003
              
              
              $1.00-$3.00





The
      Company has historically issued warrants in connection with the issuance of
      debt, extension of debt maturity dates, payment of past due interest or
      principal on debt and payments to service providers for services. The Company
      recorded the charge associated with these warrants in the year of their
      issuance.





NOTE
      16  RELATED
      PARTY TRANSACTIONS





Thomas
      T. Fleming





Thomas
      T.
      Fleming, Chairman of the Board of Directors and Chief Executive Officer of
      the
      Company, has advanced funds to the Company in the form of direct advances or
      payments to vendors on behalf of the Company and deferred compensation. A
      substantial portion of these advances consisted of borrowings from various
      financial institutions. These amounts were advanced to the Company under the
      same terms obtained by Mr. Fleming from the financial institutions. Net
      advances made to the Company by Mr. Fleming were $142,413 and $56,341 for
      the years ended June 30, 2005 and 2004, respectively. Additionally, net
      repayments to Mr. Fleming or to financial institutions on his behalf for
      funds previously loaned to the Company were $158,845 during the year ended
      June
      30, 2003 (See Note 10).





In
      March
      1999, the Company assumed financial responsibility for one of these loans in
      the
      amount of approximately $731,000. This loan continues to be secured by the
      personal assets of Mr. Fleming.





Mr.
      Fleming is the guarantor of various financial obligations of the Company,
      including the amount assumed by the Company noted above. To induce the extension
      of the first mortgage loan, Mr. Fleming guaranteed these liabilities should
      the
      Company seek bankruptcy. The May 2002, bankruptcy filing triggered Mr. Fleming’s
      personal guarantee of the first mortgage loan now held by Kirkbride Holdings,
      LLC.





Fleming
      Family Trust





The
      Fleming Family Trust, controlled by the wife of the Chairman of the Board of
      Directors, has guaranteed certain obligations of the Company with various
      financial institutions by either granting a security interest in personal assets
      controlled by the Fleming Family Trust or by pledging letters of credit for
      the
      benefit of certain creditors. One such credit facility was increased by $300,000
      during 2000 (see Note 8). On June 4, 2003, the Trust paid off a Company
      loan with another financial institution. The Company then executed a Promissory
      Note for $1,379,000 to the Trust (See Note 7).


F-23


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**





NOTE
      16
      RELATED PARTY TRANSACTIONS (CONTINUED)





Rose
      S. DiOttavio





Rose
      S.
      DiOttavio, President and Chief Operating Officer, has advanced funds to the
      Company in the form of direct advances or payments to vendors and deferred
      compensation. Net repayments to Ms. DiOttavio or to financial institutions
      for
      her benefit for funds previously loaned to the Company were $14,170 during
      the
      year ended June 30, 2004. Additionally, net outstanding advances made to the
      Company by Ms. DiOttavio were $258,413 and $192,746 for the years ended
      June 30, 2005 and 2004, respectively (See Note 10).





Ms.
      DiOttavio is also a guarantor of various financial obligations of the Company.
      To induce extension of certain debt, Ms. DiOttavio guaranteed these
      liabilities should the Company seek bankruptcy. The May 2002, bankruptcy filing
      triggered Ms DiOttavio’s personal guarantee of the first mortgage loan now held
      by Kirkbride Holdings, LLC.





Mentor
      Special Situation Fund, L.P. (“Mentor”)





A
      Principal of Mentor, who serves as a member of the Company’s Board of Directors,
      was issued 113,750 shares of common stock concurrent with the January 2005,
      extension of the note payable to Mentor. He held a total of 318,750 and 205,000
      shares of common stock as of June 30, 2005 and 2004, respectively (See Note
      8).





Stock
      Subscriptions Receivable





In
      June,
      2004, certain members of the Board of Directors and officers collectively
      exercised options for the purchase of 884,998 shares of common stock at $0.10
      per share. The Company received promissory notes totaling $88,500 in exchange
      for the shares. In December, 2006, the notes were satisfied through cash payment
      or, in the case of the officers, offset against their advances to the
      Company.




NOTE
      17  SEGMENT
      INFORMATION





The
      Company’s continuing operations are classified into three principal reportable
      segments that provide different services. Those segments are CCBHM, WMI and
      KRC.





CCBHM
      derives its revenue from providing inpatient psychiatric and drug and alcohol
      rehabilitation services. WMI derives its revenue from the operation of an
      adolescent residential treatment facility. KRC derives its revenue from leasing
      office space to unaffiliated tenants.





F-24


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      17  SEGMENT
      INFORMATION (continued)





Selected
      financial information for the years ended June 30, 2005 and 2004, is presented
      as follows:


**Year
                  Ended June 30, 2005**
              
              **CCBHM**
              
              **WMI**
              
              **KRC**
              
              **All
                  Others**
              
              **Total**External
                  Revenue
              
              $
              20,089,379
              
              $
              1,526,711
              
              $
              1,254,941
              
              $
              535,612
              
              $
              23,406,643Intersegment
                  revenue
              
              
              -
              
              
              -
              
              
              2,162,617
              
              
              718,097
              
              
              2,880,714Interest
                  Expense
              
              
              575,753
              
              
              70,227
              
              
              1,825,215
              
              
              685,779
              
              
              3,156,974Depreciation
                  and amortization
              
              
              -
              
              
              3,708
              
              
              327,043
              
              
              852
              
              
              331,603Income
                  (loss) before discontinuedoperations
              
              
              4,622,405
              
              
              53,104
              
              
              (4,384,777
              )
              
              (213,041
              )
              
              77,691Assets
              
              
              2,860,285
              
              
              (5,260
              )
              
              9,831,009
              
              
              11,336
              
              
              12,697,370Expenditures
                  for long-lived assets
              
              
              321,323
              
              
              9,173
              
              
              503,844
              
              
              -
              
              
              834,340**Year
                  Ended June 30, 2004**
              
              
              **CCBHM**
              
              
              **WMI**
              
              
              **KRC**
              
              
              **All
                  Others**
              
              
              **Total**External
                  Revenue
              
              $
              18,156,838
              
              $
              2,646,423
              
              $
              -
              
              $
              412,786
              
              $
              21,216,047Intersegment
                  revenue
              
              
              440,100
              
              
              -
              
              
              -
              
              
              327,960
              
              
              768,060Interest
                  Expense
              
              
              2,025,186
              
              
              121,123
              
              
              -
              
              
              843,579
              
              
              2,989,888Depreciation
                  and amortization
              
              
              429,426
              
              
              3,618
              
              
              -
              
              
              13,057
              
              
              446,101Income
                  (loss) before discontinuedoperations
              
              
              (823,479
              )
              
              995,823
              
              
              -
              
              
              (603,566
              )
              
              (431,222
              )Assets
              
              
              14,507,123
              
              
              274,795
              
              
              -
              
              
              148,401
              
              
              14,930,319Expenditures
                  for long-lived assets
              
              
              564,195
              
              
              -
              
              
              -
              
              
              -
              
              
              564,195





Following
      are reconciliations to corresponding totals in the accompanying financial
      statements:


**Revenues**
              
              **2005**
              
              **2004**Total
                  for reportable segments
              
              $
              25,033,648
              
              $
              21,243,361All
                  other segments
              
              
              1,253,709
              
              
              740,746Intersegment
                  revenue
              
              
              (2,880,714
              )
              
              (768,060
              )Total
              
              $
              23,406,643
              
              $
              21,216,047**Income
                  (loss) before discontinued operations**
              
              
              **2005**
              
              
              **2004**Total
                  for reportable segments
              
              $
              90,732
              
              $
              172,344All
                  other segments
              
              
              (130,447
              )
              
              (300,051
              )Corporate
                  operating expenses
              
              
              (82,594
              )
              
              (303,515
              )Income
                  (loss) before discontinued operations
              
              $
              77,691
              
              $
              (431,222
              )





Net
      patient services revenue during the year ended June 30, 2005, generated from
      one
      source of CCBHM and WMI totaled $15,192,478 of the $20,396,957 total
      consolidated net patient services revenue. During the year ended June 30, 2004,
      net patient services revenue from the same source totaled $14,995,930 of the
      $18,419,464 total consolidated net patient services revenue.




F-25


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**




NOTE
      18  RENTAL
      INCOME





The
      Company is a lessor of office space and recognizes rental income when earned.
      Commitments for minimum rental income under noncancelable leases at
      June 30, 2005, are as follows:


Years
                  ending June 30,
              
              **2005**2006
              
              $
              1,988,5862007
              
              
              1,025,8812008
              
              
              658,8972009
              
              
              24,000Total
                  minimum lease rental income
              
              $
              3,697,364





NOTE
      19  COMMITMENTS
      AND CONTINGENCIES





Litigation





The
      Company is subject to claims and lawsuits in the ordinary course of business,
      including those arising from care and treatment afforded at the Company’s
      hospital and is party to various other litigation. However, management believes
      the ultimate resolution of these pending proceedings will not have a material
      adverse effect on the Company.





The
      Company is subject to numerous lawsuits from creditors for amounts due for
      services rendered and products delivered. The Company has accrued the amount
      of
      these claims on its consolidated financial statements as necessary.








NOTE
      20  NET
      PATIENT SERVICES REVENUE





Net
      patient services revenue for the years ended June 30, 2005 and 2004
      consists of the following:


Year
                  ended June 30,
              
              **2005**
              
              **2004**Patient
                  services revenue
              
              $
              74,745,007
              
              $
              64,670,902Less:
                  contractual adjustments
              
              
              54,348,050
              
              
              46,251,438Net
                  patient services revenue
              
              $
              20,396,957
              
              $
              18,419,464





Concentration
      of net patient services revenue by payor:


Year
                  ended June 30,
              
              **2005**
              
              **2004**Community
                  Behavioral Health
              
              $
              15,192,478
              
              $
              14,995,930Medicare
              
              
              1,428,173
              
              
              318,420Commonwealth
                  of Pennsylvania
              
              
              1,697,661
              
              
              1,058,884All
                  others
              
              
              2,078,645
              
              
              2,046,230$
              20,396,957
              
              $
              18,419,464








F-26




**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**




NOTE
      21  CAPITAL
      STRUCTURE





Authorized
      Shares





The
      Company’s authorized capital stock consists of 50,000,000 shares of Common
      Stock, par value $.001 per share and 5,000,000 shares of Preferred Stock, par
      value $.001 per share, as to which the Board has the power to designate the
      rights, terms, preferences, privileges, and ratify powers, if any, and the
      restrictions and qualifications of the share of each series as established.
      Of
      the 5,000,000 shares of Preferred Stock, 10,000 shares have been designated
      as
      Series A Preferred Stock, 7,000 shares have been designated as Series B
      Convertible Preferred Stock, 25,000 shares have been designated as Series C
      Convertible Preferred Stock, 15,000 shares have been designated as Series D
      Preferred Stock, 13,250 shares have been designated as Series E Convertible
      Preferred Stock, 6,000 shares have been designated as Series F Convertible
      Preferred Stock and 1,000,000 shares have been designated as Series G
      Convertible Preferred Stock. The remaining authorized shares are
      undesignated.





Common
      Stock





The
      Company is authorized to issue 50,000,000 shares of Common Stock, $.001 par
      value per share. As of June 30, 2005, 2004 and 2003, 20,535,941, 19,260,941
      and
      18,320,943 shares, respectively, were issued and outstanding. Holders of Common
      Stock are entitled to one vote for each share of Common Stock owned of record
      on
      all matters to be voted on by stockholders, including the election of directors.
      The holders of Common Stock are entitled to receive such dividends, if any,
      as
      may be declared from time to time by the Board of Directors, in its discretion,
      from funds legally available.





The
      rights of holders of Common Stock to receive dividends are subject to the
      dividend rights of the holders of Preferred Stock, as described below.
      Similarly, the rights of holders of Common Stock, upon liquidation or
      dissolution of the Company, are subject to the preferences afforded to holders
      of the Company’s Preferred Stock.





The
      Common Stock has no preemptive or other subscription rights, no cumulative
      voting rights, and there are no conversion rights or redemption provisions.
      All
      outstanding shares of Common Stock, with the exception of the common stock
      shares subscribed, are validly issued, fully paid, and nonassessable. In June,
      2004, certain members of the Board of Directors collectively exercised options
      for the purchase of 884,998 shares of common stock at $0.10 per share. The
      Company received promissory notes totaling $88,500 in exchange for the shares.
      In December, 2006, the notes were satisfied through cash payment or, in the
      case
      of the officers, offset against their advances to the Company.





Preferred
      Stock





Holders
      of Preferred Stock vote as a class with holders of Common Stock, except that
      without the vote or consent of the holders of at least 67% of each respective
      series of the Preferred Stock then outstanding, the Company may not (i) create
      or issue any class or series of capital stock ranking, either as to payment
      of
      dividends, distribution of assets or redemptions prior to such series of
      Preferred Stock, (ii) alter or change the designations, powers, preferences,
      or
      rights, or the qualifications, limitations or restrictions of such series of
      Preferred Stock.





Holders
      of all classes and series of Preferred Stock are entitled to vote in the
      election of directors and on all other matters submitted to stockholders for
      their approval or consent. None of the Preferred Stock has any cumulative voting
      rights. The number of votes is equal to the number of shares of Common Stock
      into which their Preferred Stock is convertible, at the time of the meeting
      at
      which the vote is cast or, in the case of an action of stockholders taken
      without a formal meeting, on the date of such action, except that each Preferred
      A and D shares, which have no conversion rights, are entitled to 65 and 50
      votes, respectively, per share. Stockholders owning Series G Preferred are
      entitled to 2 votes per share.




Through
      June 30, 2005, the Company had not declared dividends on any class of Preferred
      Stock.





F-27


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      21  CAPITAL
      STRUCTURE (continued)





The
      table
      below reflects a summary of the authorized, issued and outstanding shares of
      Preferred Stock as of June 30, 2005, 2004 and 2003, respectively:


**Series**
              
              **Authorized**
                **Shares**
              
              **Issued
                  and Outstanding**
                **Shares**
              
              **Total
                  at**
                **Par
                  Value**A
              
              
              10,000
              
              
              6,000.00
              
              $
              6B
              
              
              7,000
              
              
              -
              
              
              -C
              
              
              25,000
              
              
              8,147.30
              
              
              8D
              
              
              15,000
              
              
              -
              
              
              -E
              
              
              13,250
              
              
              -
              
              
              -F
              
              
              6,000
              
              
              2,870.60
              
              
              3G
              
              
              1,000,000
              
              
              -
              
              
              -Undesignated
              
              
              3,923,750
              
              
              -
              
              
              -Total
              
              
              5,000,000
              
              
              17,017.90
              
              $
              17





Series
      A Preferred Stock





The
      Company has authorized 10,000 shares of Series A Preferred Stock, $.001 par
      value per share, of which 6,000 shares are issued and outstanding as of June
      30,
      2005, 2004 and 2003. The Company’s Series A Preferred Stock has a liquidation
      value of $100.00 per share ($600,000 in the aggregate) in liquidation of the
      Company; a preference over Common Stock to the extent of its liquidation value;
      and is entitled to annual dividends in the amount of $4.00 per share (i.e.,
      an
      annual rate of four (4%) percent) payable semiannually in arrears unless and
      until a “Dividend Reset Event” occurs. After a Dividend Reset Event, the annual
      dividend rate on Series A Preferred will be increased from four (4%) percent
      to
      a rate equal to the “prime rate” as published in “The
      Wall Street Journal” as of
      the last business day preceding the Dividend Reset Event plus six (6%) percent.
      The Series A Preferred is redeemable by the Company at its option, at
      liquidation value, in whole or in part, at any time after a Dividend Reset
      Event, upon not less than thirty (30) days’ written notice.





The
      term
“Dividend Reset Event” is defined to mean either: (a) a public offering of
      equity securities by the Company or any corporation which owns 50% or more
      of
      all classes of the Company’s Common Stock then outstanding (hereinafter, a
“Parent of the Company”) which results in the Company’s receipt (or receipt by
      the Parent of the Company) of not less than $5,000,000 net of offering
      underwriting discounts and commissions; or, (b) either the Company and/or the
      Parent of the Company, on a consolidated basis, having as of any fiscal year
      end, stockholders’ equity of $12,000,000 or more.





The
      Company has the right to redeem the Series A Preferred Stock after the Dividend
      Reset Date and upon not less than 30 days’ notice at $100.00 per share plus
      accrued dividends.





F-28


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      21  CAPITAL
      STRUCTURE (continued)





Series
      B Convertible Preferred Stock





The
      Company has authorized 7,000 shares of Series B Convertible Preferred Stock,
      $.001 par value per share. There were no shares of Series B Preferred issued
      or
      outstanding as of June 30, 2005, 2004 and 2003.





Holders
      of Series B Preferred are entitled to receive annual dividends equal to the
      dividends payable on Series A Preferred Stock, and to convert shares of Series
      B
      Preferred into Common Stock on the basis of 92 shares of Common Stock per share
      of Series B Preferred Stock. Conversion features will be adjusted in the event
      of any stock splits, dividends on Common Stock payable in Common Stock or
      similar events. Series B Preferred Stock has a liquidation value of $100.00
      per
      share in liquidation of the Company.





The
      Company has the right to redeem the Series B shares at $100 per share plus
      accrued dividends upon not less than thirty (30) days’ written
      notice.





Series
      C Convertible Preferred Stock





The
      Company has authorized 25,000 shares of Series C Convertible Preferred Stock,
      $.001 par value per share, of which 8,147.3 shares are issued and outstanding
      as
      of June 30, 2005, 2004 and 2003. Holders of shares of Series C Convertible
      Preferred Stock (the “Series C Preferred”) are entitled to annual dividends of
      $6.00 per share, payable semiannually.





Each
      share of Series C Preferred is convertible at the option of its holder into
      66.67 shares of Common Stock. Conversion features will be adjusted in the event
      of any stock splits, dividends on Common Stock payable in Common Stock or
      similar events. Series C Preferred Stock has a liquidation value of $100.00
      per
      share plus accrued dividends in liquidation of the Company and is senior in
      rank
      to all other stock of the Company except for Preferred Series E which shares
      the
      same rank, and for Preferred Series G which is superior in rank.





The
      Company has the right to redeem the Series C Shares at $100.00 per share plus
      accrued dividends upon not less than thirty (30) days’ written
      notice.





Series
      D Preferred Stock





The
      Company’s Board of Directors has designated 15,000 shares of its Preferred Stock
      as Series D Preferred Stock, $.001 par value per share, of which no shares
      are
      issued and outstanding as of June 30, 2005, 2004 and 2003. Holders of shares
      of
      Series D Preferred Stock (the “Series D Preferred”) are entitled to annual
      dividends of $6.00 per share, payable semiannually. Series D Preferred Stock
      has
      a liquidation value of $100.00 per share in liquidation of the Company and
      is
      equal in rank to the Series A Preferred.





The
      Company has the right to redeem the Series D shares at $100.00 per share plus
      accrued dividends upon not less than thirty (30) days’ written
      notice.





Series
      E Convertible Preferred Stock





The
      Company’s Board of Directors has designated 13,250 shares of its Preferred Stock
      as Series E Preferred Stock, $.001 par value per share, of which no shares
      are
      issued and outstanding as of June 30, 2005, 2004 and 2003. Holders of shares
      of
      Series E Preferred Stock (the “Series E Preferred”) are entitled to annual
      dividends of $6.00 per share, payable semiannually. Prior to the Series E
      Redemption date, each share of Series E Preferred is convertible at the option
      of its holder into 100 shares of Common Stock. Conversion features will be
      adjusted in the event of any stock splits, dividends on Common Stock payable
      in
      Common Stock or similar events. Series E Preferred Stock has a liquidation
      value
      of $100.00 per share in liquidation of the Company, and is senior in rank to
      all
      stock of the Company except for Series C which shares the same rank, and for
      Preferred Series G, which is superior in rank.







F-29


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      21  CAPITAL
      STRUCTURE (continued)





Series
      F Convertible Preferred Stock





The
      Company’s Board of Directors has designated 6,000 shares of its Preferred Stock
      as Series F Convertible Stock, $.001 par value per share, of which 2,870.6
      shares were issued and outstanding as of June 30, 2005, 2004 and 2003. Holders
      of shares of Series F Convertible Stock (the “Series F Preferred”) are entitled
      to annual dividends of $6.00 per share, payable semiannually.





Each
      share of Series F Preferred is convertible at the option of its holder into
      50
      shares of Common Stock. Conversion features will be adjusted in the event of
      any
      stock splits, dividends on Common Stock payable in Common Stock or similar
      events. Series F Preferred has a liquidation value of $100.00 per share in
      liquidation of the Company, and is equal in rank to Series A
      Preferred.





The
      Company has the right to redeem the Series F shares upon not less than thirty
      (30) days written notice at $100.00 per share plus accrued
      dividends.





Series
      G Convertible Preferred Stock





The
      Company’s Board of Directors has designated 1,000,000 shares of its Preferred
      Stock as Series G Convertible Preferred Stock, $.001 par value per share, of
      which no shares are issued and outstanding as of June 30, 2005, 2004 and 2003.
      Holders of shares of Series G Convertible Preferred Stock (the “Series G
      Preferred”) are entitled to annual dividends of $.18 per share, payable
      semiannually.





Each
      share of Series G Preferred is convertible at the option of its holder into
      2
      shares of common stock. Conversion features will be adjusted in the event of
      any
      stock splits, dividends on common stock payable in common stock or similar
      events. Series G Preferred has a liquidation value of $2.20 per share in
      liquidation of the Company and is senior in rank to all other stock of the
      Company.





The
      Company has the right to redeem the Series G shares at $2.20 per share plus
      accrued dividends upon not less than thirty (30) days’ written
      notice.





NOTE
      22  DISCONTINUED
      OPERATIONS





In
      August
      2006, the Company entered into a three (3) year clinical research service
      agreement with CRI Worldwide (CRI WW) whereby the Company agreed to provide
      up
      to 24 inpatient psychiatric beds for CRI WW‘s clinical research studies at a set
      rate per patient day plus a one time fee of $120,000 payable over ten (10)
      months. In addition, the Company agreed to assign the space lease of its
      wholly-owned subsidiary, Quantum to CRI WW. Concurrent with this agreement,
      Quantum ceased operations.





Transactions
      related to Quantum have been reflected in discontinued operations for all
      periods presented. Revenues and income from discontinued operations were as
      follows:


Year
                  ended June 30,
              
              **2005**
              
              **2004**Revenues
              
              $
              369,161
              
              $
              250,337Operating
                  Expenses
              
              
              187,230
              
              
              145,496Income
                  from discontinued operationsbefore
                  income tax expense
              
              
              181,931
              
              
              104,841Income
                  tax expense
              
              
              -
              
              
              -Net
                  income from discontinued operations
              
              $
              181,931
              
              $
              104,841





F-30


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      23  EXTRAORDINARY
      GAIN ON THE FORGIVENESS OF DEBT





During
      the fiscal year ended June 30, 2005, the Company was granted forgiveness of
      debt
      by two of its creditors. The extraordinary gain on the forgiveness of debt
      related to interest expense on these debts. The Company aggressively sought
      relief from the Internal Revenue Service through an attorney for interest
      charges while in bankruptcy. The Internal Revenue Service agreed with the
      Company and notified the Company that approximately $1,100,000 of interest
      owing
      on payroll taxes had been forgiven. The Company incurred approximately $300,000
      in attorney fees in the matter. Additionally, the Company negotiated a reduction
      in interest owing of approximately $340,000 to a note holder.





NOTE
      24  DISCLOSURES
      OF CASH FLOWS INFORMATION


YEARS
                ENDED JUNE 30,
              
              2005
              
              2004SUPPLEMENTARY DISCLOSURES
                  OF CASH FLOWS INFORMATIONCash
                  paid during the year forInterest
              
              $
              2,876,458
              
              $
              2,536,710NONCASH
                  INVESTING AND FINANCING ACTIVITIESCommon
                  stock issued for compensation for services provided
              
              $
              (100
              )
              $
              (55
              )Additional
                  Paid-in Capital
              
              
              (5,900
              )
              
              (2,145
              )Compensation
                  expense
              
              
              6,000
              
              
              2,200Common
                  stock issued in conjunction with exercise of options
              
              
              
              
              
              (885
              )Additional
                  Paid-in Capital
              
              
              
              
              
              (87,615
              )Subscriptions
                  receivable
              
              
              
              
              
              88,500Common
                  stock issued in lieu of interest on debt
              
              
              (1,175
              )Additional
                  Paid-in Capital
              
              
              (69,325
              )Interest
                  expense
              
              
              70,500Additional
                  Paid-in Capital
              
              
              
              
              
              330,000Other
                  assets
              
              
              
              
              
              (330,000
              )Additional
                  Paid-in Capital
              
              
              345,000Accrued
                  salaries and expenses
              
              
              (345,000
              )Additional
                  Paid-in Capital
              
              
              
              
              
              114,407Other
                  income
              
              
              
              
              
              (114,407
              )




NOTE
      25  NEW
      ACCOUNTING PRONOUNCEMENTS





In
      December 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue
      Recognition,” which updates and summarizes the Commission’s views on the
      application of generally accepted accounting principles to revenue recognition
      in financial statements. The Company believes that its revenue recognition
      policies conform to the requirements of Staff Accounting Bulletin No.
      104.





On
      March
      29, 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based
      Payment” (“SAB 107”). Although not altering any conclusions reached in SFAS No.
      123(R), SAB No. 107 provides the views of the SEC Staff regarding the
      interaction between SFAS No. 123(R) and certain SEC rules and regulations and,
      among other things, provides the Staff’s views regarding the valuation of
      share-based payment arrangements for public companies. The Company intends
      to
      follow the interpretative guidance on share-based payments set forth in SAB
      107
      during the Company’s adoption of SFAS No. 123(R).





F-31




**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**





NOTE
      25  NEW
      ACCOUNTING PRONOUNCEMENTS (continued)





In
      November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff position No. 45-3, “Application of FASB Interpretation No. 45 to Minimum
      Revenue Guarantees Granted to a Business or Its Owners” (FSP FIN 45-3). It
      served as an amendment to FASB Interpretation No. 45, “Guarantor’s Accounting
      and Disclosure requirements for Guarantees, Including Indirect Guarantees of
      Indebtedness of Others” (FIN 45) by adding minimum revenue guarantees to the
      list of examples of contracts to which FIN 45 applies. Under FSP FIN 45-3,
      guarantor is required to recognize, at the inception of a guarantee, a liability
      for the fair value of the obligation undertaken in issuing the guarantee. One
      example cited in FSP FIN 45-3 involves a guarantee provided by a health care
      entity to a non employed physician in order to recruit such physicians to move
      into the entity’s geographical area and establish a private practice. FSP FIN
      45-3 is effective for new minimum revenue guarantees issued or modified on
      or
      after January 1, 2006. The Company is in the process of evaluating the expected
      impact of the adoption of FSP FIN 45-3 on its financial statements.





In
      January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
      of
      Variable Interest Entities. FIN 46 clarifies the application of Accounting
      Research Bulletin 51, Consolidated Financial Statements, for certain entities
      that do not have sufficient equity at risk for the entity to finance its
      activities without additional subordinated financial support from other parties
      or in which equity investors do not have the characteristics of a controlling
      financial interest (“variable interest entities” or VIE’s). Variable interest
      entities within the scope of FIN 46 are required to be consolidated by their
      primary beneficiary. The primary beneficiary of a variable interest entity
      is
      determined to be the party that absorbs a majority of the entity’s expected
      losses, receives a majority of its expected returns, or both. FIN 46 applies
      immediately to variable interest entities created after January 31, 2003, and
      to
      variable interest entities in which an enterprise holds a variable interest
      that
      is acquired before February 1, 2003. The adoption of this statement did not
      have
      an impact on the Company’s financial position, results of operations, or cash
      flows since the Company currently has no VIE’s. In December 2003, the FASB
      issued FIN 46R with respect to VIE’s created before January 31, 2003, which,
      among other things, revised the implementation date to the first fiscal year
      or
      interim period ending after March 15, 2004, with the exception of special
      purpose entities. The consolidation requirements apply to all special purpose
      entities in the first fiscal year or interim period ending after December 15,
      2003. The Company adopted the provisions of FIN 46R effective July 1, 2004,
      and
      such adoption did not have a material impact on the financial statements since
      the Company currently has no special purpose entities.





In
      March
      2005, the FASB issued FASB Interpretation 47 (FIN 47), Accounting for
      Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143,
      “Accounting for Asset Retirement Obligations.” This interpretation clarifies
      that an entity is required to recognize a liability for the fair value of a
      conditional asset retirement obligation when incurred if the liability’s fair
      value can be reasonably estimated. The provisions of this pronouncement are
      effective for fiscal years ending after December 15, 2005. The Company adopted
      the provisions of FIN 47 effective July 1, 2004, and such adoption did not
      have
      a material impact on the financial statements since the Company currently has
      no
      conditional asset retirement obligations.





Conditional
      Asset Retirement Obligations, an interpretation of SFAS No. 143, “Accounting for
      Asset Retirement Obligations.” This interpretation clarifies that an entity is
      required to recognize a liability for the fair value of a conditional asset
      retirement obligation when incurred if the liability’s fair value can be
      reasonably estimated. The provisions of this pronouncement are effective for
      fiscal years ending after December 15, 2005. The Company adopted the provisions
      of FIN 47 effective July 1, 2004, and such adoption did not have a material
      impact on the financial statements since the Company currently has no
      conditional asset retirement obligations.





F-32


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      25  NEW
      ACCOUNTING PRONOUNCEMENTS (continued)





In
      June
      2006, the FASB issued FASB Interpretation 48 (FIN 48), Accounting for
      Uncertainty in Income Taxes - an interpretation of SFAS Statement No. 109,
      which
      clarifies the accounting for uncertainty in tax positions. This interpretation
      requires the Company to recognize in the financial statements the impact of
      a
      tax position if that position is more likely than not to be sustained based
      on
      the technical merits of the position. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. The provisions of FIN 48 are effective
      for
      fiscal years beginning after December 15, 2006, with the cumulative effect
      of
      the change in accounting principle recorded as an adjustment to opening retained
      earnings. The Company is currently evaluating the impact of adopting FIN 48
      on
      its financial statements.





In
      December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” an
      amendment of SFAS Statements No. 123 and No. 95. SFAS No. 123(R) replaces SFAS
      No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion
      No. 25, “Accounting for Stock Issued to Employees.” This statement requires
      companies to recognize the fair value of stock options and other stock - based
      compensation to employees effective as of the beginning of its next fiscal
      year
      that begins after June 15, 2005. The Company adopted early the requirement
      that
      the Company recognize compensation expense at the fair value of the stock
      option, when granted, in applying the provisions of SFAS No. 123(R) on July
      1,
      2003.





On
      May
      15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
      Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150).
      SFAS No. 150 establishes standards for how an issuer classifies and measures
      certain financial instruments with characteristics of both liabilities and
      equity. It requires that an issuer classify a financial instrument that is
      within its scope as a liability (or an asset in some circumstances). Many of
      those instruments were previously classified as equity. SFAS No. 150 affects
      the
      issuer’s accounting for three types of freestanding financial
      instruments:





·
            Mandatory
                redeemable shares, which the issuing company is obligated to buy
                back in
                exchange for cash or other assets.


·
            Instruments
                that do or may require the issuer to buy back some of its shares
                in
                exchange for cash or other assets, including put options and forward
                purchase contracts; and


·
            An
                obligation that can be settled with shares, the monetary value of
                which is
                fixed, tied solely or predominately to a variable such as a market
                index,
                or varies inversely with the value of the issuers’
                shares.





SFAS
      No.
      150 does not apply to features imbedded in a financial instrument that is not
      a
      derivative in its entirety. Most of the guidance in SFAS No. 150 is effective
      for all financial instruments entered into or modified after May 31, 2003,
      and
      otherwise is effective at the beginning of the first interim period beginning
      after June 15, 2003. The Company adopted the provisions of SFAS No. 150
      effective July 1, 2003, and such adoption did not have a material impact on
      the
      financial statements since the Company currently had no financial instruments
      with characteristics of both liabilities and equity.





In
      December 2004, The FASB issued SFAS No. 153, “Exchange of Non-monetary Assets -
      An Amendment of APB Opinion No. 29.” This Statement amends APB Opinion No. 29,
“Accounting for Non-monetary Transactions.” The amendments made by SFAS No. 153
      are based on the principle that exchanges of non-monetary assets should be
      measured based on the fair value of the assets exchanged. The provisions of
      SFAS
      No. 153 are effective for non-monetary assets exchanges occurring in fiscal
      periods beginning after June 15, 2005. The adoption of this Statement is not
      expected to have a significant impact on the Company’s financial position or
      results of operations.





F-33




**CORECARE
        SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **JUNE
          30, 2005, 2004 AND 2003**





NOTE
      25  NEW
      ACCOUNTING PRONOUNCEMENTS (continued)





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting for Changes and Error
      Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3.” SFAS No. 154
      changes the requirements for the accounting for and reporting of a change in
      accounting principle, and applies to all voluntary changes in accounting
      principle. It also applies to changes required by an accounting pronouncement
      in
      the unusual instance that the pronouncement does not include specific
      translation provisions. This statement requires retrospective application to
      prior periods’ financial statements of changes in accounting principle, unless
      it is impracticable to determine either the period-specific effects or the
      cumulative effect of the change. SFAS No. 154 is effective for accounting
      changes made in fiscal years beginning after December 15, 2005. The adoption
      of
      this Statement is not expected to have a significant impact on the Company’s
      financial position or results of operations.





NOTE
      26  SUBSEQUENT
      EVENTS





Medicare
      Liability




In
      August
      2005, the liability to the Medicare Program for the 1999 and prior cost report
      periods was offset in full from amounts due to the Company resulting from the
      final settlement of cost report years 2000 through 2003 inclusive plus
      retroactive tentative settlements due to the Company for the 2004 and 2005
      cost
      report periods.





Kirkbride
      Holdings, LLC (Allied Partners) Tranche B Refinancing





In
      May
      2006, the Promissory Note was amended whereby the unpaid principal and interest
      of Tranche B totaling $160,632 was refinanced and an additional $391,892 was
      advanced. The proceeds were used to reduce outstanding tax liabilities. Interest
      will compound at 14%. Repayment of principal and interest will be deferred
      until
      the maturity date of July 7, 2007.





Metron





In
      January 2006, Metron Group, Inc. acquired 100 shares of newly authorized
      convertible preferred stock of CCFS for $800,000. The CCFS convertible preferred
      stock is convertible into CCFS common stock on a 1 to 1 basis. The stock carries
      a 14% dividend rate and must be redeemed before December 31, 2006. This date
      has
      been extended to March 31, 2007. The proceeds provided working capital and
      enabled CCFS to purchase the claims of certain unsecured creditors of CCBHM
      totaling $800,000 at a discount of approximately 50%.





Right
      of first Refusal to Purchase Westmeade Healthcare, Inc.





In
      November 2005, the Company entered into a two (2) year agreement with
      Alternative Behavioral Services, Inc. (“ABS”) to provide management and clinical
      services for the Company’s Westmeade Adolescent Treatment program. The contract
      provides for a fixed fee plus incentives for performance improvements.
      Additionally, ABS received a right of first refusal to acquire WMI at a price
      equal to 90% of the best legitimate offer from another party.








F-34


**CORECARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
        30, 2005, 2004 AND 2003**





NOTE
      26  SUBSEQUENT
      EVENTS (continued)





Property
      Sale and Lease-back





In
      December, 2006, the Company signed an exclusive representation agreement with
      Marcus & Millichap, a Real Estate Investment Brokerage Company, to secure a
      sale of the land and associated buildings that comprise the campus known as
      the
“Kirkbride Center”. The campus is composed of three major and several minor
      buildings on twenty-one acres of land. Approximately seven acres can be
      considered excess land for sale or future development. A long term lease for
      the
      Company’s healthcare operations will be a condition of any transaction. The
      property has been listed at $35,000,000. There is no certainty that the Company
      will be successful in this regard.












F-35