SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C.  20549

                                  FORM 10-KSB/A
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                         -------------------------------
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                          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
INCORPORATION  OR  ORGANIZATION)                    IDENTIFICATION  NO.)


                               111 N. 49th Street
                             Philadelphia, PA 19139
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                  215/471-2600
                           (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 [x]
No     [  ]

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.     [  ]

The  issuer's  revenues  for  its  most  recent  fiscal  year  were $19,948,895.

The  aggregate market value of the common equity held by non-affiliates based on
the  closing  sale  price  of Common stock as of April 13, 1999, was $4,454,366.

The number of shares outstanding of each class of the issuer's common equity, as
of  April  1,  1999,  was  as  follows:  Common  Stock  -  15,949,128  shares.

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

<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
                                   FORM 10-KSB

                                TABLE OF CONTENTS
                                -----------------


PART I
<S>       <C>                              <C>
ITEM 1-   BUSINESS                                             2
ITEM 2-   DESCRIPTION OF PROPERTY                             18
ITEM 3-   LEGAL PROCEEDINGS                                   18
ITEM 4-   SUBMISSION OF MATTERS
          TO A VOTE OF SECURITY HOLDERS                       19


PART II

ITEM 5-   MARKET FOR COMMON EQUITY
          AND RELATED STOCKHOLDER MATTERS                     20
ITEM 6-   MANAGEMENT'S DISCUSSION AND
          ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS                           21
ITEM 7-   FINANCIAL STATEMENTS                                35
ITEM 8-   CHANGES IN AND DISAGREEMENTS
          WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE35


PART III

ITEM 9-   DIRECTORS, EXECUTIVE OFFICERS,
          PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION
          16 (A) OF THE EXCHANGE ACT                          36
ITEM 10-  EXECUTIVE COMPENSATION                              42
ITEM 11-  SECURITY OWNERSHIP OF
          CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT44
ITEM 12-  CERTAIN RELATIONSHIPS
          AND RELATED TRANSACTIONS
ITEM 13-  EXHIBITS, FINANCIAL STATEMENT
          SCHEDULES AND REPORTS
          ON FORM 8-K53
</TABLE>


                                        2
<PAGE>
                                     PART I
                                     ------

ITEM  1  -     BUSINESS

(A)     BUSINESS  DEVELOPMENT:
        ----------------------

     CoreCare  Systems,  Inc.  (the "Company") is a regional health care network
providing  behavioral  services and clinical drug research, operating in Eastern
Pennsylvania.  The  Company's  headquarters  are  located at 111 N. 49th Street,
Philadelphia,  PA  19139.  Its  telephone  number  at  that  location  is  (215)
471-2600.   In  1996,  the  Company  transferred its state of incorporation from
Nevada  to  Delaware.

     In  1998  the  Company  initiated the second phase of its strategic plan by
integrating  clinical  trial  research  services  to  the pharmaceutical biotech
industries  into  its  behavioral  services  operating  platform.  The  Company
commenced  conducting clinical trials in the area of new drugs to treat diseases
of  the  Central  Nervous  Systems  and  for  drugs  designed  to treat diseases
afflicting  the  geriatric population. The Company intends to recruit volunteers
for  clinical trials from the behavioral health services patient population. The
Company  put  in  place  an  experienced  team  in  clinical  trials and shortly
thereafter  signed  the  first  of  several  contracts.

     In  April  1998, the Company expanded its billing business by acquiring the
assets  of  Preferred  Medical  Services,  Inc.,  a Pennsylvania based physician
billing and practice management business, valued by the Company at $340,290, for
a  purchase price of $260,000 (less outstanding billed accounts receivable as of
the  closing date), paid $28,545 in cash and the balance of $111,744 by way of a
promissory note and 250,000 shares of the Company's Common Stock, valued at $.80
per  share.

     In  July, 1998 the Company expanded its behavioral care platform by opening
a  drug  and  alcohol rehabilitation unit at the Kirkbride Center.  The unit was
licensed  for  43  beds as of December 31, 1998 and subsequently increased to 63
beds.

     The  Company  conducts  all  of  its  operations  through  its  subsidiary
corporations.  Unless  the  context indicates otherwise, the term "Company" when
used  herein  shall  include  the  Company's  subsidiaries.

(B)     BUSINESS  OF  ISSUER:
        ---------------------

The  Company  has  three  primary  lines  of  business.  They  are  as  follows:
     (I)     Behavioral  Health  Services
     (II)    Clinical  Trials  and  Outcomes  Research
     (III)   Billing  and  Practice  Management

Additionally  the  Company  has  secondary business interests, which include the
following:
     (IV)    Leasing office space at  the  Kirkbride  Center  to  third  parties
     (V)     Health  and  Fitness  Center

                                        3
<PAGE>
     The  Company  operates  its  business  through  eight  (8)  wholly  owned
subsidiaries  including  the  following:

-     CoreCare  Behavioral  Health  Management, Inc. d/b/a/ Kirkbride Center and
      d/b/a  Westmeade  Center  at  Kirkbride
-     Westmeade  Healthcare,  Inc.  d/b/a  Westmeade  Center  at  Warwick
-     Chestnut  Hill  Health  &  Fitness  Center,  Inc.
-     Managed  CareWare,  Inc.,  d/b/a  CoreCare  Management, Inc. and Preferred
      Medical  Services
-     CoreCare  Realty  Corp.
-     CoreCare,  Inc.  (Inactive)
-     Lakewood  Retreat,  Inc.  (Inactive)
-     Quantum  Managed  Mental  Health  Systems,  Inc.,  d/b/a  Quantum Clinical
      Services  Group

(I)  Behavioral  Health  Services
     The  Company  has undertaken an aggressive development campaign to create a
behavioral  health care system which will provide continuity of care to patients
and  serve  as  a platform to expand its clinical trial research services to the
pharmaceutical  industry.  The  Company  has responded to the cost-effectiveness
demands  of  Managed  Care  by:

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

    -     Providing  a spectrum of high quality acute, step-down, and outpatient
          services;

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

    -     Shifting  the  focus of clinical control from the individual clinician
          to the system case manager  following  approved  clinical  protocols;

    -     Computerization  of  all  administrative,  financial,  and  clinical
          functions;  and

    -     Structuring  to deliver services pursuant to capitated contracts, i.e.
          contracts  shifting  the  risk  for  treatment  costs  of  a  defined
          population  from  the  insurer  or  other  third-party  payor  to  the
          provider.

     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.  Two major segments
of  Managed Care include health maintenance organizations ("HMOs") and preferred
provider  organizations  ("PPOs").   HMOs and PPOs 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. 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.  The Company currently has no case
rate  contracts,  and  no  capitated  contracts.

                                        4
<PAGE>
     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
system  providers  who,  with  one  call,  can  provide a variety of services to
multiple  patients.  In  addition,  integration  of services helps assure better
clinical  continuity  of  services  and  greater  cost  efficiency.  The Company
believes it is positioned to benefit from this trend in defined geographical and
service  areas.

     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, the Company is committed to a biopsychiatric
approach  to  treatment  relying  on  the appropriate use of psychopharmacology.
State  of  the  art  Behavioral  treatment changes with each new drug discovery,
therefore,  the Company is committed to conducting clinical research drug trials
on  central  nervous  system  drugs  at CoreCare Network sites, as well as other
unrelated  healthcare  services  sites.


     (I)(B)(1)     BEHAVIORAL  HEALTH  PRINCIPAL  PRODUCTS  AND  SERVICES:

     At  the  present time, the services provided by and the business activities
of  the  Company  are  within  the  following  categories:  (A)  Acute Inpatient
Hospitalization;  (B)  Acute  Residential  Psychiatric  Care;  (C)  Partial
Hospitalization  Services;  (D)  Outpatient  Care;  (E)  Drug  and  Alcohol
Rehabilitation  Services;  (F)  Wrap-around  Services;  (G) Billing and Practice
Management;  (H)  Real estate development and leasing activities; (I) Health and
Fitness  Center,  and  (J)  Pharmaceutical  Clinical  Research  Trials.


(A)     ACUTE  INPATIENT  HOSPITALIZATION

     CORECARE  BEHAVIORAL  HEALTH  MANAGEMENT, INC. ("CBHM") d/b/a the Kirkbride
Center  and d/b/a Westmeade Center at Kirkbride is the largest subsidiary of the
Company.  CBHM,  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, CBHM acquired the assets and selected licenses of the
INSTITUTE  OF  PENNSYLVANIA  HOSPITAL  for  $4.5  million.  The KIRKBRIDE CENTER
consists  of  seven (7) buildings totaling 422,800 square feet on a 27-acre site
comprising  an entire city block bounded by Market Street, Haverford Avenue, and
48th  and  49th Streets in Philadelphia, Pennsylvania.  Kirkbride provides acute
inpatient  psychiatric  care  in  a freestanding hospital setting supported by a
full  continuum  of  step-down  services.

The  120 bed licensed acute psychiatric hospital transitioned operations without
closure  on  February  26,  1997,  starting  with  an average daily census of 15
patients  and  increasing  to  114  in  December  1998.  Since  that  date  of
acquisition,  operating  a  dedicated geriatric unit, a dual diagnosis substance
abuse  unit,  and  a  general  adult psychiatry unit has further enhanced volume
growth.  Of  the  120  licensed  beds,  57  beds  hold  dual  licensure to treat
psychiatric clients with substance abuse problems. Additionally in July 1998 the
Kirkbride  Center  added  licensed drug and alcohol rehabilitation beds starting
with  20  beds  and  increasing  to  63  in  early  1999.  In  1997,  the 24-bed
residential  treatment license of the Westmeade Center at Wyndmoor was relocated
to  the  Kirkbride  Center.  The  following  describes the clinical programs and
acute  inpatient  services  available  at  Kirkbride:

                                        5
<PAGE>
     GERIATRIC  PROGRAM
     ------------------

     The  Geriatric Program provides specialized psychiatric acute-care to older
adults,  who  are  demonstrating  emotional symptoms and behaviors indicative of
acute distress.  Geropsychiatrists and behavioral specialists lead the treatment
team,  supported  by  a  therapeutic  milieu  and  structured  living situation.
Discharge  specialists work with the family, exploring long-term placement needs
following  the  acute  care  episode.

     GENERAL  ADULT  PROGRAM
     -----------------------

     In  the Acute Adult Program, the treatment team works intensively with each
patient  to  achieve stability, strengthen and support the family and return the
patient  to  the  home  or  to a less intensive setting, as quickly as possible.
Individuals,  18  years  or  older, participate in intense individual, group and
family  therapy,  psychoeducational  programs  and  a rich and varied program of
therapeutic  rehabilitation  activities.

     SUBACUTE  ADULT  TRANSITION  PROGRAM
     ------------------------------------

     The  Subacute  Adult  Program  provides  intensive psychiatric treatment to
individuals  who  no  longer  meet acute inpatient criteria, yet still require a
24-hour  structured  treatment setting to provide safety and stabilization.  The
Transition  program serves as a diversion from more costly acute inpatient care,
and as a step-down unit to transition patients from acute care to discharge. The
average  length  of  stay  in  this  program  is  five  (5)  days.

     THE  SUBSTANCE  ABUSE  DUAL  DIAGNOSIS  PROGRAM
     -----------------------------------------------

     Of  the  120  licensed  beds at Kirkbride, 57 beds hold dual licensure from
both  the  Pennsylvania  Department  of  Public  Welfare  and  the  Pennsylvania
Department  of  Health  to  treat  psychiatric  clients  with  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 medical detoxification and methadone treatment. Treatment typically also
includes  involvement  in  self-help  groups,  such  as  Alcoholics Anonymous or
Narcotics  Anonymous.

     THE  KIRKBRIDE  CENTER'S  MARKET:  The Kirkbride Center's primary market is
West  and North Philadelphia.  While certified to provide Medicare, Medicaid and
Blue  Cross  recipients,  the  facility's  primary payor is Community Behavioral
Health  (CBH).

     Effective  February  1,  1997,  each  county  in  Pennsylvania  assumed
responsibility for managing its own medical assistance population.  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,  a  non-profit  community-based  managed  care
organization.  Kirkbride  Center  is  located  in  the  heart  of Philadelphia's
Medicaid  population,  which  is  now controlled by Community Behavioral Health.
The  Company  anticipates  that  CBH and Medicare will continue to represent the
predominant  payors  of  services  at  the  Kirkbride  Center.

                                        6
<PAGE>
     Notwithstanding  the  number  of  contracts which the Kirkbride Center has,
these contracts permit the Kirkbride Center 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.


(B)     ACUTE  RESIDENTIAL  PSYCHIATRIC  CARE

     The  Company,  through  an  acute  residential  treatment center, Westmeade
Center  at  Warwick  (the  "Westmeade  Center,")  is  engaged in the business of
providing  non-hospital  acute  residential  psychiatric  services to adolescent
patients. The Westmeade Center at Wyndmoor, a 24-bed acute residential treatment
center  serving  adult  patients  located in Montgomery County, Pennsylvania was
closed  in  December  1996.   Its license has been  transferred to the Kirkbride
Center  for  improved  operational  efficiency.  A  third  residential treatment
center,  Lakewood Retreat, located in the Pocono Mountain region of northeastern
Pennsylvania,  was  closed  in  April  1996.

     Through  the  Westmeade Center, the Company provides services that are less
costly  than  in  a  traditional  hospital setting.  The residential psychiatric
treatment  program  is  intended  for  patients who volunteer to be admitted for
treatment,  who  do  not  need extensive long-term care, and who do not need any
form  of  restraint.

     Following  the  acquisition  of  the  Westmeade  facilities,  the  Company
determined  that  it  would  be  more  efficient  to concentrate its residential
treatment  efforts  at  the Westmeade Centers, and to sell Lakewood Retreat.  In
part,  the  decision  was  motivated  by  Managed  Care companies' desire to use
providers  that  are  geographically  convenient  and easily accessible to their
patients,  and  Lakewood Retreat's distance from the Company's concentrations of
service  in  Southeastern  Pennsylvania.

     THE WESTMEADE PROGRAM:   The Westmeade Center at Warwick was established to
provide  residential  psychotherapeutic  services to adolescents, ages 12 to 18,
who  are  ambulatory  and medically stable. The program, which operates 24 hours
each  day, offers intensive clinical treatment in a less restrictive residential
setting.  The  length of stay is short-term and the focus of treatment addresses
the  key  issues  that  precipitated  the  patient's  admission.  The goal is to
eliminate  or  reduce  the  barriers  that  prevent the patient from functioning
successfully  as  an  outpatient.

     The  Westmeade  Center  provides  an  acute  care  alternative to inpatient
psychiatric  treatment.  The  Westmeade  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.  The Westmeade Center does not attempt to treat people
who  are  so  severely ill that they require seclusion and/or restraint that are
only  available  in  a  hospital  setting.

     Each  patient  is  assessed to determine unique strengths and weaknesses so
that a multi-disciplinary treatment team can develop an individualized treatment
plan.  The  goal  of  this  process  is  to  identify the specific interventions
designed  to  assist  and  encourage  the  patient's understanding of his or her
potential  for  emotional  and  psychological  well  being to build a successful
outpatient.  This process identifies the philosophical basis of the program; the
treatment  plan  establishes  a  guideline  for  the  direction  of  care  the
multi-disciplinary  professional staff will provide and is related to the unique
identified clinical problems of each patient.  As part of the treatment planning
process,  objectives  are  established  which  address  the  methodology,  staff
responsibility  and  time  frames  necessary  to  facilitate  treatment.

                                        7
<PAGE>
     The  Westmeade patients suffer from a variety of psychiatric disorders such
as  depression,  manic  depression and anxiety disorder.  The Westmeade Center's
core  psychiatric  programs are designed to accomplish stabilization of symptoms
by  addressing  management of major life stresses.  Therapy experiences focus on
cognitive  and  behavioral  restructuring  of  dysfunctional thinking and belief
systems  by  addressing  cognitive  and perceptual misperceptions, dysfunctional
coping  mechanisms,  and inadequate life skills.  Concentrated, diagnosis-driven
individual  and  group  therapy  is  given  to  patients  in  homogeneous groups
(gender-specific  where  needed).

     THE  WESTMEADE CENTER'S MARKET:  The primary market of the Westmeade Center
at  Warwick is Eastern Pennsylvania with significant concentration of cases from
Bucks, Montgomery and Philadelphia counties.  The Westmeade Center at Warwick is
a  certified Medical Assistance provider and has numerous contracts with Managed
Care Providers, health insurance companies, however, the most significant payors
are  Community  Behavioral  Health,  Americhoice  and  Medicaid.

     The  Westmeade  Center at Wyndmoor's primary market has shifted in the last
two  years  to  reflect  the changes in the managed care industry.  Major payors
have  shifted  from  US  Healthcare  to  the  managed  Medicaid  payors of Merit
Behavioral  Healthcare  and Mustard Seed which were then supplanted by Community
Behavioral  Health.  Because  Philadelphia  residents  increasingly  represented
Wyndmoor's  patient  base,  the operating license was relocated to the Kirkbride
Center,  thus  making  West  Philadelphia  the  major  market.

     Notwithstanding  the  number  of  contracts which the Westmeade Center has,
there is no assurance that these companies will continue to provide coverage for
the psychiatric care offered by the Westmeade Centers, even with these contracts
in  force.   In  addition,  these contracts permit the Westmeade Centers 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 Westmeade
Center.

(C)     PARTIAL  HOSPITALIZATION  SERVICES

     The  Kirkbride  Center  is  the  Company's  only  licensed provider site to
provide  hospital  based  psychiatric  partial  hospitalization  services.  The
license  provides  for 50 slots of treatment for the provision of care to adults
and  seniors  at  the  Kirkbride Center.  Such programs provide up to 8 hours of
care  a  day  and allow the clients to reside at home while receiving treatment.
Clinical  intensity  may vary allowing the program to serve as an alternative to
acute  inpatient  hospitalization  as  well  as  a  step-down  program for acute
programs.

     GERIATRIC  PARTIAL  HOSPITALIZATION  PROGRAM
     --------------------------------------------

     The  Geriatric  Partial  Hospitalization  Program provides day-treatment to
senior  individuals  demonstrating  psychiatric  illness.  Services are provided
Monday  through  Friday,  and  include  diagnostic  and  mental health treatment
services  within  a  protected  and structured environment. Individual and group
therapy,  activity  therapy  and  medication  monitoring  are  provided.  Family
support  is  also  provided.  Day-treatment  allows  the  individual to continue
living  at  home,  or  in  an  assisted  living  or  nursing  care  facility.

                                        8
<PAGE>
     ADULT  PARTIAL  HOSPITALIZATION  PROGRAM
     ----------------------------------------

     The Adult Partial Hospitalization Program provides interdisciplinary mental
health  care,  as  an  alternative to inpatient treatment or as a transition for
those  who  need  ongoing  treatment  and  support after an inpatient stay.  The
program,  which  provides  services  Monday  through  Friday,  offers  group,
individual,  family and multi-family group therapy, psycho-educational services,
multi-media  educational  and  activity  programs,  access  to  anonymous-based
self-help groups or community-based support groups as appropriate and adjunctive
services  such  as  family  counseling  and  occupational  therapy  programs  as
indicated.

     PARTIAL  HOSPITALIZATION  MARKET:  The  Partial Hospitalization Programs at
     --------------------------------
Kirkbride  serve  primarily  West  and  North  Philadelphia. The major payors of
service  are  Community  Behavioral  Health  and  Medicare. The Company has also
applied  for  licensure  for  several  satellite  locations  but there can be no
assurance  that  these  license  to  operate  will  be  obtained.

(D)     OUTPATIENT  AND  INTENSIVE  OUTPATIENT  PROGRAMS

     The Company has developed a comprehensive network of professional providers
to  meet  the  outpatient  needs  of  its  clients. These professional providers
include  psychiatrists,  psychologists,  and  licensed social workers, certified
addiction  counselors  and  psychiatric  nurses.

As  they  are  credentialed  by  various  managed care companies and third party
payors,  these  health  care  professionals  and  clinicians are able to provide
services  to  children,  adolescents,  adults  and  seniors.  Approaches offered
include  individual,  group,  couples  and  family therapy depending on clinical
need.  Pharmacotherapy  is  also  provided.

     Urgent  appointments  are  provided  within  five  (5)  hours;  emergency
appointments are provided within forty-eight hours; and routine appointments are
scheduled  within five (5) business days.  Day, evening and weekend appointments
are  available  at affordable fees.  Because the Company maintains contacts with
many  of  the managed care companies, the cost of therapy to the client is often
only  the  co-payment.

     Outpatient  services  are  provided at KIRKBRIDE CENTER (West Philadelphia,
Pa), and the WESTMEADE CENTER (Warwick, Pa).  Until March 1998, the Company also
provided  outpatient  services  through  American  Institute  of  Behavioral
Counseling,  Inc.  at  Greenbrook, New Jersey, and in Easton, Pennsylvania until
December 1998.  Given limited activity and no strategic focus in New Jersey, the
Company  sold  the  operations  of  this  facility.


     OUTPATIENT  MARKET:  All  sites  serve  primarily  Managed  Care  referral
     ------------------
patients.  Kirkbride  Center  serves Medicare, Medicaid and Community Behavioral
Health  claimants  as  well.

                                        9
<PAGE>
(E)     DRUG  AND  ALCOHOL  REHABILITATION  SERVICES

     In  the last year, the Kirkbride Center has had to increase the size of its
acute  substance  abuse  dual  diagnosis program from 25 to 57 beds.  Given this
demand,  Kirkbride  has  received an additional license permitting the Center to
treat  up  to  63 drug and alcohol rehabilitation clients on a subacute level in
addition  to  the  Center's  acute  program.  The  Program has established payor
contracts  with  Medical Assistance and Behavioral Health Specialists Initiative
and  Community  Behavioral  Health.

     REHABILITATION  PROGRAM  MARKET:     Kirkbride Center primarily serves West
and  North Philadelphia.  Primary payors are expected to be Community Behavioral
Health,  Medicaid  and  special  programmatic funding contracts from the justice
systems.

(F)     WRAP-AROUND  SERVICES

     In  February  1997,  upon completion of the acquisition of the Institute of
Pennsylvania,  the  Kirkbride  Center  received a Provider 50 license to provide
wrap-around-psychiatric  services  to  adolescents.  Provider  50  services  are
designed  to provide support services in the home and/or school setting to avoid
inpatient  hospitalization.  While  Kirkbride  Center  holds  this  license, the
program  has  not  yet  become  operational,  but  remains part of the Company's
strategic  plan.  The  Company  has negotiated payor contracts with Americhoice,
Merit  and  Community  Behavioral  Health  for this service and intends to begin
operations  in  1999.

(G)     BILLING  AND  PRACTICE  MANAGEMENT

     The  Company's  acquisition  of  ZA  Consulting/Management, Inc. ("CMI,") a
provider practice management, billing and collection company for diverse medical
specialties, enhanced and accelerated its efforts to computerize its operations.
CMI  also has entered into contracts with CoreCare Behavioral Health Management,
Inc.  and  all other Company's subsidiaries to act as the billing and collection
agent for all Company services.  CMI has also assumed all network management and
corporate  office  functions  since  July  1997.  In April 1998, CMI doubled its
non-CoreCare  related  revenues  through  the  acquisition of certain assets and
scheduled  liabilities  of  Preferred  Medical  Services.  CMI  consolidated
operational  activities, which include the reduction of administrative staff and
closure  of  the Preferred Medical Services office in Blue Bell, Pennsylvania in
December  1998.  CMI  is  located  in  Wayne,  Pennsylvania.

     The  Company  operates its Billing and Practice Management business through
its  one  wholly  owned  subsidiary,  Managed  CareWare,  Inc.  (D/B/A) CoreCare
Management,  Inc.  and  Preferred  Medical  Services.

     Services  provided  by  the  Company  include:
     a)     Billing  services  for  physician  practices,  especially  hospital
            based specialties  of  radiation  oncology  and  anesthesiology.
     b)     Billing  services  for  Behavioral  facilities  including  hospital
            and non-hospital
     c)     Practice  management  services  including  bookkeeping, accounting,
            and credentialling  for  physician  groups.
     d)     Information  Services  support  for  billing  including  direct
            electronic claims  transmission  between  Medicare  and  Payers.

                                       10
<PAGE>
     PRACTICE  MANAGEMENT  MARKET:     CMI  serves  clients primarily in Eastern
Pennsylvania,  New  Jersey  and  New York.  Services are rendered under services
agreements  on  a  fee for services basis.  Core competencies include behavioral
health  care,  radiation  oncology,  and  anesthesiology,  and  most  Medical
subspecialties.


(H)     REAL  ESTATE  DEVELOPMENT  AND  LEASING  ACTIVITIES

     KIRKBRIDE  REAL  ESTATE  LEASING  ACTIVITIES
     --------------------------------------------

     Since  the  Kirkbride  Center  acquisition  in  1997,  the Company has been
developing  and  marketing  unused  space  creating  a  medical  community  of
complementary  healthcare  providers  and  further  enhancing  the  value of the
property.  In addition to the developed land there exists significant unimproved
property  suitable  for  sale  or  lease.

     To  provide  for  an  orderly  development  program,  CRCS  created  a  new
subsidiary, CoreCare Realty Corporation to assume responsibility for development
of  the  Kirkbride  Center.  To  expand  CRCS'  resources,  Franklin Development
Company,  LLC  ("FDC")  based in Boston, Massachusetts was hired as a management
consultant.  Christopher  Fleming, a senior manager in FDC, is the son of Thomas
T.  Fleming,  Chairman  of  CoreCare  Systems,  Inc.

     To effect the development plan and to simplify Kirkbride Center's financial
records  and  Medicare  cost reporting, CoreCare Realty Corporation has signed a
master  lease  with  Kirkbride  Center  covering  all  space  not  reserved  for
Kirkbride's  direct  patient  care  services.

Schedule  of  Leases  at  Kirkbride  Center

<TABLE>
<CAPTION>
Tenant                               Space Leased (SF)  Lease Expiration Date
-----------------------------------  -----------------  ---------------------
<S>                                  <C>                <C>
Physician Offices                               24,000             02/01/2001
Children's Hospital                             65,400             10/31/2007
Southeast Mental Health Association             18,000             07/01/2009
Pennsylvania Hospital                           18,683             06/30/1999
Northeastern Linen Services                     15,000             08/21/2007
Rudolphy Residence for the Blind                 5,000             09/30/1999
Vacant                                          44,000
Total                                          190,083
</TABLE>

The  Company  has  other  subsidiaries:
     -     Chestnut  Hill  Health  and  Fitness  Center,  Inc.
     -     CoreCare,  Inc.
     -     Lakewood  Retreat,  Inc.

                                       11
<PAGE>
LAKEWOOD  RETREAT,  INC.

     The Company owns a 57-acre facility in East Stroudsburg, PA previously used
as a residential treatment facility. Operations were terminated in December 1996
due  to  adverse  market  changes  resulting  from  managed care. The Company is
attempting  to  sell  the  facility.  Its  value  was  written  down  in 1998 to
$1,100,000 which represents the Companies estimate for its net realizable value.


(I)     HEALTH  AND  FITNESS  CENTER

     The  Company, through its wholly owned subsidiary, Chestnut Hill Health and
Fitness  Center,  Inc.  ("CHHFC")  operate  a  health and fitness center.  CHHFC
provides  a  complex  of  related  health  and  medical  services,  including  a
comprehensive  aerobic  program with the latest cardiac conditioning techniques,
as well as yoga for stress management, resistance and weight training equipment,
and exercise physiologists.  CHHFC leases approximately 7,000 square feet in the
Whitemarsh  Professional Center in Erdenheim, Pennsylvania, which facility has a
sauna,  whirlpool,  full  locker  room  and  child  care.

     The  Company currently plans to relocate CHHFC to a better quality building
in an effort to eliminate certain growth obstacles.  Given the relocation of the
Westmeade  license  to  the  Kirkbride  Center,  the Company is reevaluating the
fitness  center's  growth  plan  and  place  in  the Company's overall strategic
business  plan.

     CHHFC'S  MARKET: CHHFC serves a local higher income community, the Chestnut
Hill  area  of Philadelphia, Pennsylvania.  Its service area is approximately 20
minutes  driving  radius  from  the  health  and  fitness  center.


(K)  CLINICAL  RESEARCH  TRIAL  SERVICES

     The  Company,  through  its wholly owned subsidiary, Quantum Managed Mental
Health  Systems, Inc., d/b/a Quantum Clinical Services Group, has recently begun
to  penetrate  the  clinical  research market. During 1998, the Company utilized
Quantum  to  provide  investigative services for the pharmaceutical and contract
research  organizations  in  the  area  of psychiatric and neurological clinical
trials,  and  to  conduct  outcomes  research  studies for clients using medical
records  of  physician  practices  and  experience  of  related  facilities.

Drugs  to  treat  psychiatric and neurological diseases are estimated to account
for  25%  to  30%  of  all drugs under development by pharmaceutical and biotech
firms.  Clinical  Trials for Central Nervous System (CNS) drugs are estimated to
have  been  $1.8  billion  in 1998. Wall Street Analysts estimate the demand for
clinical  tests  to  be increasing at a rate of 15% - 20% per year. At this time
there  exists  a  critical need for CNS investigators due to the large number of
drugs  in the development pipeline and requirements for extensive testing by the
FDA.  Industry completion rates on trials are low due to patient recruitment and
project  management  difficulties.

     Quantum  has  been  staffed  with  a  experienced  and accomplished team to
perform  clinical  trials  of  psychopharmacological agents and products.  These
trials  are  to  be  conducted at the Kirkbride Center using approximately 6,000
square  feet  of  space  for  outpatient  research studies and a 20-bed unit for
studies requiring intensive observation.  Quantum is also to serve as a platform
for  coordinating multi-center clinical trials at sites other than the Kirkbride
Center, including affiliated units of the Company, physician practice management
groups  and  other  behavioral  health  systems.

                                       12
<PAGE>
     Four contracts with clinical research companies have been signed by Quantum
and  are  in  progress,  including  contracts  with  Clinical  Studies,  Ltd. of
Providence,  RI  that  is  under  contract  with  Janssen Research Foundation of
Belgium  and  a contract with Covance Clinical and Periapproval Services Inc, of
Princeton,  NJ  that  is  under  contract  with  Abbott  Laboratories.

     The  Company  operates  its  clinical  research business through its wholly
owned  subsidiary,  Quantum  Managed Mental Health Systems, Inc.  (d/b/a Quantum
Clinical  Services  Group).  Quantum  contracts with its related subsidiaries or
other  non-related  third  party  companies  to  conducts  clinical  trials.

     The  company  intends  to provide services on products to treat diseases of
the  Central  Nervous  System  and  Geriatric population. The intends to provide
services  in  the four phases of drug trials in human volunteers; which commence
after  the  drugs  have  been  approved  for  testing  in  humans  by  the  FDA.
     Phase  I:  testing  for  tolerance  in  healthy  volunteers
     Phase  II:  testing  for  effectiveness  in  a  small  sample  of afflicted
patients.
     Phase  III:  placebo  controlled  testing  in  a  large sample of afflicted
patients  necessary  for  FDA  approval
     Phase  IV:  Long  term  monitoring  tests  of  drugs  post  FDA  approval.

     Currently  Quantum  is providing services in Phase II and III trials of new
drugs.  The  company  is  evaluating  the  development  of a Phase I unit at its
Kirkbride  Center.

     QUANTUM'S  MARKET:  United  States  as  well  as  internationally  based
pharmaceutical  companies  are  seeking appropriate clinical trial sites for the
testing  of  their  drugs.



     (B)(2)     DISTRIBUTION  METHODS:

     I.  Behavioral  Services

     The  Company  obtains patients primarily through referrals from physicians,
hospitals, community based health care organizations, and Managed Care plans and
other  third  party  payors.  Therefore,  the  focus  of the Company's sales and
marketing  programs  is direct sales to physicians, hospitals, other health care
institutions  and  third  party  payors.  The  Company's  marketing  focus  is
necessarily  local,  concentrating  on establishing relationships with the local
referral sources.  In the markets that it currently serves, the Company believes
that  it  has a strong reputation for quality with physicians and other referral
sources.

     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.
The  Company  believes, 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  Company's  market  area.

                                       13
<PAGE>
     The  Company  markets  its  services  to  all  types  of  payors, including
insurance  companies  and  Managed Care companies, but primarily to Managed Care
companies  on  a negotiated fee basis.  In markets where the Company can offer a
comprehensive range of services, it intends to market its services on a selected
"capitated  basis"  (fixed fee per covered life per month), or "case rate basis"
(fixed  fee  per  inpatient episode).  To date, the Company has not entered into
any  capitated  contracts.

     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.  This
behavioral patient platform serves as a magnet to attract central nervous system
clinical  drug  trials  for  Quantum  as  well.

II.  Clinical  Research  Services
---------------------------------

     The  Company  has 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. The Companies markets its
services  Pharmaceutical Companies, CRO's and SMO's.  The Company's marketing is
focused  on  established relationship between key staff and pharmaceutical firms
and  their  representatives.  Should the Company be successful in establishing a
Phase  I  unit inpatient clinical research unit will serve as a feeder for Phase
II,  III,  and  IV studies and should result in an increase research activities.

III.  Billings  and  Practice  Management
-----------------------------------------

     The  Company's  growth has been derived by acquisition historically. Growth
through  new  provider  contracts  has  been limited given the demand created by
Kirkbride's  growth.  The  Company has recently developed a marketing plan based
upon  three  pronged  strategy:
     1.     Referrals  made  from  financial  and reimbursement consulting or
            lending groups  to  physicians  and  small  provider  groups.
     2.     Referrals  made  from  existing  clients
     3.     New  business  development  from  traditional  marketing

     Historically  the  Company  has  had  a  successful  cooperative  marketing
relationship with reimbursement consultants and intends to expand its network of
such  groups.

     (B)(3)     PRODUCT  OR  SERVICE  DEVELOPMENT:

          (B)  (3)  (A)  BEHAVIORAL  SERVICES:
          ------------------------------------
     The  Company's  marketing  strategy  is  to  develop in selected geographic
markets, extensive, wholly-owned, multi-level health care delivery systems which
provide  a high quality of care in a cost effective manner.  The Company intends
to  pursue  growth  by surrounding inpatient sites with outpatient mental health
clinics  and other alternative or step-down services.  The Company believes that
by  providing  a  fully  integrated  coverage  of the market, it will be able to
generate  a  critical  mass  of  clinicians,  patients  and services to generate
significant  cost  advantages  that  are more attractive to payors.  The Company
believes  that  this  critical  mass strategy will allow the Company to leverage
management  resources, contracting opportunities with Managed Care payors, sales
and  marketing  programs, information systems and corporate overhead, as well as
providing  a  patient  base  for the growth of clinical drug research contracts.

                                       14
<PAGE>
     The  Company's  approach  to the delivery of health services is intended to
yield  the  following  benefits:

     The Low Cost  Provider.  By  establishing  an extensive,  fully  integrated
     network of multi-disciplinary  health care professionals in a given market,
     the Company will seek to achieve  economies of scale,  thereby lowering the
     cost of care  without  compromising  quality.  For  instance,  the  Company
     believes  that by employing a full range of clinicians it is better able to
     match the  appropriate  clinician  and type of treatment  to the  patients'
     needs.

     Managed-Care Friendly. The Company believes that establishing a significant
     presence  in each of its  markets  will  enable it to meet payor needs more
     effectively,  and that as the  Company  increases  its ability to provide a
     full range of health services, a standardized level of care and the ability
     to service all of the payors' patients within a geographic  region, it will
     increase market share. Additionally,  the Company will offer payors systems
     for risk  management  (including  contracts under which the Company assumes
     various  levels  of  risk),  claims  reimbursement  and  clinical  outcomes
     measures, thereby reducing the payors' administrative burden as well as the
     number of provider contracts.

     Integrated  Clinical  Research.  The Company is  committed to evolving as a
     state  of  the  art  behavioral  healthcare  provider  as  well  as a  site
     management  organization for conducting clinical research. We believe these
     two product platforms will synergistically  support mutual growth providing
     an economic advantage to each product.

     Attractive  to  Sellers.  The  Company  believes  that  through  successful
     implementation  of its  business  plan  and  marketing  strategy,  it  will
     represent  an  increasingly   attractive  potential  buyer  to  single  and
     multi-site health care providers who face significant uncertainty regarding
     the  future  and  who  may  not  possess   the   financial   resources   or
     administrative skills to adapt to health care reforms, including changes in
     reimbursement.  The  Company  will  be  able  to  offer  potential  sellers
     management  expertise,  administrative and regulatory support and increased
     job  security.  In addition,  the Company will offer sellers the ability to
     realize the value of their businesses as well as the opportunity to benefit
     economically from the growth of a larger enterprise.

                                       15
<PAGE>
     (B)  (3)  (B)  CLINICAL  RESEARCH:
     ----------------------------------
     The  Company's focus is to integrate Clinical Research Services into all of
its  behavioral  services  and  sites to establish a track record as a reliable,
productive  investigative site that performs according to protocols. The Company
believes  that the demographic composition of its behavioral customers will make
it  an  attractive  site  for  conducting  clinical  research on new drugs.  The
Company  plans  to leverage its relationships through its affiliations, referral
sources,  and its Quantum Network of providers to evolve in to a Site Management
Organization  specializing  in Central Nervous System and Geriatric drug trials.

     (B)  (3)  (C)  BILLING  AND  PRACTICE  MANAGEMENT:
     --------------------------------------------------
     The  Company's  development  strategy is to expand the range of services it
can  offer current and future clients. Given the failure of acquisition model of
Physician  Practice  Management  by Hospitals and Public Companies. These groups
are  divesting physician practice groups thereby creating demand for billing and
collection  services  by  the  independent  physicians.

     The Company will aggressively market to such prospective clients as well as
expand  the  scope  of  its services to include human resources, credentialling,
information  services,  and  payor  contract  compliance  management  services.

     (B)(4)     COMPETITION:
I.  Behavioral  Services
------------------------
     There  is  intense  competition  among  providers in the Company's existing
markets.  While  most  of the markets in which the Company provides services are
highly  fragmented, the behavioral health care industry in general is undergoing
consolidation,  and  the  Company  will  face  intense competition in seeking to
increase  its  market  share.  Many  of  the  Company's  current  and  potential
competitors  have  significantly greater financial and other resources than will
be available to the Company.  In addition, the national competitors benefit from
contracting  with  Managed  Care companies which themselves operate in more than
one  region,  volume  purchasing  and,  in  some  cases,  name  recognition.

     The  Company's  management  believes  that the pace of consolidation in the
behavioral  health  care industry dictates an aggressive multi-prong growth plan
which  includes  the  development  of start-up services as well as, acquisition,
alliance  or  joint venture strategy to enter new markets and to increase market
share.

II.  Clinical  Research  Services
---------------------------------
     Clinical  Research  Services for drug trials is a rapidly growing industry.
Drugs  for  Central  Nervous System Diseases are estimated to account for 30% of
all  drugs  under  development. Estimates are that 8-10% of all investigators is
focused  on  this  type  of  research.  The  growth  in  demand has outpaced the
availability  of  sites and investigators. The Company believes that demand will
support many more competitors and that success will be a function of recruitment
of  volunteers  and  quality  of  performance.

III.  Billing  and  Practice  Management
----------------------------------------
     The  industry  is  highly  fragmented. The Company believes that 75% of the
industry  is  served  by  small  companies.  Many  of  the Company's current and
potential  competitors  have  significantly greater financial resources than the
Company's.

     The  Company  believes  that  its  capability to service both physician and
hospital based billing as well as provide practice management services will be a
competitive  advantage  in  the  market  place.  Clients prefer to contract with
vendors  that  can  provide  multiple services rather than working with multiple
vendors  that  offer  limited  services.


                                       16
<PAGE>
     (B)(5)     RAW  MATERIALS:  Not  Applicable.

     (B)(6)     CUSTOMERS:

     The  largest payor for both Kirkbride and Westmeade at Warwick is Community
Behavioral Health, which contributes approximately 63% of all patients for these
sites.  Medicare  reimbursed  Kirkbride  for approximately 20% of all inpatients
treated  at  the  facility.


     For  the  year ended December 31, 1998, inpatient payer mix for the Company
was  broken  down  as  follows:

<TABLE>
<CAPTION>
                                                                 WESTMEADE   KIRKBRIDE
---------------------------------------------------------------  ----------  ----------
<S>                                                              <C>         <C>
Private payment sources (including private insurance companies)          6%         1 %
Medicare/Preferred Provider arrangements                                 0%         20%
Medicaid                                                                26%          4%
CBH, ABH and Managed Care                                               68%         75%

Outpatient revenues were broken down as follows:
---------------------------------------------------------------
-     Private payment sources                                            3%
-     Medicare/Managed Care /Preferred Provider arrangements            97%
</TABLE>

     Private  payment  is the category for which patients are neither reimbursed
by  Medicare  nor  covered  by a Managed Care arrangement.  These payors include
traditional  insurance  indemnity  plans as well as direct payments by patients.
With respect to outpatient revenues, this category also includes personal injury
insurance coverage.  With respect to both inpatient and outpatient revenues, the
Company  anticipates  that  in  the  future,  in  line  with general health care
industry  trends,  the  percentage of revenues derived from traditional Medicare
and  Medicaid will decrease, and the percentage of revenues derived from Managed
Care  and  preferred  provider  arrangements  will  increase.

     CHHFC  serves  a private pay consumer market; however, given the preventive
medicine  orientation  of  HMOs,  many  will  reimburse  for  fitness  services.
Currently, CHHFC is negotiating preferred provider contracts with such agencies.
CHHFC also offers corporate contracts for employers interested in providing such
services  to  their  employees.

     Quantum provides services as a subcontractor to clinical research companies
hired  by  pharmaceutical companies whose drugs are tested at facilities such as
Kirkbride.  Quantum  began  generating  revenue  in  1999.


     (B)(7)     PATENTS,  TRADEMARKS,  LICENSES,  ETC.:

     The  Company  has  no  patents  or  trademarks  that  are  material  to its
operations.  Various  licenses  are  required for the operation of Kirkbride and
Westmeade  Centers,  and  other company operations. See "Governmental Approvals"
below.


                                       17
<PAGE>
     (B)(8)     GOVERNMENTAL  APPROVALS:

     Kirkbride is licensed by the Department of Public Welfare, Office of Mental
Health,  for  the Commonwealth of Pennsylvania for Inpatient Private Psychiatric
Hospital,  a  Partial  Hospital,  an  outpatient clinic, and by the Pennsylvania
Department  of  Health as a drug and alcohol rehabilitation center; additionally
57  of  the  hospital's  inpatient psychiatric beds hold dual licenses with both
Departments.

     The Westmeade Center at Warwick 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 Westmeade
Center  at  Kirkbride  is  licensed  by  the  Department  of  Public Welfare for
Residential  Treatment  of  Adults  for  24-beds.

     The  Kirkbride  and  Westmeade  Centers  operate  with  a  Certificate  of
Accreditation  from  the  Joint  Commission  on the Accreditation of Health-Care
Facilities.  In July 1998, the Westmeade Center at Warwick received a three-year
accreditation;  The  Kirkbride  Center  received  a  three-year accreditation in
December  1998.

     CHHFC  operates as a "Health Club" under a Certificate of Compliance issued
by  the Attorney General of the Commonwealth of Pennsylvania, Bureau of Consumer
Protection,  pursuant  to  the  Pennsylvania  Health  Club  Act.

     (B)(9)     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  the  Company.

     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
the  Company 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 the Company 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 the
business  of  the  Company.

                                       18
<PAGE>
     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 the Company's operations, the
Company  must structure its operations to be in compliance with such provisions.
There  is  no  assurance,  however, that the Company will develop a satisfactory
structure  to  deal  with  all  such  restrictions.


     (B)(10)     RESEARCH  AND  DEVELOPMENT:  Not  Applicable.

     (B)(11)     ENVIRONMENTAL  LAWS:

     The  Company's  operations  are not significantly affected by environmental
regulations.

     (B)(12)     EMPLOYEES:

     As of December 31, 1998, the Company and its subsidiaries had approximately
400  full-time  and  part-time  employees.  This  number does not include mental
health  professionals  (e.g.,  psychiatrists,  psychologists,  etc.) who provide
services  through  the  Company's facilities and who may be deemed employees for
federal  tax  and  accounting purposes.  Kirkbride Center represents the highest
concentration  of  Company  employees  with  a  total  of  438.



ITEM  2  -     DESCRIPTION  OF  PROPERTY

The  Company  owns  or  leases  the  following  properties.

<TABLE>
<CAPTION>
PROPERTY          LOCATION      OWN / LEASE                DESCRIPTION
------------  ----------------  -----------  ----------------------------------------
<S>           <C>               <C>          <C>

Kirkbride     Philadelphia, PA  Own          422,800 square feet on 27 acres
Center
------------
Westmeade at  Hartsville, PA    Own          14,000 square feet on 11 acres
Warwick
------------
Wayne Office  Wayne, PA         Lease        5,449 square feet; Lease expires 7/31/99
------------  ----------------  -----------  ----------------------------------------
Lakewood      Stroudsburg, PA   Own          Approximately 57 acres
------------  ----------------  -----------  ----------------------------------------
</TABLE>


ITEM  3  -     LEGAL  PROCEEDINGS

     An  affiliate  of  UNION CHELSEA NATIONAL BANK holds a mortgage foreclosure
judgment  against  property  comprising the site of CENTER AT LAKEWOOD, which is
owned  by  LAKEWOOD  RETREAT,  INC.,  a  subsidiary of CRCS.  Pursuant to a loan
modification  agreement  executed  in  April  1995,  and  furthers  extension
agreements,  Union  Chelsea  agreed  to  take no action to enforce this judgment
before  September  16,  1996.  CRCS  has  requested continued forbearance by the
lender  while CRCS attempts to sell the property or refinance the mortgage.  The
lender,  while cooperating with CRCS to sell the property, has not agreed to any
further  extensions.  If  the  lender  were  to  commence  enforcement  of  its
foreclosure  judgment, CRCS would be required to submit the Deed in satisfaction
of  the indebtedness or seek bankruptcy court protection for the subsidiary that
holds  title  to the property.  As of 12/31/1998, the book value of the property
was  judged  to  be  1.1  million  dollars.

                                       19
<PAGE>
     In  July,  1996,  a  lawsuit was filed in the Superior Court of New Jersey,
Somerset  County  by  certain  therapists  formerly  associated  with  CRCS
subsidiaries,  AMERICAN  INSTITUTE  FOR  BEHAVIORAL  COUNSELING,  INC.  and PENN
INTERPERSONAL  COMMUNICATIONS, INC.  The complainant names these subsidiaries as
defendants  as well as CRCS, Anthony and Marlene Todaro, Thomas Fleming and Rose
DiOttavio.  The  suit  alleges that the Plaintiffs were damaged because the fees
charged,  by  CRCS'  subsidiaries  for  providing  office  space  and management
services, exceeded the reasonable value of the services provided.  The suit also
claims  that  CRCS'  subsidiaries  have  not  remitted  to  the  Plaintiffs  an
unspecified  amount  of  fees  collected from patients by the subsidiaries which
allegedly  were  to have been remitted to the plaintiffs.  The suit also alleges
that  the  defendants  tortuously  interfered  with  the plaintiffs' contractual
relationships  with  patients  and  managed  care  companies  and  defamed  the
plaintiffs.  The  complaint  does  not  specify  the  damages  sought  by  the
plaintiffs.  Management  does not believe there is any validity to these claims.
CRCS  does not believe that the ultimate resolution of this litigation will have
a  material,  adverse  effect  upon  the  business, finances or affairs of CRCS.

     In  November,  1998,  a  former  employee  of CoreCare filed a complaint in
Federal  District  Court  for the Eastern District of Pennsylvania alleging that
the  Company  discriminated  against her in employment by failing to accommodate
her disability, and that the Company retaliated against her for filing a workers
compensation  claim.  The  Company  has  denied  all  of  these  claims.  The
plaintiff's  complaint  asks  for compensatory and punitive damages in excess of
$100,000.  We believe that the ultimate resolution of this claim will not have a
material,  adverse  effect  on  CoreCare's  operations  or  financial condition.

     CRCS is subject to professional malpractice and related claims from time to
time  in the ordinary course of business.  CRCS maintains insurance against such
claims.  Insurers are defending all such claims, and, except as discussed above,
CRCS  is confident that it's ultimate liability or settlement obligation in such
claims  will  be  within  policy  limits.



ITEM  4  -     SUBMISSION  OF  MATTERS  TO  VOTE  OF  SECURITY  HOLDERS
     -     Election  of  Directors
     -     Increase  of  2  million  shares  for  the  employee  stock  option
plan Both  matters  were approved by Shareholders at the October 29, 1998
Shareholder Meeting.


                                       20
<PAGE>
                                     PART II
                                     -------

ITEM  5  -     MARKET  FOR  COMMON  EQUITY  AND  RELATED
          SHAREHOLDER  MATTERS

(A)     MARKET  INFORMATION:
        --------------------

     The  Company's  Common  Stock  is traded over-the-counter on the electronic
bulletin  board operated by the National Association of Securities Dealers under
the  symbol  "CRCS."  The following table sets forth the high and low bid prices
quoted  for  the  Company's  Common  Stock  since  January  1,  1996.

<TABLE>
<CAPTION>
                     HIGH     LOW
                    -------  -----
CALENDAR YEAR 1996
------------------
<S>                 <C>      <C>
First Quarter         1 5/8  1 1/4
Second Quarter        3 3/8  1 3/8
Third Quarter             2  1 1/4
Fourth Quarter        3 7/8  2 5/8

CALENDAR YEAR 1997
------------------
First Quarter         1 7/8   11/5
Second Quarter        1 7/8    3/4
Third Quarter             2    3/4
Fourth Quarter        1 1/8  22/32

CALENDAR YEAR 1998
------------------
First Quarter          1.03    .81
Second Quarter      1 24/25  24/25
Third Quarter         1 1/4    3/4
Fourth Quarter       1 7/16    5/8
</TABLE>

(B)     HOLDERS:
        --------

     As of December 31, 1998, there were approximately 573 record holders of the
Company's  Common  Stock.

(C)      DIVIDENDS:
         ----------

     The  Company  has  never  declared or paid any cash dividends on its Common
Stock.  The  Company  currently  anticipates  that  all  future earnings will be
retained  by  the  Company  to  support  its  growth strategy.  Accordingly, the
Company  does  not  anticipate  paying cash dividends on the 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 the Company's
Board  of  Directors  and will depend upon, among other things, future earnings,
operations,  capital  requirements,  the  general  financial  condition  of  the
Company,  contractual  restrictions  and  general  business  conditions.  The
Company's  term  loan  and  revolving  credit  facility prohibits the payment of
dividends  without  the  consent  of  the  lenders.

                                       21
<PAGE>
     For  information  concerning  dividend  rights  of holders of the Company's
Preferred  Stock,  see  "Part  I,  Item  8  -  Description  of  Securities."


ITEM  6  -     MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS  OF  OPERATIONS

     The  following  discussion should be read in conjunction with the Company's
financial  statements  and  notes  thereto.

(A)     INTRODUCTION:

     The  Company,  through  eight  of  its  wholly  owned  actively  operating
subsidiaries,  provides,  owns  and operates inpatient and outpatient behavioral
health care services and facilities; provides management and billing services to
health  care  providers;  operates  a  health  and  fitness center; and provides
investigative  services  for  the  pharmaceutical  and  clinical  research
organizations.

     On  April  15,  1998,  the  Company  acquired  certain assets and scheduled
liabilities  of  Preferred  Medical  Services,  Inc.,  a  physician  billing and
practices management business.  The purchase price was $260,000, less the amount
of  outstanding  billed  accounts  receivable as of the closing date, payable in
cash  and  a demand note in the amount of $111,744.36, and 250,000 shares of the
Company's  common  stock.

     On  March 1, 1998, the Company sold certain assets, properties and goodwill
of  the  American  Institute for Behavioral Counseling, Inc. ("Greenbrook") to a
Delaware  limited  liability  corporation  that  will  manage the operations and
liquidate  certain  remaining  assets and liabilities.  The assets were sold for
their  net  book  value without a material impact of gains.  As a result of this
divestiture,  the  Company  should  eliminate annualized losses of approximately
$150,000.  The purchase price was $25,000 payable with the assumption of certain
liabilities  together  with  receivables collected by the new owner on behalf of
the  Company  through  July  31,  1998.

     On  December  1,  1998  the  company  sold  certain assets, properties, and
goodwill  of  the  Penn Interpersonal Communications, Inc. to a Delaware limited
liability  corporation  that  will  manage  the operations and liquidate certain
remaining  assets and liabilities. The assets were sold for their net book value
without a material impact of gains. As a result of this divestiture, the Company
should  eliminate  annualized  losses  of  approximately $100,000.  The purchase
price  was  $30,000  and  the  assumption  of  certain liabilities together with
receivables collected by the new owner on behalf of the Company through July 31,
1998.


                                       22
<PAGE>
(B)  RESTATEMENT  FOR  1998
Subsequent  to  the  issuance of the Company's consolidated financial statements
for  the  year ended December 31, 1998, it was determined that the reported 1998
results  were  overstated.  Upon  examination,  it  was  determined that certain
revenue  and accounts receivables were over accrued, while certain expenses were
understated  due  to  an  inadequate  provision  of  accrued  unpaid  expenses.

The  Company  restated  its  1998  loss to approximately $8,939,044.  This is an
increase  of  $4,348,423 versus the previously reported loss of  $4,590,621. The
details  of  the  components  of  this  loss  are  discussed  below.:


     The 1998 revenue was overstated by $1,875,000.  This  adjustment was due to
     the  over  accruing  of  net  patient  revenue  and  the  related  accounts
     receivable. This was primarily caused by:

          1.   Inadequate  calculation  of  contractual  allowances for Medicare
               patients  of  $700,000  and for  potential  Medicaid  patients of
               $275,000.

          2.   Accounts  receivable  adjustments  of  $300,000  associated  with
               computer system errors related to net patient revenue.

          3.   Inadequate  reserves to provide for retroactive payor changes and
               patient day denials of $600,000.

     The 1998 expenses were  understated  by  $2,475,000  due to the  inadequate
     provision of accrued  unpaid  expenses and  incorrect  recording of journal
     entries. The items in this category consist of:

          1.   Lack of a provision  for the cost of tail coverage for the claims
               made malpractice insurance coverage. This amount is $128,000.

          2.   Interest  expense and property taxes on a discontinued  operation
               were not accrued in the amount of $820,000.

          3.   A provision  was not made for certain  state and local taxes that
               are not related to the Corporation's net income but rather to the
               capital structure or to the net revenue of the Corporation. These
               amounted to $69,000.

          4.   Interest  expense and  commission due on certain of the Company's
               notes  was  not  adequately   provided  for.  These  amounted  to
               $414,000.

          5.   A provision was not made for commissions of $84,000 to be paid on
               a terminated lease.

          6.   Certain  expense  items  received  after  the end of the year for
               services  rendered  during the year were not provided for.  These
               amounted to $460,000.  The items included  legal fees,  provision
               for  retrospective  adjustment of certain insurance expense and a
               general provision for unrecorded liabilities.

          7.   Certain  prepaid  expenses  and  deposits  that  should have been
               written off were not. These amounted to $300,000.

          8.   Pharmacy expenses in the amount of $200,000 were not recognized.


As  a  result,  the accompanying consolidated financial statements as of and for
the  year  ended  December  31,  1998  present  the  restated  results.

A  summary  of  the  effects  of  the  restatement  follows:

<TABLE>
<CAPTION>
                                    1998          1998
                                 PREVIOUSLY     RESTATED
                                  REPORTED
<S>                             <C>           <C>

Net Revenues                    $21,617,054   $19,948,895

Income (Loss) from Operations   $(2,734,793)  $(6,025,624)

Net Income (Loss)               $(4,590,621)  $(8,939,044)
</TABLE>


                                       23
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996


16.     Restatement  (continued):

<TABLE>
<CAPTION>
                                      ASSETS


                                                          December 31, 1998
                                                  -------------------------------
                                                    As previously
                                                       Reported        Restated
                                                  ------------------  -----------
<S>                                               <C>                 <C>
Current assets:
Cash                                              $          115,242  $   115,242
Accounts receivable,  net                                  5,588,188    4,411,418
Prepaid and other current assets                             224,215      175,659
                                                  ------------------  -----------
   Total current assets                                    5,927,645    4,702,319
                                                  ------------------  -----------
Contract rights, net of accumulated amortization
  of $1,023,619 in 1998 and $531,011 in 1997                 265,300      265,300
                                                  ------------------  -----------

Real estate and other assets held for sale                 1,100,000    1,100,000
                                                  ------------------  -----------

Property, plant and equipment, net                        14,151,787   14,151,787
                                                  ------------------  -----------

Other assets:
Goodwill, net of accumulated amortization
  of $496,924 in 1998 and $257,598 in 1997                 1,527,981    1,705,231
Deferred finance costs, net of accumulated
  amortization of $1,759,635 in 1998 and
  $241,648 in 1997                                           443,172      443,172
Security deposits                                            109,334       10,467
Restricted cash                                              207,041      207,041
Other                                                        981,436      609,610
                                                  ------------------  -----------
                                                           3,268,964    2,975,521
                                                  ------------------  -----------

                                                  $       24,713,696  $23,194,927
                                                  ==================  ===========
</TABLE>


                                       24
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996


16.     Restatement  (continued):

                      LIABILITIES AND SHAREHOLDERS' EQUITY


                                             December 31, 1998
                                   ----------------------------------
                                      As Previously
                                        Reported         As Restated
                                   -------------------  -------------
<S>                                <C>                  <C>
Current liabilities:
Line of credit                     $        4,308,703   $  4,308,703
Current portion of:
  Long-term debt                           15,199,388     16,191,983
  Lease termination fee payable                38,565         38,565
Account payable                             3,748,884      3,748,882
Advances, officers-shareholders               910,692      1,332,692
Accrued expenses                              840,354      1,851,026
Payroll and payroll taxes payable           3,048,183      3,048,183
Due to Medicare                             1,000,000      1,692,389
                                   -------------------  -------------
                                           29,094,769     32,212,423
                                   -------------------  -------------

Long term liabilities:
Notes payable                               2,098,907      2,098,907
Lease termination fee                          93,467         93,467
                                   -------------------  -------------
                                            2,192,374      2,192,374
                                   -------------------  -------------

Shareholders' deficiency:
Preferred stock                                    17             17
Common stock                                   15,949         15,949
Additional paid in capital                 11,374,340     11,086,340
Accumulated deficit                       (17,963,753)   (22,312,176)
                                   -------------------  -------------
                                           (6,573,447)   (11,209,870)
                                   -------------------  -------------

                                   $       24,713,696   $ 23,194,927
                                   ===================  =============
</TABLE>


                                       25
<PAGE>
<TABLE>
<CAPTION>
                               CORECARE SYSTEMS, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          DECEMBER 31, 1998, 1997 AND 1996

16.     Restatement  (continued):
                        CONSOLIDATED STATEMENTS OF OPERATIONS


                                               December 31, 1998
                                ----------------------------------------
                                      As Previously
                                         Reported             Restated
                                --------------------------  ------------
<S>                             <C>                         <C>
Revenue:
Patient services, net           $              18,125,610   $16,457,451
Management services                             1,962,803     1,962,803
Health and fitness center                         450,625       450,625
Rental income                                   1,078,016     1,078,016
                                --------------------------  ------------
                                               21,617,054    19,948,895
                                --------------------------  ------------
Direct costs:
Patient services                                8,684,360     8,884,360
Management services                               842,438       842,438
Health and fitness center                         278,774       278,774
                                --------------------------  ------------
                                                9,805,572    10,005,572
                                --------------------------  ------------

Gross profit                                   11,811,482     9,943,323
                                --------------------------  ------------

Operating expenses:
Salaries and employee benefits                  3,418,430     3,552,430
Selling and administrative                      5,906,911     6,994,583
Amortization                                    2,423,054     2,423,054
Depreciation                                      482,360       482,360
Provision for bad debts                         1,946,140     2,147,140
Impaired asset write down                         369,380       369,380
                                --------------------------  ------------
Total operating expenses                       14,546,275   15,968,947
                                --------------------------  ------------

Income (loss) from operations                  (2,734,793)   (6,025,624)
                                --------------------------  ------------

Non-operating expenses:
Interest expense                                1,855,828     2,913,420
                                --------------------------  ------------
                                                1,855,828     2,913,420
                                --------------------------  ------------

Net loss                        $              (4,590,621)  $(8,939,044)
                                ==========================  ============

Basic net loss per share        $                   (0.33)  $     (0.65)
                                ==========================  ============

Diluted net loss per share      $                   (0.33)  $     (0.65)
                                ==========================  ============

Weighted  average  number  of
common  shares
</TABLE>


                                       26
<PAGE>
(C)  RESTATEMENT  FOR  1997


     In  its  Registration  Statement on Form 10-SB, the Company reported a loss
from  operations  of  $(460,259)  for  the  year ended December 31, 1997, a loss
before  income  tax  benefit  of  $(2,586,076)  and  net income after income tax
benefit  of  $1,197,656.  Subsequent  to the filing of the Company's Form 10-SB,
the  Company  determined  that  the reported 1997 results were overstated due to
over-accrual  of  revenues.  The  Company  over-accrued  amounts  due  from  a
significant  third party payor, resulting from a miscalculation of the allowable
per  diem  charges  for  in-patient  services.  Primarily  as  a  result  of the
restatement of these revenues, the Company's loss from operations is anticipated
to  be  restated  from  ($460,259)  to  approximately  $(2,840,259).

     Based  on  the  prior  calculation  of  the  allowable per diem charges for
inpatient services, at the time the 1997 financial statements were issued and at
the  time  the  10-SB was filed, Management's estimates permitted the Company to
record  a  deferred  tax  benefit  in 1997 in accordance with SFAS 109.  Had the
recalculated  per  diem charge been used in Management's estimates, the deferred
tax  benefit  would  not  have been recognized.  As a result, the Company's 1997
results  will  be  restated  to  eliminate  the  $3,783,732  income  tax benefit
previously  reported.  As a result of the elimination of this income tax benefit
and  the  reduction in revenues, the Company's previously reported net income of
$1,197,656  in  1997  will  be  restated  to  a  net  loss  of  $(4,966,076).

<TABLE>
<CAPTION>
                                    1997          1997
                                 PREVIOUSLY     RESTATED
                                  REPORTED
                                ------------  ------------
<S>                             <C>           <C>

Net Revenues                    $12,854,184   $10,465,184

Income (Loss) from Operations   $  (460,259)  $(2,840,259)

Net Income (Loss)               $ 1,197,656   $(4,966,076)
</TABLE>

     A  summary  of  the  effects  of  the  restatement  follows:


                                       27
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996


                            Restatement (continued):

                                     ASSETS



                                    December 31, 1997
                                      ---------------
                                      As Previously
                                         Reported     As Restated
                                      --------------  ------------

<S>                                   <C>             <C>
Current assets:
Cash                                  $      304,267  $    304,267
Accounts receivable, net                   4,955,473     2,575,473
Prepaid & other current assets               212,367       212,367
Deferred income taxes                                    1,555,000
                                                      ------------
Total current assets                       7,027,107     3,092,107
                                      --------------  ------------

Contract rights, net of accumulated
  amortization of $1,023,619 in 1998
  and $531,011 in 1997                       548,663       548,663
                                      --------------  ------------

Real estate and other assets
  held for sale                            1,513,723     1,513,723
                                      --------------  ------------

Property, plant and equipment net         10,727,385    10,727,385
                                      --------------  ------------

Other assets:
  Goodwill, net of
  accumulated amortization
  of $496,924 in 1998
  and 257,598 in 1997                      1,801,155     1,801,155
  Deferred finance costs,
  net of accumulated
  amortization of
  $1,759,635 in 1998 and
  $241,648 in 1997                           305,354       305,354
  Security deposits                          108,468       108,468
  Restricted cash                            197,394       197,394
  Deferred income taxes                                  2,228,732
  Other                                      247,232       247,232
                                      --------------  ------------
                                           4,888,335     2,659,603
                                      --------------  ------------

                                      $   24,705,213  $ 18,541,481
                                      ==============  ============
</TABLE>


                                       28
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996



16.     Restatement  (continued):



                 LIABILITIES  AND  SHAREHOLDERS'  EQUITY


                                       December 31, 1997
                                      -------------------
                                        As Previously
                                           Reported          As Restated
                                      -------------------  ---------------

<S>                                   <C>                  <C>
Current liabilities:
  Line of credit                      $        1,582,240   $    1,582,240
  Current portion of:
  Long-term debt                              10,203,425       10,203,425
  Lease termination fee payable                   38,565           38,565
  Obligations under capital lease                 71,763           71,763
  Accounts payable                             2,275,442        2,275,442
  Advances, officers-shareholders              1,013,428        1,013,428
  Accrued expenses                             2,091,675        2,091,675
  Payroll and payroll taxes payable            1,688,105        1,688,105
                                      -------------------  ---------------
  Total current liabilities                   18,964,643       18,964,643
                                      -------------------  ---------------

Long term liabilities:
  Notes payable                                2,192,798        2,192,798
  Lease termination fee payable                   93,467           93,467
                                      -------------------  ---------------
                                               2,286,265        2,286,265
                                      -------------------  ---------------
Commitments and contingencies

Company obligated mandatorily
  redeemable Series E convertible
  preferred stock (redemption value
  $943,400 in 1998 and  1997)                  1,293,271        1,293,271
                                      -------------------  ---------------

Shareholders' equity (deficiency):
  Preferred stock                                     26               26
  Common stock                                    12,694           12,694
  Additional paid in capital                   9,357,714        9,357,714
  Accumulated deficit                         (7,209,400)     (13,373,132)
                                      -------------------  ---------------
                                               2,161,034       (4,002,698)
                                      -------------------  ---------------

                                      $       24,705,213   $   18,541,481
                                      ===================  ===============
</TABLE>


                                       29
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996




                                       December 31, 1997
                                      -------------------
                                         As Previously
                                           Reported         As Restated
                                      -------------------  -------------
<S>                                   <C>                  <C>
Revenue:
  Patient services, net               $       10,050,834   $  7,670,834
  Management services                          1,760,075      1,760,075
  Health and fitness center                      521,414        521,414
  Rental income                                  512,861        512,861
                                      -------------------  -------------
                                              12,845,184     10,465,184
                                      -------------------  -------------
Direct costs:
  Patient services                             4,753,042      4,753,042
  Management services                            254,269        254,269
  Health and fitness center                      304,055        304,055
                                      -------------------  -------------
                                               5,311,366      5,311,366
                                      -------------------  -------------

Gross profit                                   7,533,818      5,153,818
                                      -------------------  -------------

Operating expenses:
  Salaries and employee benefits               2,716,304      2,716,304
  Selling and administrative                   3,730,504      3,730,504
  Amortization                                   677,067        677,067
  Depreciation                                   279,546        279,546
  Provision for bad debts                        590,656        590,656
  Impaired assets write down                           -              -
  Total operating expenses                     7,994,077      7,994,077
                                      -------------------  -------------

Income (loss) from operations                   (460,259)    (2,840,259)
                                      -------------------  -------------

Non-operating expenses:
  Interest expense                             1,844,284      1,844,284
  Factor fees                                    281,533        281,533
                                      -------------------  -------------
                                               2,125,817      2,125,817
                                      -------------------  -------------

Net income (loss) before
     income tax benefit                       (2,586,076)    (4,966,076)

Income tax (benefit) expense                   3,783,732
                                      -------------------

Net income (loss)                     $        1,197,656   $ (4,966,076)
                                      ===================  =============

Basic net income (loss) per share     $              .11   $       (.44)
                                      ===================  =============

Diluted net income (loss) per share   $              .08   $       (.44)
                                      ===================  =============

Weighted average number of
  common shares outstanding                   11,326,617     11,326,617
                                      ===================  =============
</TABLE>


                                       30
<PAGE>
(C)     RESULTS  OF  OPERATIONS:

          (C)(1)     1998  VERSUS  1997:

Revenues:
---------
Operating revenues in 1998 increased by $9,483,711, or 91%, from $10,465,184  in
1997  to $19,948,895 in 1998.  The increase was primarily due to improvements in
Net  Patient  Service Revenues, which increased by $8,786,617 from $7,670,834 in
1997  to $16,457,451, as a  result of a 114% increase in patient days in 1998 at
the  Kirkbride  Center  and  at  Westmeade  at  Warwick.

-     Acute  inpatient  days at the Kirkbride Center increased by 134% to 29,320
in  1998  from  12,489  in  1997  due  primarily  to:

1.     Improvement  in  market  awareness  of  Kirkbride  programs and a greater
number  of  referral  sources.

2.     Temple  University  affiliation

3.     Increase  in  admissions  related  to  the new programs added to Corecare
Systems,  Inc.'s  continuum  of  services,  especially  the new drug and alcohol
rehabilitation  programs.

-     Kirkbride  Center opened a 43 bed licensed drug and alcohol rehabilitation
center  in  July  1998  which  was  then  expanded to 63 beds in February, 1999.

-     Kirkbride  Center  entered  into  contracts  with  the  Federal  Probation
Department  in  1998  to  provide  psychiatric  and  substance  abuse  services.

<TABLE>
<CAPTION>
                KIRKBRIDE CENTER - INPATIENT ACTIVITY STATISTICS

1997
----

QUARTER                        1st    2nd    3rd    4th
----------------------------  -----  -----         ------
<S>                           <C>    <C>    <C>    <C>

Admissions                             289    504     622
----------------------------         -----  -----  ------
Average Length of Adult Stay          8.56   8.93    8.86
----------------------------         -----  -----  ------
Patient Days                         2,295  4,467   5,524
----------------------------         -----  -----  ------
Average Daily Census                  25.2   48.6    60.0
----------------------------         -----  -----  ------


1998
----------------------------
QUARTER                         1st    2nd    3rd     4th
----------------------------  -----  -----  -----  ------
Admissions                      726    735    787     831
----------------------------  -----  -----  -----  ------
Average Length of Adult Stay   9.29  10.34  11.49   12.65
----------------------------  -----  -----  -----  ------
Patient Days                  6,898  7,599  9,044  10,512
----------------------------  -----  -----  -----  ------
Average Daily Census           76.6   83.5   98.3   114.3
----------------------------  -----  -----  -----  ------
</TABLE>


Terms  Defined:
---------------
     Admissions
     -  A  patient  which a doctor has diagnosed as requiring inpatient hospital
        treatment.

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

                                       31
<PAGE>
Terms  Defined  Continued:
--------------------------

     Average  Length  of  Stay
     -     Total  inpatient  days,  including acute care plus drug and alcohol,
           divided by the  total  number  of  admissions  during  the  period

     Average  Daily  Census
     -     The  average  number  of  patients  in  the  hospital.

     Management  Services Revenues increased by $202,728 from $1,760,075 in 1997
to  $1,962,803  in  1998  primarily  as  a  result  of the assets acquisition of
Preferred  Medical  Services  in  July  1998,  which was partially offset by the
expiration  of  the  management  contract with St. Luke's/Quakertown Hospital in
June  1998.

     Revenue  from  the  Health  and  Fitness  Center  declined  by $70,789 from
$521,414  in  1997  to $450,625 in 1998 due to a decline in membership resulting
from  increased  competition and operating difficulties with the physical plant.

     Rental  Income increased by $565,155 from $512,861 in 1997 to $1,078,016 in
1998  due  to increased space leased to third parties at the Kirkbride Center as
well  as the full year of rental income in 1998 as compared to a partial year in
1997  for  leases  signed  in  1997.


Direct  Costs:
--------------
     Direct  costs increased 88.4% from 5,311,366 in 1997 to $10,005,572 in 1998
primarily  due  to  increases  in  Patient Services of $4,131,318 and Management
Services  of  $588,169,  which were partially offset by reductions of $25,281 at
the  Health  and  Fitness Center. Direct costs declined as a percentage of total
revenue  from  51%  to  50%.

     Cost of Patient Services increased by $4,131,318 from $4,753,042 in 1997 to
$8,884,360  in  1998  due  to  increased census at Kirkbride and at Westmeade at
Warwick.  Patient  Services  Expenses  declined as a percentage of total revenue
from  45.4%  in  1997  to  44.5%  in 1998 due to improved staffing controls. The
Company established a CoreFlex staffing policy to maintain staffing at efficient
levels per occupied bed as census fluctuates. A centralized staffing coordinator
department  manages  staffing  on  an  integrated  basis throughout the company.

     Cost of Management Services increased by $588,169 from $254,269 to $842,438
in  1998  primarily  as  a result of costs associated with the Preferred Medical
Services  acquisition.

     Cost of the Health and Fitness Center decreased by $25,281 from $304,055 to
$278,774  as  the  company  adjusted  staffing  commensurate with the decline in
membership.

Gross  Profits:
---------------
     Gross  profits  increased by $4,789,505 or 92.9% from $5,153,818 in 1997 to
$9,943,323  in  1998.  The Gross Margin increased from 49.2% in 1997 to 49.8% in
1998.


                                       32
<PAGE>
Operating  Expenses:
--------------------
     Operating  expenses  increased by $7,974,870 from $7,994,077 to $15,968,947
primarily  due to increases of $3,264,079 in Selling and Administrative Expense,
$1,745,987 in Amortization Expense, $1,556,484 in Bad Debt Expense, and Salaries
Expense  of  $836,126.

     Salaries  and  Employee  Benefits  expense  increases  were attributable to
higher  staffing  levels  necessary  to  service  the  increase in average daily
census.  Salaries  and  Employee  Benefits  decreased  as  a percentage of total
revenue  from  26.0%  in  1997  to  17.8%  in 1998 due to operating efficiencies
achieved  at  the  higher revenue level in 1998. 1997 was a start up year at the
Kirkbride  Center.  Comparisons  between 1998 and 1997 is difficult as a portion
of  these  costs  were  included  in  a  third party management contract for the
Kirkbride  Center which are shown in Selling and Administrative Expense in 1997.

     Selling  and Administrative Expense increased by $3,264,079 from $3,730,504
to  $6,994,583  due  to  costs associated with internally managing the Kirkbride
Center  resulting  from  the  increase  in  average  daily  census.  Selling and
Administrative  Expense  declined as a percentage of total revenue from 35.6% to
35.0%.

     -     Due to the 1997 Management Contract  being  allocated to Salaries and
           Administrative  Expenses; a relevant comparison is the combined costs
           of  these  categories  which  declined  from  61.6% to 52.9% in 1998,
           reflecting improvements in  operating  efficiencies.

     Amortization  Expense  increased  primarily  due  to Deferred Finance Costs
associated  with  the WRH mortgage, which were fully amortized over the one-year
term  of  the  financing.

     Depreciation Expenses increases were attributable to the investments in the
Kirkbride  Center  necessary  to  generate  Rental  Income.

     Provision  for  Bad  Debt  Expense increased due to difficulties associated
with  the  start-up  of  the  Kirkbride  Center  operations,  lack of historical
experience  associated  with  municipal  funded  clients.

     The  Impaired  Asset  Write Down Expense of $369,380 is attributable to the
Lakewood property. The property is under a letter of intent for sale and its net
book  value  was  reduced  to  reflect  its  value  under the contemplated sale.

     Interest Expense and Factoring Fees declined as the Company refinanced high
cost  debt obligations with less costly debt financing. The Company restructured
its  factoring  arrangement on its receivables in 1998 with Healthcare Financial
Partners  to  a  revolving  line  of  credit.

     The  Company  produced a net loss of ($8,939,044) in 1998 compared to a net
loss  of  ($4,966,076)  in  1997.


                                       33
<PAGE>
     (C)(2)     1997  VERSUS  1996:

Revenues:
---------
     Operating revenues increase by $3,440,880 or 49% from $7,024,304 in 1996 to
$10,465,184 in 1997 primarily as a result of acquisition of the Kirkbride Center
made in early 1997.  Revenues of entities acquired in 1997 (including Kirkbride)
from their respective acquisition dates were $8,512,521, or approximately 66% of
consolidated  1997  revenues,  as  follows:

     -     Kirkbride  Center  -  5,138,102,  or  49%  of  revenues;

     -     Quantum/Managed  Mental  Health  Inc.   -  (no  revenues);

     -     CoreCare  Management, Inc. - $994,419 for the first six months of
           1998, or 8% of revenues (this  unit  has  also  been  used "in house"
           to service other operations  of  the  Company);

     The  balance  of  1997  revenue  was  generated  by various subsidiaries of
$4,332,663  or  approximately 41% of revenue of which Westmeade represented 20%.
The  relative  significance,  in  terms  of  their  contribution to consolidated
revenues,  of  entities  acquired  in  1997 was substantially reduced because of
Kirkbride's  significance.


Direct  Costs:
--------------
     Direct  costs  in 1997 increased by $2,186,350 from $3,25,016 to $5,311,366
primarily  as  a  result  of  the  entities  acquired  during  the  year.

Operating  Expenses:
--------------------
     Total Operating Expenses increased by $1,289,535 from $6,704,542 in 1996 to
$7,994,077  in 1997 primarily due to increases in Salaries and Employee Benefits
Expense  of $704,354, Selling & Administrative Expense of $204,025, and Bad Debt
Expense  of  $216,055.

     Selling and Administrative Expenses in 1997 increased approximately 5% over
1996  to  $3,730,004  or 36% of revenues versus $3,526,479 or 50% of revenues in
1996.  This  is  attributable  to  the increase in revenues without a comparable
increase  in  fixed  costs  reflecting greater operational efficiency.  Overhead
efficiency  improved  due  to  revenue  growth  as  well  as  consolidation  of
administrative  costs.  In  August 1997, the Company closed its former corporate
office  located  in  Erdenheim,  PA  and  merged  such  functions  with CoreCare
Management,  Inc.  thereby  decreasing  annual  overhead  expenses.

     Operating  salaries  and  employee  benefits represented 26% and 29% of net
revenues  for 1997 and 1996, respectively, due again to the increase in revenues
without  a  comparable  increase  in  fixed  costs.

     Depreciation  expense  increased  by $60,610  in 1997, primarily reflecting
the  increase  in  depreciable  assets resulting from the Kirkbride acquisition.

                                       34
<PAGE>
     Amortization  expense  increased  from  $572,576  to  $677,067  due  to the
increase  in  debt  related  costs  during  1997.

     Interest expense increased by $1,375,426 to $2,125,817 in 1997 primarily as
a  result  of  the  acquisition  of  the  Kirkbride  Center.

     The  weighted  average  number  of  common  shares  outstanding in 1997 was
11,326,617  shares, which represented a 29% increase over 1996 levels.  Net gain
per  common  share  was  $.44  in  1997  from  $(.41)  in  1996.


ANALYSIS  OF  1997  OPERATIONS:
-------------------------------
     In  1996  the  Company  had  only  four  operating  units,  consisting  of
residential  psychiatric  treatment facilities (2), outpatient care and a health
and  fitness  center. In 1997, the Company's operations were carried on in seven
service  lines:

     1)     inpatient  hospital  at  Kirkbride
     2)     real  estate  activities  at  Kirkbride
     3)     residential  psychiatric  treatment  facilities,
     4)     outpatients  care
     5)     hospital-based  management  services
     6)     health  and  fitness  center
     7)     billing  and  practice  management

                                       35
<PAGE>
     These  service  lines  produced  a  loss from operations, on a consolidated
basis,  primarily  attributable  to:
     1)     Startup  of  inpatient hospital facilities with census levels below
            break even;
     2)     Operating expenses of acquired entities, due  in  part to inadequate
            operating controls,  budgets  and  management  information  systems.
     3)     Overhead  payroll  relative  to  the  Company's  revenue  base.
     4)     Rate  structures.

LIQUIDITY  AND  CAPITAL  RESOURCES

Operating  Activities:
----------------------
     Net  Cash  Provided  {Used} by Operations was ($2,571,178), ($590,800), and
($3,150,013)  in  1998,  1997,  and  1996,  respectively.  The  decrease in cash
provided by operations in 1998 compared to 1997 was primarily the result of  (I)
increase  in  the  net  loss which was partially offset by increases in non-cash
expenses for Amortization, Depreciation, and Impaired Asset Write-down, and (II)
increase  in  accounts  receivables  of  $1,211,806  associated with the rise in
revenue.

Investing  Activities:
----------------------
     Investing  activities  used  $5,680,966,  $8,582,284, and $435,332 in 1998,
1997,  and  1996,  respectively.

Financing  Activities:
----------------------
     The  company borrowed $13,151,789, $8,669,095, and $4,678,390 during fiscal
years  1998, 1997, and 1996, respectively. The borrowings in 1997 were primarily
related  to the acquisition of the Kirkbride facility and in 1998 the borrowings
were  primarily  used  to  refinance  the  debt  associated  with  the Kirkbride
acquisition  and  start-up losses.  The company repaid $9,311,823, $618,080, and
$2,551,248  in  debt  during  fiscal  years  1998, 1997, and 1996, respectively.

     On  February  27,  1997,  the  Company  through its wholly owned subsidiary
CoreCare  Behavioral  Health Management, Inc. acquired the real estate, licenses
and other assets of the Institute of Pennsylvania Hospital for $4.5 million, and
named  it  Kirkbride  Center.  The Company paid $4,500,000 for the property. The
Company  financed  the  acquisition by borrowing the sum of  $6,440,000 from GLN
Capital  Co.,  LLC.,  an  independent  real  estate  company,  in exchange for a
Promissory  Note  secured  by  a  mortgage  on  the  property.

     In  February  1998,  the Company refinanced the property with WRH Mortgage,
Inc. for $13,000,000, using the proceeds to satisfy the mortgage indebtedness to
GLN,  to pay for tenant improvements to the property required in connection with
lease  commitments,  and to satisfy certain short-term indebtedness. The term of
the  loan has been extended to June 30, 1999 from March 1, 1999.  The loan bears
interest  at  the  London  Interbank  Offered Rate (LIBOR) plus six and one half
(6.5%)  per  cent.

On  May  21,  1998,  certain  subsidiaries  of  the  Company, including CoreCare
Behavioral Health Management, Inc., Penn Interpersonal Communications, Inc., and
Managed  CareWare, Inc. ("Borrowers") entered into a Loan and Security Agreement
("Loan Agreement") with HCFP Funding, Inc. pursuant to which a revolving line of
credit  up  to  a  maximum  of  $5,000,000  was established. The indebtedness is
evidenced by a promissory note and is secured by a lien on all of the Borrowers'
account  receivable.

                                       36
<PAGE>
     On  December  30,  1998,  Philadelphia  Ventures and its associated venture
funds  as holders of Class E Convertible Preferred Stock delivered notice of its
election  to  convert 9,933.72 preferred shares into 1,192,046 of common shares.
The transaction did not generate any capital to the company but did increase the
number  of  common  shares  outstanding.

     In  June  1998, the Company was successful in consummating a revolving line
of  credit  of  a  maximum  of $5,000,000 with HCFP Funding, Inc. secured by the
accounts  receivable  of  four of the Company's subsidiaries.  This facility has
improved  the  Company's liquidity by providing for working capital for services
rendered  less than 150 days.  Given the growth of the Company additional equity
or  debt  financing  may  be  required  in  order  to realize its business plan.

     In  January 1998, the Company entered into a master equipment lease program
with  Copelco  Capital,  Inc.  for approximately $396,000, the proceeds of which
were used to finance certain equipment such as computers, telephones, accounting
software and office equipment.  The term of the financing is for five years.  At
December  31,  1998,  approximately  $85,000  was  available from this facility.


RECENT  SALES  OF  UNREGISTERED  SECURITIES

     The  following  sales  of securities of the Company took place as indicated
below.  Unless otherwise described, all such sales were a result of transactions
that  were exempt from registration under the Securities Act pursuant to Section
4(2)  of the Securities Act, and the shares of the Company's 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  -  1998
--------------------------------------
     As  of July 1, 1998, the Company issued a total of 711,444 shares of Common
Stock  to  four consultants and advisors of the Company for consulting and other
services  rendered.

ACQUISITION  OF  ASSETS  OF  PREFERRED  MEDICAL  SERVICES,  INC.
----------------------------------------------------------------
     On  April  15,  1998,  the  Company  acquired  certain assets and scheduled
liabilities  of  Preferred  Medical  Services, Inc. ("Preferred,") a billing and
practice  management  business.  Pursuant to the terms of the Assets Acquisition
Agreement, the Company issued on May 4, 1998 a total of 250,000 shares of Common
Stock  to  stockholders of Preferred. The transaction was exempt from securities
registration  as  the  principals  were  experienced  and  knowledgeable  in the
industry.  In  issuing  the shares to the two shareholders of Preferred Medical,
the  Company relied on the exemption from registration under Section 4(2) of the
Securities  Act.  The  Company  relied  on  4(2)  because  there  were  only two
offerees,  both  of  whom were knowledgeable in the Company's industry, and, the
Company  believes,  in  financial  matters  generally;  the  transaction  was  a
negotiated sale of a business in which the Company believed the two shareholders
were  advised by counsel; and the shares issued were "restricted securities" and
had  transfer  restrictions  placed  on  them which are customary for restricted
securities.


                                       37
<PAGE>
1998  -  SHARES  ISSUED  TO  EMPLOYEES  UNDER  COMPANY  1996  STOCK  PLAN
-------------------------------------------------------------------------
     Out  of  the  shares  reserved  for issuance pursuant to the Company's 1996
Stock  Plan,  as of July 1, 1998, the Company issued a total of 62,300 shares of
Common Stock to a total of 199 employees of the Company. These transactions were
exempt from registration under the Securities Act pursuant to Rule 701 under the
Securities  Act.  The shares of Common Stock issued are restricted securities as
that  term  is defined in Rule 144 and may be resold only in compliance with the
registration  provisions  of  the  Securities  Act  or  an exemption thereunder.

FEBRUARY  1998  INVESTMENT
--------------------------
     In  consideration  of  the payment of $.50 per share, on February 26, 1998,
the  Company issued a total of 250,000 shares of Company Stock to two accredited
investors.  In  connection  with the sale, the company further agreed that for a
period of one-year beginning May 18, 1998, the investors shall have the right to
require  the  Company  to  repurchase  the  shares  for  $1.00  per  share.  The
transactions  with  the  investors  were  exempt  from  registration  under  the
Securities  Act  pursuant  to Section 4(2) of the Securities Act.  The shares of
Common  Stock  issued to the investors are restricted securities as that term is
defined  in  Rule 144 and may be resold only in compliance with the registration
provisions  of  the  Securities  Act  or  an  exemption  thereunder.

NOTES  AND  WC/WD  WARRANTS
---------------------------
     Between  November  1995  and  February  1996,  in  separately  negotiated
transactions,  the  Company  borrowed a total of $359,750 from eight individual,
accredited  investors,  for a term of one year from the date of investment.  The
debts  were  evidenced  by Promissory Notes bearing interest initially at 7% per
annum  and  later  by  amendment  at  10%  per annum. In addition, the investors
received  warrants  to  purchase an aggregate of 334,771 shares of the Company's
Common  Stock at $1.125 per share.  None of the investors were previously or are
currently  affiliated  with  the  Company.  The issuance of these securities was
exempt  from  registration  under Rule 506 of Regulation D. Subsequently, during
1997  and  1998,  the  Company, in consideration of the investors' agreements to
waive  alleged  defaults under the notes and to forbear payment, issued warrants
to  purchase  an  aggregate  of  246,935 shares of the Company's Common Stock at
$1.125  per  share,  and  an aggregate of 418,366 shares of the Company's Common
Stock. The transactions with the lenders were exempt from registration under the
Securities  Act  pursuant  to Section 4(2) of the Securities Act.  The shares of
Common  Stock  issued  to  the lender, and the shares underlying the warrants if
exercised, are restricted securities as that term is defined in Rule 144 and may
be  resold only in compliance with the registration provisions of the Securities
Act  or  an  exemption  thereunder.

ISSUANCE  OF  COMMON  STOCK  TO  CONVERT  DEBT
----------------------------------------------
     Pursuant  to  an  agreement dated December 31, 1995, the Company on May 14,
1997  issued 50,000 shares of restricted Common Stock to an investor in exchange
for  all  outstanding  obligations  owed  to  him  by  the  Company's subsidiary
Westmeade  Healthcare,  Inc.  On  January  27,  1998, the Company issued 100,000
shares  of  restricted  Common  Stock  to  the  investor  as payment in full for
CoreCare  Behavioral  Health Care, P.C., a Pennsylvania professional corporation
owned  by  the  investor.


                                       38
<PAGE>
OUTLOOK-LIQUIDITY  AND  CAPITAL  RESOURCES

     Interest  payments  on the notes, maturity of certain debt obligations, and
liabilities  associated  with  accrued  payroll  taxes  and  Medicare  represent
significant liquidity requirements for the company in 1999. The company believes
that  the  revenue increases and operating results realized from improvements in
average  daily  census  and operational efficiencies will permit it to refinance
many  of  its  debt  and  liability  obligations with a medium term or long term
structured debt financing.  The appraised values of the Company's two facilities
far exceed the current book value and debt level on the Company's balance sheet.
The  Company  is  highly  confident  that  its  short-term  liabilities  can  be
restructured  into  long-term  mortgage  debt.

     Medicare is a cost based reimbursement program. The Company had substantial
growth  in non-Medicare and Drug and Alcohol Rehabilitation, which decreased the
percentage  of  Medicare  patients  in  1998  versus  1997.  This  resulted  in
anticipated payments due to Medicare of $1,000,000.  The Company has established
a  reserve account with Healthcare Financial Partners so that such funds will be
available  to  the  Company  when  due.

YEAR  2000

The  company  believes  its  internal systems are mostly in compliance with Year
2000  protocol.  At this time there are a few non-critical systems which are not
in  compliance  but  have been identified and the Company believes these systems
will  be  corrected  before  year-end.

     The  Company  is dependent upon vendors and third party payors, clients and
is  surveying  them  to  ascertain their preparedness. The Company is developing
contingency  plans  to  protects its ability to financially operate in the event
critical  third  parties  have  systems problems resulting from failure to be in
Year  2000  compliance.

     The  Company's  total  cost  is  estimated  to  be  $200,000  for Year 2000
compliance.


                                       39
<PAGE>
SIGNATURES
Pursuant  to  the requirements of Section 13 or 15(d) of the Securities Exchange
Act  of  1934,  the  Registrant  has duly caused this report to be signed on its
behalf  by  the  undersigned;  thereunto  duly  authorized,  in  the  City  of
Philadelphia,  State  of  Pennsylvania,  on  April  8,  1999.

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  April  8,  1999

SIGNATURE                              TITLE

/s/  Thomas  T.  Fleming               Chairman  of  the  Board
------------------------
Thomas  T.  Fleming


/s/  Rose  S.  DiOttavio               President  and  Director
------------------------
Rose  S.  DiOttavio


/s/  Thomas  X.  Flaherty              Director
-------------------------
Thomas  X.  Flaherty


/s/  George  P.  Stasen                Director
-----------------------
George  P.  Stasen


/s/  Charles  A.  Burton               Director
------------------------
Charles  A.  Burton


/s/  Brad  Barry                       Executive  Vice  President  &
----------------
Brad  Barry                            Chief  Financial  Officer



ITEM  7  -     FINANCIAL  STATEMENTS

     The  financial  statements can be found at the end of this report beginning
on  page  55.



ITEM  8  -     CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS
          ON  ACCOUNTING  AND  FINANCIAL  DISCLOSURE

     None.


                                       40
<PAGE>
                                    PART III
                                    --------

ITEM  9  -     DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL
     PERSONS

     As of March 1999, the directors, executive officers, and senior managers of
the  Company  are  as  follows:

<TABLE>
<CAPTION>
     DIRECTORS  &  OFFICERS:

               NAME                  AGE               POSITION
<S>                                  <C>  <C>
Thomas T. Fleming                     72  Chairman of the Board of
Directors and CEO

Rose S. DiOttavio                     48  President, Treasurer and a Director

Thomas X. Flaherty                    38  Director

George P. Stasen                      53  Director

Charles A. Burton                     53  Director

Brad Barry                            54  Executive Vice President &
Chief Financial Officer

Keith Day, MBA                        42  Senior Vice President &
Corporate Secretary

Mark Novitsky, M.D.                   45  Senior Vice President &
Corporate Medical Director

Fred Baurer, M.D.                     41  Senior Vice President &
Medical Director, Kirkbride Center

John Schrogie, M.D.                   63  Senior Vice President

John Fleming                          44  Vice President Development

Ella M. Bowen, ED.D.                  53  Vice President of Community
Relations and Public Affairs

Meg Givnish-Mercer                    59  Vice President for Education and
Training

Daniel B. LoPreto, Ph.D.              39  Vice President of Quality
Management

Albert Campana, MBA                   48  Vice President for Core Services &
Risk Management and Kirkbride
& Senior Director of Administrative
Services
</TABLE>


                                       41
<PAGE>
<TABLE>
<CAPTION>

       SENIOR MANAGERS:
            NAME                              POSITION
<S>                             <C>
  David Baron, D.O., FACN       Director of Clinical Research

  Ernest J. Ritacco, CPA, MBA   Director of Finance

  Jeff Friedman, Ph.D., L.S.W.  Clinical Director of Westmeade
  at Warwick

  Roberta K. Mainiero, MBA      Controller - CMI / Director of
  Practice Management

  Erwin A. Carner, Ed.D., MSW   Sr. Director of Geriatric Continuum

  Sharon Irwin                  Sr. Director of Mental Health
  Continuum

  Laura Jones                   Sr. Director Substance
  Abuse Continuum

  Margaret Halas                Director of CoreCare Management Inc.

  Dennis Fontana                Director of Management Information
  Systems

  William Chambley              Director of Human
Resources
</TABLE>


All  directors  hold  office  until  the next annual meeting of stockholders and
until  their  successors  have  been  elected and qualified.  John Fleming, Vice
President  of  Corporate  Development is the son of the Chief Executive Officer,
Thomas  T.  Fleming.    No  director  receives any compensation for serving as a
director.

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.

                                       42
<PAGE>
     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.

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  Vice  Chairperson  of  Horizon House, a
non-profit  organization  serving  the mentally ill, homeless and disadvantaged.

     THOMAS  X.  FLAHERTY  has  been a Director of the Company since January 31,
1995  and  has  also  served  as Treasurer until August 1998 when he resigned as
Treasurer  due  to  time constraints. Mr. Flaherty has held comparable positions
with  certain of the Company's present subsidiaries since 1991.  Mr. Flaherty is
the  founder,  and  since  March  1990  has  served as President, of Value Added
Investment  Corporation  ("VAIC,")  specialized investment banking and financial
consulting  organization  headquartered  in  Narberth, Pennsylvania, since March
1990.  Prior  to  forming  VAIC,  Mr.  Flaherty  was  a  tax consultant with the
accounting  firms  of  Arthur  Andersen  and  Company  and  Coopers and Lybrand.
Previously,  Mr.  Flaherty  was  employed  as a Financial Analyst and Investment
Consultant by Shearson Lehman Brothers.  He has held or currently holds licenses
as  a  Certified  Public  Accountant  and  a  registered  securities  broker and
commodities  broker.

Mr. Flaherty is a recognized speaker and member of the National Speakers Bureau.
He  has  presented  and  lectured  worldwide  on various financial, business and
management  topics.  Outside of his daily responsibilities as President of VAIC,
Mr.  Flaherty also serves as a member of the Board of Directors of the following
corporations and other organizations; Durable Medical Equipment Corporation; ITI
Technical Services, Inc.; The Marquis Mortgage Corporation; Park Place Builders,
Inc.;  Senior  Lifestyles  Incorporated;  Universal  Trade  Corporation;  Living
Younger Longer, Inc.; M&M Opportunities, Inc.; The Northwestern Corporation; The
Northwestern  Properties  Company;  Northwestern  Enterprises,  Inc.;  The Amica
Company; Allied Health Care, Inc.; and Northwestern Management Services Company.

                                       43
<PAGE>
     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.

OFFICERS  OF  THE  COMPANY:
---------------------------

     BRAD  BARRY  joined  CoreCare  Systems, Inc. in June 1999 as Executive Vice
President  CFO.  Formerly, he was Senior Vice President and CFO and a founder of
Omnia.  Prior  to joining Omnia, Mr. Barry was the Vice President of Mergers and
Acquisitions  for  Vanguard.  Mr.  Barry has over 20 years of senior health care
financial  management  experience, having served both as Chief Financial Officer
and  Chief  Operating  Officer for various hospitals ranging in size from 100 to
300  beds.  In  addition,  he  has  extensive  experience  in  health  care data
processing, having been Vice President of Product Development for a major health
care  software  firm.  He is a member of Widener University's adjunct faculty in
their  MBA  in  Health  Administration.  Mr. Barry received a BS in Commerce and
Engineering  Science  from  Drexel University, his MBA in Accounting and Finance
from  Drexel  University  and  his  MHA from Widener University.  Currently, Mr.
Barry serves as a director on two non-profit health care provider boards and one
for-profit  health  care  company  in  the  medical  device  industry.


                                       44
<PAGE>
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  in  Philadelphia 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.

KEITH  DAY,  MBA joined the Company as Senior Vice President in July of 1998 and
became  Corporate  Secretary  in  December 1998.  Mr. Day is responsible for the
development  of Quantum Clinical Services Group, the Company's clinical research
subsidiary.  Prior  to  joining  the  Company,  Mr.  Day  had  been acting as an
independent consultant in the clinical research field.  From 1993 to 1997 he was
Director  of Finance for Airgas, Inc. in Radnor, PA where he was responsible for
investigating,  negotiating and structuring corporate development opportunities.
From  1989  to  1992  he  was  a  Project  Manager  for  Hines Interests Limited
Partnerships  in  Philadelphia,  PA.  From  1984  to 1989 he was Chief Financial
Officer  and  Principal  of  Conklin  Construction Corporation of Greenwich, CT.
From  1982  to  1984  he was a Senior Financial Analyst for Pepsico, Inc. in NY.
From 1979 to 1981 he was a Financial Management Associate for GTE Corporation in
Stamford,  CT.  Mr. Day received his BS in Economics in 1979 from the University
of  Pennsylvania,  Wharton School, and his MBA from Dartmouth College, Amos Tuck
School  of  Business  in  1983.

                                       45
<PAGE>
     JOHN  SCHROGIE,  M.D.  has  been  acting  as  the Senior Vice President for
Clinical  Research  since July of 1998 and is responsible for the development of
the  Company's  clinical  research  subsidiary, Quantum Clinical Services Group.
Dr.  Schrogie  is  trained  in  internal  medicine and completed a fellowship in
clinical pharmacology at John Hopkins University.  He received in BS from Boston
College  in  1956  and his M.D. from Yale University School of Medicine in 1960.
During  his  career he has served in various positions at the FDA, NIH, Schering
Plough  and  Merck  Research  Institute.  He  founded  one of the first contract
research  organizations, the Philadelphia Association for Clinical Trials (PACT)
and  served  as  Chairman, President and CEO.  After the company was acquired by
Corning,  Inc.  (now  Covance),  he continued to serve as an executive.  He most
recently  acted  as Assistant Director of health Policy and Clinical Outcomes at
Jefferson  Medical College, and prior to that was Chairman and CEO of Pulse Data
Institute,  a  start-up  medical  services  company  in  Bryn  Mawr,  PA.  He is
currently  the  Secretary-Treasurer  of  the  American  Society  for  Clinical
Pharmacology  and  Therapeutics.

                                       46
<PAGE>
     JOHN FLEMING  Vice President Development is responsible for the development
For the Kirkbride Center. John negotiated and administers all third party tenant
contracts, supervises tenant fit-out, budgets, monitors and manages the facility
and  property, assists in securing, negotiating, and executing all CoreCare Real
Estate  related financing.  From 1991 through to 1995 John was Managing Director
of  the  Chestnut  Hill  Health  and Fitness Center.  He was responsible for the
operations  of  the  facility,  including  all budgeting, managing marketing and
strategic  planning  of  the Fitness center.  From 1984 through to 1990 John was
Project  Manager  for  St.  James Properties and Real Estate sales in Boston; he
also  supervised  and managed the renovation and leasing of small to medium size
commercial  office  buildings  in  downtown  Boston.

     DR.  ELLA  M.  BOWEN,  ED.D.  currently  serves  as  the  Vice President of
Community  Relations  and  Public  Affairs  for CoreCare Systems, Inc.  Prior to
CoreCare, Dr. Bowen served as the Director/Vice President of Community Relations
for Oak Tree/Oxford Health Plans.  She also served in several capacities in city
government  and in education.  Her job experiences include serving as the Senior
Assistant  Managing  Director  in Mayor Rendell's administration, Youth Services
Commissioner  for  Mayor  Goode's  administration,  Legislative  Assistant  for
Councilwoman  Augusta  Clark,  assistant  professor  and  assistant  Dean  of
Instruction  for  the  School  in New Jersey and OLC in Illinois.  Dr. Bowen has
also  worked  as  an  Affirmative  Action  Consultant  in Business and Industry.

     Dr.  Bowen received her Master's Degree and Doctorate of Education from the
University  of Illinois.  She received her Undergraduate Degree in Business from
the  University  of  Maryland,  Eastern  Shore.  She  is  currently  an  adjunct
professor  in  Education  at  Rowan University and hosts a monthly radio program
called  "Mind,  Body  and  Soul"  on  WHAT  Radio.  Her other activities include
serving  on  such boards as Special Olympics, Big Brother/Big Sister, PAL, PUSH,
Mayor's  Coordinating  Office  for  Drug & Alcohol Programs, Philadelphia Fight,
Black  Family  Reunion  Center  and  the  National  Forum  and  Black  Public
Administrators.  She  has published several books and articles and is well known
as  a  dynamic  motivational  speaker  both  locally  and  nationally.

     MEG  GIVNISH-MERCER  is Vice President for Education and Training, CoreCare
Systems,  Inc.  She  is  also a member of the faculty for the Graduate School of
Health  and  Education  at  St.  Joseph's University.  From 1974 until 1985, Ms.
Givnish-Mercer  was  a  key  member  of  the  management team that purchased and
developed  the  Horsham  Clinic.  She  worked  as  both a clinical leader and an
administrative  liaison  during  those  years.  Ms. Givnish-Mercer holds degrees
from  Chestnut Hill College, Beaver College and Summit University.  She has been
a  member of Who's Who of American Women since 1985 and was awarded a television
Emmy for her writing, directing and narrating the one time special "What Will We
Do  About  Momma?,"  a  thought  provoking  dramatic attempt to care for elderly
parents.

     She  is  certified  as  a Trainer and Practitioner by the American Board of
Examiners in Psychodrama, group Psychotherapy and Sociometry.  In this capacity,
she  has  trained  hundreds  of clinicians throughout the United States.  She is
also  well  known for her energizing presentations, management-training seminars
as  well  as  for her clinical seminars for Psychotherapists, teachers and other
members  of  the  helping professions.  Ms. Givnish-Mercer joined the Company in
1992  as  a  senior  manager/clinician  of  Lakewood  Retreat,  Inc.

                                       47
<PAGE>
     DANIEL B. LOPRETO, PH.D., Vice President of Care Systems Management came to
CoreCare  Systems,  Inc. after directing the Care Management Department at Green
Spring  of  Eastern  Pennsylvania,  the  third largest managed behavioral health
company  in  the  country.  Dr.  LoPreto  directed  a  department of over thirty
psychiatrists  and mental health professionals who were responsible for managing
the  mental  health  and  substance  abuse  services  to approximately 3 million
covered lives in Pennsylvania, New Jersey and Delaware.  Originally recruited to
the  position  of CoreCare's Director of Adult Continuum, he assumed his current
position  upon CoreCare's acquisition of Kirkbride Center.  He has worked within
private  psychiatric  hospitals,  outpatient  clinics and managed care as both a
clinician  and  administrator  for  15  years.

     Dr.  LoPreto  is  licensed  as  a Psychologist in both Pennsylvania and New
Jersey and is board-certified in the specialty area of applied psychophysiology.
He  is  a  Diplomat  of  the American Board of Quality Assurance and Utilization
Review  Physicians  and  is  a  Diplomat  of  the  American  College of Forensic
Examiners,  Board of Examiners, Board of Psychological Specialties.  Dr. LoPreto
provides peer reviews as well as independent medical examinations and disability
evaluations  for  numerous  insurance  companies  in  both  Pennsylvania and New
Jersey.  He  is one of only two psychologists chosen and approved to participate
in Southeastern Pennsylvania Transit Authority's panel of professional providers
of  service  to  SEPTA  employees.

ALBERT  CAMPANA,  MBA  is the Vice President / Senior Director of Administrative
Services  at  the  Kirkbride Center.  He was born and raised in Philadelphia and
received  his  BS Degree in Psychology from Penn State University.  He began his
career  in  behavioral  health  at the Horsham Clinic where he worked his way up
from  mental  Health Technician to Clinical Coordinator and Chief Social Worker.
In  1989, he received his MBA from Temple University. His last positions, before
joining  Corecare  Systems, Inc., were with Graduate Health Systems at Mt. Sinai
Hospital  as  their Senior Director for Psychiatry and with Allegheny University
Hospitals,  Parkview  as  Director  of  Behavioral  Health.


ITEM  10  -     EXECUTIVE  COMPENSATION

(A)     GENERAL:
        --------

     For  the  fiscal  years  ended  December  31,  1996 and 1997 neither of the
Company's  Chief  Executive  Officer or President received any compensation from
the  Company.  In  order  to  reflect  a  fair  estimate of the cost of services
provided  by  the  Company's  Chairman  of  the  Board,  Thomas  T. Fleming, and
President,  Rose  S.  DiOttavio,  in this period, the Company charged operations
with  $144,000  in  1997,  or $72,000 for each, which was accrued and credited a
like  amount  to  paid  in  capital.  Mr.  Fleming  and  Ms. DiOttavio have each
received  annual salaries of $156,000 commencing March 1998, and paid currently,
which  salaries  the  company  believes  are  below  industry  standards.

(B)     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  the  Company's  Chief  Executive Officer and the next four most highly
compensated  executive  officers  during  the  year  ended  December  31,  1998.

                                       48
<PAGE>
<TABLE>
<CAPTION>
                                       SUMMARY COMPENSATION TABLE
                                         LONG TERM COMPENSATION
                                        1998 ANNUAL COMPENSATION


                                                                                             Securities
                                                                                             ----------
                                                                                 Restricted  Underlying
                                                               All Other Annual  ----------  ----------
Name and Principal Position                Salary   Bonus ($)    Compensation      Stock      Options
----------------------------------------  --------  ---------  ----------------  ----------  ----------
<S>                                       <C>       <C>        <C>               <C>         <C>
Thomas Fleming, Chairman                  $120,000        -0-             6,758         -0-         -0-
Of the Board and Chief Executive Officer                       car allowance
Rose S. DiOttavio,  President             $120,000        -0-               -0-         -0-         -0-

Richard C. Beatty                          107,466        -0-               -0-         -0-         -0-
David Baron                                250,542        -0-               -0-         -0-         -0-
----------------------------------------  --------  ---------  ----------------  ----------  ----------
<FN>
1)     Refer  to  General  Information  above.
</TABLE>

THE  COMPANY HAS NOT PRESENTED COMPENSATION FOR 1997 IN THE TABLE AS MR. FLEMING
AND  MS. DIOTTAVIO  DID NOT RECEIVE COMPENSATION IN 1997 AND NO OTHER OFFICER OF
THE  COMPANY  RECEIVED  COMPENSATION  IN  EXCESS  OF  $100,000  IN  1997.


(C)     OPTIONS/SAR  GRANTS:
        --------------------

<TABLE>
<CAPTION>
(a)                      (b)             (c)           (d)          (e)
------------------  -------------  ---------------  ----------  -----------
Year ended 1998
------------------
                      Number of        %Total
                     Securities     Options/SARS     Exercise
                     Underlying      Granted to      or Base
                    Options/SARS      Employees       Price     Expiration
Name                   Granted     in Fiscal Year     ($/Sh)       Date
------------------  -------------  ---------------  ----------  -----------
<S>                 <C>            <C>              <C>         <C>
Thomas T. Fleming             -0-             -0-
------------------  -------------  ---------------  ----------  -----------
Rose S. DiOttavio             -0-             -0-
------------------  -------------  ---------------  ----------  -----------
David Baron               100,000              23%  $  1.25/sh      7/15/02
------------------  -------------  ---------------  ----------  -----------
Richard C. Beatty          40,000               9%  $  1.50/sh     12/31/98
------------------  -------------  ---------------  ----------  -----------
</TABLE>


(D)     AGGREGATED  OPTION/SAR  EXERCISES  AND FISCAL YEAR-END OPTION/SAR VALUE:
        ------------------------------------------------------------------------

     During the fiscal year ended December 31, 1998, no executive officer of the
Company  exercised  any  options.

(E)     LONG-TERM  INCENTIVE  PLANS:  None.
        ----------------------------

(F)     COMPENSATION  OF  DIRECTORS:
        ----------------------------

     During  the fiscal year ended December 31, 1998, no director of the Company
received any compensation for any services provided in such capacity.  Directors
of  the  Company are reimbursed for expenses incurred by them in connection with
their  activities  on  behalf  of  the  Company.

                                       49
<PAGE>
(G)     EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
        ------------------------------------------------------------------------
ARRANGEMENTS:
-------------

     The  Company and/or its subsidiaries have no employment agreements with any
of  its  executive  officers.


(H)     REPORT  ON  REPRICING  OF  OPTIONS/SARS:  Not  Applicable.
        ----------------------------------------


ITEM  11  -     SECURITY  OWNERSHIP  OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table  sets forth information as of December 31, 1998, 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.


<TABLE>
<CAPTION>
                             PRINCIPAL SHAREHOLDERS
                      NUMBER OF SHARES BENEFICIALLY OWNED 1


NAME AND
ADDRESS OF
BENEFICIAL              COMMON       SERIES A    SERIES E    SERIES F
OWNER                   STOCK2       PREFERRED  PREFERRED3  PREFERRED4
                                                ----------
<S>                <C>               <C>        <C>         <C>
Officers and
Directors:
-----------------
Thomas T.                 1,673,470      3,000                 1,270.6
Fleming5                    (10.5%)


Rose S.                   1,687,500      3,000                     350
DiOttavio6                  (10.6%)


Thomas X.                   405,000
Flaherty7                       (*)

David Baron  8              101,000
                                (*)
                   ----------------
Richard Beatty  9            66,000
                                (*)
                   ----------------
John Fleming  10             56,000
                                (*)
                   ----------------
Ella M. Bowen                   500
                                (*)
                   ----------------
Daniel LoPreto               10,600
                                (*)
                   ----------------
Meg Givnish-                 68,990
Mercer  11                      (*)
-----------------  ----------------


                                       50
<PAGE>
Roberta                      15,500
Mainiero  12                    (*)
-----------------  ----------------
                          4,262,200
Total Officers              (24.7%)      6,000                 1,620.6
and Directors:
-----------------

(b) Other
Beneficial
Owners:
-----------------
Phila.             1,327,956 (8.3%)
Ventures, 11,
L.P.13
Phila.
Ventures-Japan
1, L.P.
Phila.
Ventures-Japan,
11-L.P.

200 S. Broad
Street 8th Floor
Philadelphia,
Pa. 19102
-----------------
Total Other               1,327,956
Beneficial                   (8.3%)
Owner
<FN>
(*)  less  than  5%
</TABLE>


(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 E Convertible  Preferred  Stock is convertible  into Common Stock on
     the basis of 100 share of  Common  Stock per share of Series E  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)  Does not include 140,186 shares of Common Stock by Health Ventures Limited,
     a consulting firm in which Mr. Fleming is a principal,  is a stockholder of
     Chestnut Hill Fitness Club. Includes 63,530 shares of Common Stock issuable
     upon conversion of 1,270.6 shares of Series F Preferred

(6)  Does not include  140,186  shares of Common Stock owned by Health  Ventures
     Limited,  a consulting  firm in which Ms.  DiOttavio  is a principal,  is a
     stockholder of Chestnut Hill Fitness Club,  Inc.  Includes 17,500 shares of
     Common Stock issuable upon conversion of 350 shares of Series F Preferred.

(7)  Does not include 67,102 shares of Common Stock owned by Josephine Flaherty,
     the mother of Thomas X.  Flaherty,  and a member of the Company's  Board of
     Directors.

                                       51
<PAGE>
(8)  Includes an option to acquire 100,000 shares at $1.25 per shares granted to
     Dr. Baron when he joined the Company  pursuant to the Company's  1996 Stock
     Plan.

(9)  Includes  options to  acquire  40,000  shares of Common  Stock at $1.50 per
     share  granted to Mr.  Beatty  when he joined the  Company  pursuant to the
     Company's 1996 Stock Plan.

(10) Includes an option to acquire  15,000  shares of Common  Stock at $0.10 per
     share pursuant to the Company's 1996 Stock Plan.

(11) Includes an option to acquire  150,000  shares of Common Stock at $0.10 per
     share pursuant to the Company's 1996 Stock Plan.

(12) Includes an option to acquire  15,000  shares of Common  Stock at $1.50 per
     shares pursuant to the Company's 1996 Stock Plan.

(13) Common Shares held by each Philadelphia Venture Fund are as follows:
     Philadelphia  Ventures  II  L.P.            1,033,360
     Philadelphia  Ventures  Japan  I  L.P.        147,298
     Philadelphia  Ventures  Japan  II  L.P.       147,298
     ---------------------------------------     ---------
     For  a  Total  of:                          1,327,956
     Charles  A.  Burton  is the Director of the Company, and General Partner in
     each  of  the  above  Philadelphia  Venture  Funds.


ITEM  12  -     CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

     The  Company  believes  that  the terms of the transactions described below
were  as  favorable to the Company as would have been obtained by the Company 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, which they
then  lent  to the Company upon the same terms, which they had obtained from the
banks.  As  of  December  31,  1998,  Mr.  Fleming  and  Ms.  DiOttavio advanced
$1,013,428  to  the Company of which $386,080 for funds, which they had borrowed
from  banks  and  loaned  to  the  Company.

PERSONAL  GUARANTEES  BY  PRINCIPAL  STOCKHOLDERS
-------------------------------------------------

     The Company's subsidiaries have approximately $3,300,000 in lines of credit
and  term  loans  which  either  are  loans  made directly to the Company or its
subsidiaries  which  are secured by personal guarantees and collateral of Thomas
Fleming, Rose DiOttavio, and in some cases, other members of the Fleming family.

                                       52
<PAGE>
FRANKLIN  DEVELOPMENT  COMPANY
------------------------------

     In  October  1996,  the  Company  entered  into  a  Development  Management
Agreement with Franklin Development Company, LLC. ("Franklin").  Mr. Christopher
Fleming,  the son of Thomas T. Fleming, the Chairman of the Company, is a senior
officer  of  Federal.  The  Company  and  Franklin have agreed to terminate this
contract  effective  February  1998,  except  for  certain performance fees with
respect  to  the  refinancing of the Kirkbride Center and commissions earned for
leases  concluded.  The terms and conditions relative to the termination of this
agreement  are  still  being  negotiated  as  of  the  date of this registration
statement.  Since  the  effective  date  of  the  contract, the company has paid
Franklin  approximately  $227,000  in  cash  and  stock  for  development  and
performance  fees.

CONVERSION  OF  SERIES  B  CONVERTIBLE  PREFERRED  STOCK
--------------------------------------------------------

     On  June  30,  1996,  the  six Series B Convertible Preferred stockholders,
including  Mr.  Fleming,  converted their preferred shares and accrued dividends
into  Common Stock.  The conversion ratio is 92 shares of Common Stock per share
of  Series B Convertible Preferred Stock.  The aggregate number of common shares
issued was 725,903.  The conversion also included accrued and unpaid interest on
the  CoreCare  Notes  totaling  $124,582.21  at  $1.00  per  share.

     The  company  issued  a total 725,902 of common stock for the conversion of
6,546.7  shares  of Preferred Series B stock into 601,320 shares of common stock
and  124,582  shares of common stock for accredited unpaid interest of $124,582.

     See  Item  4  "Recent Sales of Unregistered Securities" for descriptions of
certain  transactions  involving  acquisitions  by  the  Company.

     The  Company's  authorized  capital  stock consists of 50,000,000 shares of
Common  Stock,  $.001  par  value  per  share,  of  which  15,949,128 shares are
outstanding as of December 31, 1998, and 5,000,000 shares of Preferred Stock, as
to  which  the  Board of Directors has the power to designate the rights, terms,
preferences,  etc.  Of  the initially undesignated Preferred Stock 10,000 shares
have  been  designated  as  Series  A  Preferred  Stock; 25,000 shares have been
designated  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; and 6,000 shares have been designated as
Series  F  Convertible  Preferred  Stock.

COMMON  STOCK
-------------

     The Company is authorized to issue 50,000,000 shares of Common Stock, $.001
par value per share.  As of December 31, 1998, 15,949,128 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.

                                       53
<PAGE>
     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, fully
paid,  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 Series B, C, D, E, and F 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.

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 the
date of this Registration Statement.  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.

     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.

                                       54
<PAGE>
SERIES  B  CONVERTIBLE  PREFERRED  STOCK
----------------------------------------

     The  Company  has authorized 7,000 shares of Series B Convertible Preferred
Stock.  All  previously  outstanding shares of Series B Preferred were converted
on  June 30, 1996, and as of the date of this Registration Statement, 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.

     Of  the  Series  B Convertible Stock issued to Thomas T. Fleming, 88,044.40
shares  where  converted  to  725,903 shares of common stock effective August 8,
1996.

SERIES  C  CONVERTIBLE  PREFERRED  STOCK
----------------------------------------

     The  Company has authorized 25,000 shares of Series C Convertible Preferred
Stock, of which 8,147.3 shares are issued and outstanding as of the date of this
Registration  Statement.  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 plus in liquidation of the Company; and is superior
in  rank  to  all other stock of the Company except for Preferred Series E which
shares  the  same  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.

SERIES  D  PREFERRED  STOCK
---------------------------

     The  Company's  Board  of  Directors  has  designated  15,000 shares of its
Preferred  Stock  as Series D Preferred Stock, of which no shares are issued and
outstanding as of the date of this Registration Statement.  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.

                                       55
<PAGE>
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,  of which there are no shares
issued,  and outstanding as of the date of this Registration Statement.  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 are
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 in liquidation of
the  Company,  and  is  superior  in rank to all stock of the Company except for
Series  C  that  shares  the  same  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.

     On  December 30, 1998 the Company received written notice from Philadelphia
Ventures and its affiliated investment funds to convert the 9,933.72 outstanding
shares of Series E Preferred Stock into 1,192,0446 shares of Free Trading Common
Stock.

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, of which 2,870.6 shares
are  issued  and  outstanding  as  of  the  date of this Registration Statement.
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  are 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.

UNDESIGNATED  PREFERRED  STOCK
------------------------------

     The  Company's Board of Directors presently has the authority by resolution
to issue up to 4,923,750 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.

                                       56
<PAGE>
OUTSTANDING  WARRANTS/OPTIONS
-----------------------------

     Prior  to  the  date of this Registration Statement, the Company had issued
the  following  outstanding  Warrants  or  Options  to  purchase  Common  Stock:

     A.   Series WC and WD Warrants issued from December 1, 1995 to February 16,
          1996 exercisable for a total of 581,716 shares at an exercise price of
          $1.125  per  share  with an  expiration  date of  December  31,  1996,
          extended by amendment to April 1, 2002  (provided  that the expiration
          date will be  extended  until  such  time as the  Company  shall  have
          processed a  registration  statement  covering the warrant  shares and
          such registration statement shall have been effective for 90 days)

     B.   Warrant  issued  October 1, 1995  exercisable  for 50,000 shares at an
          exercise  price of $2.00 per share with an expiration  date of October
          17, 1997 (provided  that the  expiration  date shall be extended until
          such  time as the  Company  has  processed  a  registration  statement
          covering the warrant shares and such  registration  statement has been
          effective for 90 days)

     C.   Warrant issued October 1995  exercisable  for a number of shares equal
          to 10% of the Common Stock  outstanding  on the date of  exercise.  In
          determining   the  number  of  shares   outstanding,   all  securities
          convertible into common stock are deemed  converted;  with an exercise
          price of $2.00 per share with escalation  provisions of $.50 per share
          on October 18, 1997, and each October 18  thereafter,  to a maximum of
          $3.50 per share.  The  expiration  date is October 17, 2000  (provided
          that the  expiration  date shall be  extended  indefinitely  until the
          Company has processed a  registration  statement  covering the warrant
          shares and such registration statement has been in effect for 90 days)

     D.   Warrants  issued between June 10, 1996 and August 2, 1996  exercisable
          for a total of 658,333 shares at exercise prices ranging from $1.00 to
          $1.50 per share with  expiration  dates of June 10,  2001 to August 2,
          2001

     E.   Warrants  issued  October 1, 1996  exercisable  for 4,000 shares at an
          exercise  price of $2.50 per share with an expiration  date of October
          31, 2001

     F.   Series E Warrants  issued October 4, 1996  exercisable  for a total of
          433,899 shares at an exercise price of $3.00 per share with expiration
          dates of  October  4, 2002  (See  "Part II,  Item 4,  Recent  Sales of
          Unregistered Securities)

     G.   GL  Warrants  issued  December  20,  1996  exercisable  for a total of
          126,567  shares  at an  exercise  price of  $1.50  per  share  with an
          expiration date of December 1, 2002 (provided that the expiration date
          will be extended until such time as the Company shall have processed a
          registration   statement   covering   the  warrant   shares  and  such
          registration  statement  shall have been  effective for 180 days) (See
          "Part II, Item 4, Recent Sales of Unregistered Securities)

                                       57
<PAGE>
     H.   Series IAF Warrants issued  February 14, 1997  exercisable for a total
          of 95,000  shares  at an  exercise  price of $1.50  per share  with an
          expiration date of January 31, 2002 (provided that the expiration date
          will be extended until such time as the Company shall have processed a
          registration   statement   covering   the  warrant   shares  and  such
          registration  statement  shall have been  effective for 180 days) (See
          "Part II, Item 4, Recent Sales of Unregistered Securities)

     I.   Warrants issued between March 5, 1997 to December 19, 1997 exercisable
          for a total of 82,500 shares at exercise  prices  ranging from $.80 to
          $1.50 per share with expiration dates of December 31, 2000 to December
          31, 2004

     J.   Warrant  authorized  to be issued May 30,  1997,  issued July 10, 1998
          exercisable  for 50,000 shares at an exercise price of $2.00 per share
          with an expiration date May 30, 2001

     K.   Options  issued  between  November  26,  1997  and  January  30,  1998
          exercisable for a total of 430,553 shares at an exercise price of $.90
          per share with  expiration  dates of November  25, 2002 to January 30,
          2003 (See "Part II, Item 4, Recent Sales of Unregistered Securities)

     L.   Options  issued  between  November  26,  1997  and  January  30,  1998
          exercisable for a total of 430,552 shares at an exercise price of $.90
          per share with  expiration  dates of November  26, 2002 to January 30,
          2003 (See "Part II, Item 4, Recent Sales of Unregistered Securities)

     M.   Warrants  issued June 24, 1998 and July 24, 1998 each  exercisable for
          25,000  shares  at an  exercise  price  of  $1.00  per  share  with an
          expiration  date of June 30, 2002 (See "Part II, Item 4, Recent  Sales
          of Unregistered Securities)

     A  number  of  the Warrants described above contain antidilution provisions
that  are triggered by events such as, among others, the issuance by the Company
of  shares  at  a  purchase  price  less  than  the stated exercise price of the
Warrants.  The  triggering events have been recognized, appropriate calculations
have  been  made on the Company's books, and the overall impact on the number of
shares  issuable  and  the  purchase  price  therefor  is  immaterial.

1996  EMPLOYEE  STOCK  PLAN
---------------------------

     On  July  8,  1996,  the Company adopted an employee stock plan pursuant to
which  800,000  shares of the Company's authorized but unissued shares of Common
Stock  were  reserved for issuance in connection with grants of stock to and the
exercise of options by employees under such plan. Since the adoption of the plan
through  July  1998,  237,000  shares of stock have been granted and options for
560,000 shares have been granted and are outstanding of which options to acquire
no  shares  have  been  exercised.

     At  the October 29, 1998 Meeting of Shareholders, the Shareholders approved
reserving  2,000,000 additional shares in connection with grants of stock to and
the  exercise  of  options  by  employees  made  under  such  plan.

                                       58
<PAGE>
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 and Nevada
law  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.

     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 13 - EXHIBITS,  FINANCIAL  STATEMENT  SCHEDULES  AND
          REPORTS  ON  FORM  8-K

(a)  A list of financial  statements and financial  statement  schedule filed as
     part of this report is set forth on page 56 hereof.  The only Exhibit filed
     with this report is Exhibit 27, Financial Data Schedule.

(b)  Reports on Form 8-K
     During the last quarter of the period  covered by this report,  the Company
     did not file any Current Reports on Form 8-K.

(c)  Exhibit 27
     Financial Information in SEC format (see page 54)

(d)  Accountant's Consent (see page 55)


                                       59
<PAGE>
                              ACCOUNTANT'S  CONSENT


To  the  Stockholders  and  Board  of  Directors
CoreCare  Systems,  Inc.


We  consent  to the use of our Independent Auditor's Report dated March 9, 1999,
and  accompanying financial statements of CoreCare Systems, Inc. (the "Company")
for  the years ended December 31, 1998 and 1997,  in the Company's Annual Report
on  Form  10K-SB for the year ended December 31, 1998, filed with the Securities
and  Exchange  Commission.




SCHIFFMAN  HUGHES  BROWN
Certified  Public  Accountants
Blue  Bell,  Pennsylvania
October  6,  1999



                                       60
<PAGE>
<TABLE>
<CAPTION>
              FINANCIAL  STATEMENTS


                                            PAGE
<S>                                         <C>
Independent Auditor's Report                   58

Consolidated Balance Sheets                 59-60

Consolidated Statements of Operations          61

Consolidated Statements of Changes in
Shareholders' Equity                           62

Consolidated Statements of Cash Flows          63

Notes to Consolidated Financial Statements  64-90
</TABLE>


                                       61
<PAGE>







                             CORECARE SYSTEMS, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996









                                        1
<PAGE>
                          INDEPENDENT AUDITOR'S REPORT



To  the  Shareholders  and  Board  of  Directors
CoreCare  Systems,  Inc.
Philadelphia,  Pennsylvania


We  have  audited  the  accompanying  consolidated  balance  sheets  of CoreCare
Systems,  Inc.  as  of  December  31, 1998 and 1997 and the related consolidated
statements  of  operations,  changes in shareholders' deficiency, and cash flows
for  each  of  the  years in the three year period ended December 31, 1998 (1997
Restated - see Notes 1 and 17).  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on  these  financial  statements  based  on  our  audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those  standards require that we plan and perform the audit to obtain reasonable
assurance  about  whether  the  financial  statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing  the  accounting  principles  used  and  significant estimates made by
management,  as well as evaluating the overall financial statement presentation.
We  believe  that  our  audit  provides  a  reasonable  basis  for  our opinion.

In  our  opinion,  the financial statements referred to above present fairly, in
all  material  aspects,  the  financial position of CoreCare Systems, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for  each  of  the  years  in  the  three year period ended December 31, 1998 in
conformity  with  generally  accepted  accounting  principles.

As discussed in Note 16 to the financial statements, certain errors resulting in
overstatement  of previously reported accounts receivables and understatement of
liabilities  as of December 31,1998 were discovered by management of the Company
during the current year.  The financial statements have been restated to reflect
the  corrections.



SCHIFFMAN  HUGHES  BROWN
Blue  Bell,  Pennsylvania
March  9,  1999,  except  for  Note  16, as to which the date is August 17, 1999



                                        2
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997



                                     ASSETS

                                                  1998         1997
                                              -----------  -----------
                                              As Restated  As Restated
                                              See Note 16  See Note 17

<S>                                           <C>          <C>
Current assets:
  Cash                                        $   115,242  $   304,267
  Accounts receivable, net                      4,411,418    2,575,473
  Prepaid and other current assets                175,659      212,367
                                              -----------  -----------
    Total current assets                        4,702,319    3,092,107
                                              -----------  -----------

Contract rights, net of accumulated
 amortization of $1,023,619 in 1998
 and $531,011 in 1997                             265,300      548,663
                                              -----------  -----------

Real estate and other assets held for sale      1,100,000    1,513,723
                                              -----------  -----------

Property, plant and equipment net              14,151,787   10,727,385
                                              -----------  -----------

Other assets:
  Goodwill, net of accumulated amortization
   of $496,924 in 1998 and 257,598 in 1997      1,705,231    1,801,155
  Deferred finance costs, net of accumulated
   amortization of $1,759,635 in 1998 and
   $241,648 in 1997                               443,172      305,354
  Security deposits                                10,467      108,468
  Restricted cash                                 207,041      197,394
  Other                                           609,610      247,232
                                              -----------  -----------
                                                2,975,521    2,659,603
                                              -----------  -----------

                                              $23,194,927  $18,541,481
                                              ===========  ===========
</TABLE>

     The  accompanying  notes  are  an integral part of the financial statements


                                        3
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997




                 LIABILITIES  AND  SHAREHOLDERS'  DEFICIENCY



                                               1998           1997
                                           -------------  -------------
                                            As Restated    As Restated
                                            See Note 16    See Note 17
<S>                                        <C>            <C>
Current liabilities:
  Line of credit                           $  4,308,703   $  1,582,240
   Current portion of:
    Long-term debt                           16,191,983     10,203,425
    Lease termination fee payable                38,565         38,565
    Obligations under capital lease                             71,763
  Accounts payable                            3,748,882      2,275,442
  Advances, officers-shareholders             1,332,692      1,013,428
  Accrued expenses                            1,851,026      2,091,675
  Payroll and payroll taxes payable           3,048,183      1,688,105
  Due to Medicare                             1,692,389
                                           -------------
          Total current liabilities          32,212,423     18,964,643
                                           -------------  -------------

Long term liabilities:
  Notes payable                               2,098,907      2,192,798
  Lease termination fee payable                  93,467         93,467
                                           -------------  -------------
                                              2,192,374      2,286,265
                                           -------------  -------------
Commitments and contingencies

Company obligated mandatorily redeemable
  Series E convertible preferred stock
  (redemption value $943,400 in 1997)                 0      1,293,271
                                           -------------  -------------

Shareholders' deficiency:
  Preferred stock                                    17             26
  Common stock                                   15,949         12,694
  Additional paid in capital                 11,086,340      9,357,714
  Accumulated deficit                       (22,312,176)   (13,373,132)
                                           -------------  -------------
                                            (11,209,870)    (4,002,698)
                                           -------------  -------------

                                           $ 23,194,927   $ 18,541,481
                                           =============  =============
</TABLE>


                                        4
<PAGE>
<TABLE>
<CAPTION>
                                        CORECARE SYSTEMS, INC.
                                CONSOLIDATED STATEMENTS OF OPERATIONS
                         FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                        1998             1997               1996
                                  -----------------  ------------  -----------------------
                                     As Restated     As Restated
                                     See Note 16     See Note 17
<S>                               <C>                <C>           <C>
Revenue:
  Patient services, net           $     16,457,451   $ 7,670,834   $            5,741,894
  Management services                    1,962,803     1,760,075                  717,423
  Health and fitness center                450,625       521,414                  564,987
  Rental income                          1,078,016       512,861
                                        19,948,895    10,465,184                7,024,304
                                  -----------------  ------------  -----------------------
Direct costs:
  Patient services                       8,884,360     4,753,042                2,561,845
  Management services                      842,438       254,269                  444,433
  Health and fitness center                278,774       304,055                  118,738
                                  -----------------  ------------  -----------------------
                                        10,005,572     5,311,366                3,125,016
                                  -----------------  ------------  -----------------------

Gross profit                             9,943,323     5,153,818                3,899,288
                                  -----------------  ------------  -----------------------

Operating expenses:
  Salaries and employee benefits         3,552,430     2,716,304                2,011,950
  Selling and administrative             6,994,583     3,730,504                3,526,479
  Amortization                           2,423,054       677,067                  572,576
  Depreciation                             482,360       279,546                  218,936
  Provision for bad debts                2,147,140       590,656                  374,601
  Impaired asset write down                369,380
                                  -----------------  ------------  -----------------------
    Total operating expenses            15,968,947     7,994,077                6,704,542
                                  -----------------  ------------  -----------------------

Loss from operations                    (6,025,624)   (2,840,259)              (2,805,254)
                                  -----------------  ------------  -----------------------

Non-operating expenses:
  Interest expense                       2,913,420     1,844,284                  640,008
  Factor fees                              281,533       110,383
                                  -----------------  ------------  -----------------------
                                         2,913,420     2,125,817                  750,391
                                  -----------------  ------------  -----------------------

Net loss                          $     (8,939,044)  $(4,966,076)  $           (3,555,645)
                                  =================  ============  =======================

Basic net loss per share          $           (.65)  $      (.44)  $                 (.41)
                                  =================  ============  =======================

Diluted net loss per share        $           (.65)  $      (.44)  $                 (.41)
                                  =================  ============  =======================


Weighted average number of
 common shares outstanding              13,758,587    11,326,617                8,744,842
                                  =================  ============  =======================
</TABLE>

     The  accompanying  notes  are  an integral part of the financial statements


                                        5
<PAGE>
<TABLE>
<CAPTION>
                                                     CORECARE SYSTEMS, INC.
                             CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
                                         FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

                                        Additional
                        Common  Stock       Preferred  Stock      Paid  In     Accumulated
                    -----------------     ------------------


                                     Shares      Par Value      Shares     Par Value     Capital       Deficit         Total
                                   -----------  ------------  ----------  -----------  ------------  -------------  -------------

<S>                                <C>          <C>           <C>         <C>          <C>           <C>            <C>
Balance, December 31, 1996         10,491,326        10,491      17,868           32     7,286,388    (8,407,056)    (1,110,145)

Net loss for the year ended
 December 31, 1997 (as Restated,
 See Note 17)                                                                                         (4,966,076)    (4,966,076)

Issuance of common stock            1,785,587         1,786                              2,056,207                    2,057,993
Conversion of preferred stock
 to common stock                      416,615           417        (850)          (6)       15,119                       15,530
                                   -----------  ------------  ----------  -----------  ------------  -------------  -------------

Balance, December 31, 1997
 (as Restated, See Note 17)        12,693,528        12,694      17,018           26   $ 9,357,714  $(13,373,132)  $ (4,002,698)

Net loss for the year
 ended December 31, 1998
 (as Restated, See Note 16)                                                                           (8,939,044)     (8,939,044)

Issuance of common stock            2,063,554         2,063   1,224,538                                                1,226,601

Conversion of preferred stock
 to common stock                    1,192,046         1,192      (9,934)          (9)    1,292,088                     1,293,271

Reclass of unpaid services
 to loans from officers                                                                   (288,000)                     (288,000)

Redemption of warrants                                                                    (500,000)                     (500,000)
                                   -----------  ------------  ----------  -----------  ------------  -------------  -------------

                                   15,949,128   $    15,949       7,084   $       17   $11,086,340  $(22,312,176)  $(11,209,870)
                                   ===========  ============  ==========  ===========  ============  =============  =============
</TABLE>


                                        6
<PAGE>
<TABLE>
<CAPTION>
                                    CORECARE SYSTEMS, INC.
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                     FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                                         1998           1997          1996
                                                     -------------  ------------  ------------
As Restated                                           As Restated
See Note 16                                           See Note 17
<S>                                                  <C>            <C>           <C>
Cash flows from operating activities:
  Net loss                                           $ (8,939,044)  $(4,966,076)  $(3,555,645)
  Common stock issued for services
    and interest expense                                  769,005       690,766       313,000
  Contributed capital for services                       (288,000)                    144,000
  Non-cash adjustments to reconcile net loss to
   net cash provided by operating activities:
    Depreciation                                          482,360       279,546       218,936
    Amortization                                        2,423,054       677,067       572,576
    Impaired asset write down                             369,380
    Allowance for doubtful accounts                      (224,069)     (151,198)        2,021
  (Increase) decrease in operating assets:
    Accounts receivable                                (1,211,806)   (1,329,723)     (597,202)
    Other current assets                                   36,708      (210,495)       63,230
    Deposits                                               98,001         8,558       (73,050)
    Deferred costs                                                      (65,000)       65,000
    Other assets                                         (372,025)     (237,683)     (180,787)
  Increase (decrease) in operating liabilities:
    Accounts payable                                    1,473,440     1,466,235       202,035
    Lease payable                                                                     168,717
    Accrued expenses                                     (240,649)    1,759,275      (267,013)
    Payroll taxes payable                               1,360,078     1,487,928      (225,831)
    Due to Medicare                                     1,692,389
                                                     -------------
Net cash used in operating activities                  (2,571,178)     (590,800)   (3,150,013)
                                                     -------------  ------------  ------------

Cash flows from investing activities:
  Increase in capitalized financing costs              (1,828,938)     (114,157)     (378,775)
  Purchase of property and equipment                   (3,852,028)   (8,468,127)      (18,014)
  Purchase of contract rights                                                         (38,543)
                                                     -------------
Net cash used in investing activities                  (5,680,966)   (8,582,284)     (435,332)
                                                     -------------  ------------  ------------

Cash flows from financing activities:
  Proceeds from issuance of stock                         256,597       948,817     1,176,276
  Advances from officers                                  319,264       481,472       246,976
  Repayment of notes                                   (9,311,823)     (618,080)   (2,551,248)
  Repayment of lease obligations                          (71,763)      (17,413)      (54,346)
  Proceeds from short and long term debt               13,151,789     8,669,095     3,065,361
  Increase in debt due to accrued interest                992,592
  Proceeds from line of credit                          2,726,463       (30,789)    1,613,029
                                                     -------------  ------------  ------------
Net cash provided by financing activities               8,063,119     9,433,102     3,496,048
                                                     -------------  ------------  ------------

Net increase (decrease) in cash                          (189,025)      260,018       (89,297)

Cash, beginning of period                                 304,267        44,249       133,546
                                                     -------------  ------------  ------------

Cash, end of period                                  $    115,242   $   304,267   $    44,249
                                                     =============  ============  ============

Supplemental disclosures of cash flows information:
  Interest paid                                      $    815,705   $   646,145   $   616,749
                                                     =============  ============  ============
  Taxes paid                                         $        -0-   $       -0-   $       -0-
                                                     =============  ============  ============

Non-cash financing activities:
  Redemption of warrants for debt                    $    500,000
                                                     =============

Non-cash investing activities:
  Businesses acquired                                $    201,000   $   200,000
                                                     =============  ============
  Common stock issued for services                   $    769,005   $   690,766   $   313,000
                                                     =============  ============  ============
</TABLE>


                                        7
<PAGE>
                             CORECARE SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

1.   Restatement:

     Subsequent  to the issuance of the 1998 audited  financial  statements,  it
     came to management's attention that the 1998 financial statements contained
     inaccuracies.  The 1998  financial  statements  contained  herein have been
     restated (see Note 16). During the audit of the 1998 financial records,  it
     came to management's attention that the 1997 financial statements contained
     inaccuracies.  The 1997  financial  statements  contained  herein have been
     restated (see Note 17).

2.   The Business:

     CoreCare Systems, Inc., through its eight operating subsidiaries,  provides
     management  services to behavioral  service providers;  provides,  owns and
     operates out-patient and inpatient  behavioral health services;  operates a
     health  and  fitness  center;  develops  billing  software  for the  health
     industry,  leases space at the  Kirkbride  facility to third  parties,  and
     provides clinical research services to the pharmaceutical industry.

3.   Summary of significant accounting policies:

     Principles  of  consolidation:

     The December 31, 1998,  1997 and 1996  financial  statements of the Company
     include the  accounts  of  CoreCare  Systems,  Inc.,  and its wholly  owned
     subsidiaries.

     All material  inter-company  accounts and transactions have been eliminated
     in consolidation.

     Use  of  estimate:

     In  preparing   financial   statements,   management  makes  estimates  and
     assumptions  that affect the reported  amounts of assets and liabilities in
     the   Consolidated   Balance   Sheet  and  revenues  and  expenses  in  the
     Consolidated  Statements of  Operations.  Actual  results could differ from
     those  estimates.  Estimates  made by  management  include:  allowance  for
     doubtful accounts, contractual allowances,  depreciation,  amortization and
     income taxes.

     Concentration  of  credit  risk:

     Financial  instruments which subject the Company to concentration of credit
     risk consist of trade receivables from government health care systems, such
     as Medicare, Medicaid and Community Behavioral Health care providers.


                                        8
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

3.   Summary of significant accounting policies (continued):

     Year  2000  compliance:

     The Company  primarily  uses licensed  software  products in its operations
     with a significant portion of processes and transactions centralized in one
     particular  software  package.  During 1998 and 1999,  management  plans to
     upgrade to the most current version of this software  package which,  among
     other things, is Year 2000 compliant.  Cost of the project has not yet been
     determined.

     Earnings  (loss)  per  share:

     Basic earnings  (loss) per share are computed by dividing net income (loss)
     by the weighted average number of shares of common stock.  Diluted earnings
     per share  reflect the dilutive  effect of an  equivalent  number of common
     shares of convertible preferred stock, stock options and warrants.  For the
     years ended December 31, 1998,  1997 and 1996,  the  computation of diluted
     loss per share was antidilutive;  therefore, the amounts reported for basic
     and diluted loss per share were the same.

     Income  taxes:

     The  provision  for  income  taxes  is based  upon  income  recognized  for
     financial   statement  purposes  and  includes  the  effects  of  temporary
     differences  between  such  income and that  recognized  for the tax return
     purposes.  Future tax benefits,  such as net operating loss  carryforwards,
     are  recognized  to the extent that  realization  of such  benefits is more
     likely than not.

     Deferred  finance  costs:

     Deferred  finance costs arising from the  acquisition of long term debt are
     being  amortized  using  the  straight-line  method  over the  terms of the
     related subordinated convertible promissory notes.

     Net  patient  service  revenue:

     Patient  service  revenue is recorded  net of  contractual  allowances  and
     accounted  for  using  the  accrual  method of  accounting  based  upon the
     Company's  established  standard  rates  during  the  period  in which  the
     services  are  provided.   Contractual  and  other  allowances,   including
     uncollectible  amounts,  are  accounted  for on the accrual  basis so as to
     include accounts  receivable and net patient revenue amounts expected to be
     realized  through  payments  from  third-party  payors and others.  Revenue
     received  under certain  third-party  arrangements  is subject to audit and
     retroactive  adjustment by such payors. Such adjustments are accrued for on
     an estimated basis and adjusted when final settlements are determined.


                                        9
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

3.   Summary of significant accounting policies (continued):

     Goodwill  and  contract  rights:

     Costs  in  excess  of the fair  value  of net  assets  acquired  are  being
     amortized  on  a  straight-line  basis  over  a  40  year  period.  Certain
     acquisition costs are written off at an accelerated rate if it appears that
     the economic value of such costs is reduced.

     Contract  rights  are being  amortized  using the  straight-line  method of
     accounting over a three to five year period.

     Property,  plant  and  equipment  and  depreciation:

     Property,   plant  and  equipment  are  stated  at  cost  less  accumulated
     depreciation. Additions and betterments are capitalized and maintenance and
     repairs are charged to current  operations.  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 is provided
     using the straight line method. Estimated useful lives of the assets are:

          Buildings                  31.5  to  40  years
          Building  improvements     31.5  to  40  years
          Furniture  and  equipment  5  to   7  years
          Automobiles                5  years

     Reclassifications:

     Certain  reclassifications  have been made to the 1997 financial statements
     to conform to the 1998 financial statement presentation.  These adjustments
     had no effect on net loss for that period.


                                       10
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

4.   Acquisitions:

     Kirkbride  Center:

     On February 27, 1997,  the Company,  through its  wholly-owned  subsidiary,
     CoreCare  Behavioral Health Management,  Inc., acquired the property of the
     Institute  of  Pennsylvania  Hospital  and  re-named  it  Kirkbride  Center
     (Kirkbride).  Kirkbride is comprised of 420,000  square feet of  commercial
     real estate on 27 acres of land in West Philadelphia, Pennsylvania.

     Kirkbride  Center is licensed for 120 acute inpatient  psychiatric beds and
     63 drug and alcohol  beds;  50 adult  partial  hospitalization  slots;  and
     outpatient services.  Of its 120 beds, 57 beds hold dual licensure to treat
     substance abuse disorders.  The Center also holds a provider 50 license for
     mobile therapy services and has 24 licensed residential treatment beds.

     The  Company  is  utilizing  approximately  50% of  the  facility  for  its
     inpatient beds and  outpatient  services and leases the balance for medical
     offices,  a  school,  a  food  processing  plant,  a  laundry  and  related
     behavioral services.

     The total purchase price of the facility was $4,500,000  plus closing costs
     of $1,025,662. The closing costs were allocated to deferred financing costs
     and the  facility in the amounts of $462,940  and  $562,722,  respectively.
     From the date of the  acquisition  through  December  31,  1997,  Kirkbride
     capitalized  $2,936,509 of costs associated with improving and carrying the
     facility. During 1998, Kirkbride capitalized $1,563,797 of costs associated
     with improving and carrying the facility.

     In connection with the acquisition of Kirkbride,  in January 1997, CoreCare
     Realty Corp.  was  organized  to manage the real estate  assets of CoreCare
     Systems, Inc., principally the Kirkbride Center.  CoreCare Realty Corp. has
     retained Franklin Realty Corp. (FRC) to provide the management  services of
     the real estate portion of Kirkbride and therefore has no employees. During
     1997,  FRC  was  paid  $10,000  to  manage  Kirkbride.  In the  opinion  of
     management,  the fee  paid to FRC is an arm's  length  amount.  Revenue  is
     derived  from leases  with  tenants in  Kirkbride  Center  which  currently
     include two major hospital systems in the Philadelphia  area and individual
     doctors who lease office space.


                                       11
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

4.   Acquisitions (continued):

     Quantum  Managed  Mental  Health  Systems,  Inc.:

     On July 3, 1997, the Company acquired 100% of the outstanding  common stock
     of Quantum  Managed  Mental Health System,  Inc.  (Quantum) in exchange for
     200,000 shares of its common stock.  Quantum is a network of  approximately
     3,000 psychologists contractually organized as a Preferred Provider Network
     for employee assistance programs.

     Quantum  commenced  operations  in 1998 and signed four  clinical  research
     contracts which should generate revenue in 1999.

     On June 30, 1997, the Company  acquired the assets and certain  liabilities
     of  ZA  Consulting/Management,  Inc.  (ZA/CMI),  a  physician  billing  and
     practice management services business.  CoreCare's wholly-owned subsidiary,
     Managed CareWare, Inc., d/b/a CoreCare Management,  Inc. (CMI) operates the
     company and has the  responsibility  for all of the  Company's  billing and
     collections which were previously outsourced.  The purchase price was $1.00
     and the  assumption  of selected  liabilities  approximating  $20,000.  The
     Company  signed a demand  note  payable  to the seller for the value of the
     accounts  receivable  and  work-in-process  which  is to be  collected  and
     remitted to the seller. For the six months ended December 31, 1997, CMI had
     revenue of $994,419 and a net income of $178,700.

     Preferred  Medical  Services:

     On April 15,  1998,  Managed  Careware  acquired  the  assets of  Preferred
     Medical  Services for $312,744.  The purchase price was funded with 250,000
     shares of CRCS  common  stock  valued  at  $201,000  and a demand  note for
     $111,744  bearing  interest of 5.54% per annum.  During  1998,  $30,550 was
     paid. In December, 1998, the Company integrated the operations of Preferred
     into CMI and closed their Blue Bell, Pennsylvania office.

5.   Real estate and other assets held for sale:

     On July 22, 1992, in connection with the  acquisition of Lakewood  Retreat,
     Inc.,  the Company  purchased  real estate  which  included  56.7+ acres of
     unimproved, - developable land. Upon acquisition, the cost allocated to the
     developable land, of $115,857, was based upon the then fair market value of
     the unimproved developable land.


                                       12
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

5.   Real estate and other assets held for sale (continued):

     During the first quarter of 1996, the Company closed Lakewood Retreat, Inc.
     It is currently  held for sale.  As of December 31, 1997,  the facility was
     recorded at its original cost, net of accumulated depreciation, $1,513,723.
     The  Company  has  adopted  FASB  Statement  No.  121  "Accounting  for the
     Impairment of Long-Lived  Assets and for  Long-Lived  Assets To Be Disposed
     Of" and the real  estate and other  assets  held for sale are valued at the
     lower of cost or net realizable  value. At December 31, 1998, the asset was
     recorded at the lower of cost or the appraised value. In February 1999, the
     Company  received an offer to buy the property for $1,100,000 and the asset
     was reduced at December 31, 1998 to reflect the offered price.

6.   Accounts receivable:

     In June 1998, the Company  entered into a revolving line of credit pledging
     the accounts receivable as collateral. This facility replaced the factoring
     agreement which was in place from January 1996 through May 1998.

     In January,  1996,  a subsidiary  of the company  entered into an Agreement
     with a factor whereby the Company can sell (with recourse) up to $2,500,000
     of  certain  accounts  receivable  on  a  revolving  basis.  The  agreement
     obligates  the  subsidiary  to repurchase  accounts  receivable  which have
     defaulted.  Upon the sale of the  accounts  receivable  to the factor,  the
     subsidiary   receives  proceeds  of  approximately  80%  of  such  accounts
     receivables.  The factor holds approximately 19% of the accounts receivable
     as a reserve.  The reserves are  maintained  as a fixed  percentage  of the
     cumulative  balance of sold and unpaid  receivables.  Reserves in excess of
     required balances are remitted to the subsidiary.

     As a result of the  Kirkbride  Center  acquisition,  this  arrangement  was
     expanded permitting the company to sell up to $5,000,000 of certain account
     receivables in its Westmeade Center at Warwick and Kirkbride operations.

                                       13
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

6.   Accounts receivable (continued):

     As of December 31, 1998 and 1997,  accounts  receivable  and  allowance for
     doubtful accounts are as set forth below:

<TABLE>
<CAPTION>
                                         December  31,
                                    ----------------------
                                       1998        1997
                                    ----------  ----------

<S>                                 <C>         <C>
Total accounts receivable           $5,341,418  $4,863,653
Accounts receivable sold to factor               1,134,111
                                    ----------  ----------
                                     5,341,418   3,729,542
Allowance for doubtful accounts        930,000   1,154,069
                                    ----------  ----------

Accounts receivable, net            $4,411,418  $2,575,473
                                    ==========  ==========
</TABLE>

7.     Property,  plant  and  equipment:

     As of December 31, 1998 and 1997, property, plant and equipment consists of
the  following:

<TABLE>
<CAPTION>
                                         December  31,
                                  --------------------------
                                      1998          1997
                                  ------------  ------------
<S>                               <C>           <C>
  Land                            $ 1,637,329   $ 1,637,329
  Buildings                         4,864,635     4,864,635
  Building improvements             7,378,221     3,780,801
  Furniture and equipment           1,271,424     1,008,561
  Automobiles                          20,450        28,705
  Property held for licensing         200,000       200,000
  Furniture and equipment under
    capital lease                     235,307       235,307
                                  ------------  ------------
                                   15,607,366    11,755,338
  Less: Accumulated depreciation   (1,455,579)   (1,027,953)
                                  ------------  ------------
                                  $14,151,787   $10,727,385
                                  ============  ============
</TABLE>


                                       14
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

8.   Income taxes:

     At December 31, 1998,  1997 and 1996,  the Company had net  operating  loss
     carryforwards   available  to  reduce  future  federal  taxable  income  of
     approximately $22,000,000,  $13,000,000 and $8,000,000,  respectively.  The
     carryforwards expire through 2011.

9.   Bank lines of credit:

     In May,  1996,  the  Company  entered  into a bank line of credit  facility
     agreement for  $1,100,000.  The credit line facility  bears interest at the
     bank's prime rate and is collateralized by marketable securities pledged by
     the officers. At December 31, 1998 and 1997, borrowings against the line of
     credit totaled the maximum outstanding during the year, $1,100,000.

     The Company has also borrowed $468,500 under its August 1996 line of credit
     facility  agreement with another bank which is collateralized by marketable
     securities  pledged by the  Company's  officers.  Interest  on  outstanding
     balances  accrues at the rate of prime plus 1.5%.  At December 31, 1998 and
     1997, borrowings against the line of credit totaled the maximum outstanding
     during the year, $468,500.

     A line of credit in the amount of $44,529  was issued to  Lakewood  Retreat
     Inc.  (Lakewood),  a wholly owned subsidiary of the Company, at an interest
     rate of 10.25%. At December 31, 1997, borrowings against the line of credit
     facility totaled $13,740. This loan was guaranteed by the officers.

     In May,  1998, the Company  entered into a line of credit  agreement with a
     financial corporation for $5,000,000. The credit line bears interest at the
     bank's prime rate.  At December 31,  1998,  borrowings  against the line of
     credit totaled $2,740,203.

                                       15
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996
10.     Long  term  debt:


                                                        1998       1997
                                                     ----------  --------
<S>                                                  <C>         <C>
  Mortgage note payable:
    Payable in monthly installments of $3,500
    plus interest at the rate of 11% per annum.
    The mortgage is collateralized by assets of
    Lakewood which include real estate held for
    sale or development and property, plant and
    equipment having a net book value of
    $1,631,973.  The mortgage note payable was
    to mature on September 16, 1996 but was
    extended to December 17, 1996. The terms
    for the extension require the Company to
    reduce the principal $50,000 in September,
    October, and November of 1996 and to issue
    15,000 shares of its common stock to the
    mortgagee. Payment has not been made during
    1997. In 1997, the Company signed an agreement
    whereby the mortgagee can sell the property.
    The 1998 amount includes all accrued and
    unpaid interest.                                 $1,350,000  $702,000

  Mortgage note payable (continued):
    Interest is payable monthly at LIBOR plus
    6.5% per annum. The mortgage is
    collateralized by assets of CoreCare
    Behavioral Health Management, Inc.
    which includes property, plant, equipment,
    investments and all proceeds and products
    of the Company. The mortgage note matures
    on August 26, 1998 but may be extended
    to February 26, 1999 by exercising an option
    contained in the loan indenture. Upon the
    repayment of the note, the lender will
    charge additional interest as stated in the
    loan document. At December 31, 1997 the
    additional interest due was $1,098,252 and
    was recorded as accrued interest expense.
    (See Note 4 Acquisitions, Kirkbride)              6,440,000
</TABLE>


                                       16
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

10.     Long  term  debt  (continued):


1998                                                    1997
---------------------------------------------------  -----------
<S>                                                  <C>          <C>
  Interest is payable monthly at LIBOR plus
  6.5% per annum. The mortgage is collateralized
  by assets of CoreCare Behavioral Health
  Management, Inc. which includes property,
  plant, equipment, investments and all proceeds
  and products of the Company. The mortgage
  note matured on February 26, 1999, but the
  mortgagee extended the maturity to June 30, 1999.
  The mortgage holder has 600,000 shares of
  common stock of the Company in escrow as
  additional collateral which will be returned
  upon repayment of the mortgage debt.               $13,000,000

  In June 1996, through a refinance of the then
  existing debt, the Company obtained financing
  pursuant to a mortgage note payable to an
  independent finance company.  The mortgage
  note which bears interest at the average
  rate of 10.9% per annum matures on July 1,
  2001. The mortgage is being amortized over
  20 years with 59 monthly payments of $18,249
  and a final payment of $1,629,160.  The note
  is secured by the Warwick, Pennsylvania
  facility, is partially guaranteed by two officers
  and shareholders of CoreCare Systems, Inc.
  and a letter of credit for $175,000.                 1,706,745  1,737,181

  In February 1997, the Company obtained
  financing pursuant to a mortgage note
  payable to an independent finance company.
  The mortgage matures on June 27, 2001. The
  mortgage is being amortized over 20 years
  with 59 monthly payments of $5,140 and shall
  be paid without offset. The note bears interest
  at a rate of 10.94% per annum. The note is
  secured by the Warwick, Pennsylvania facility,
  is partially guaranteed by two officers and
  shareholders of CoreCare Systems, Inc.                 486,604    494,566
</TABLE>


                                       17
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

10.     Long  term  debt  (continued):


1998                                              1997
-----------------------------------------------  -------
<S>                                              <C>      <C>
Notes payable:
  The investor promissory note bears interest
  at the prime rate of interest per annum and
  is due on demand.  The note matures on
  October 1, 2019.  Subordinated Payment
  Bonds owned by two officers-shareholders
  of the Company are pledged as collateral.                50,000

  Convertible promissory notes bear interest
  at the rate of 10% per annum.  At the option
  of the note holder, these notes can be
  converted into common stock of the Company
  at a conversion price of $2.00 per share.       10,000   10,000

  Subordinate note bears interest at the rate
  of 12% per annum. The note requires interest
  payments quarterly and principal payments
  of $166,666 on December 31, 1998, 1999 and
  2000.  Associated with the note is a warrant
  to purchase 333,000 shares of common stock
  at $1.50 per share until August, 2001.         500,000  500,000

  Demand note payable bears interest at the
  lowest rate allowable under Section 7872
  of the Internal Revenue Code for work-in-
  process payments and the prime interest
  rate for accounts receivable.                  110,957  204,421

  Notes which bear interest at a rate of 3%
  per calendar quarter. The notes mature at
  various dates throughout 1998. The notes
  are secured by a personal guarantee of
  the Company's principal shareholders.                   625,000

  Note which bears interest at a rate of 11%
  per annum. The principal amount together
  with all interest accrued through December
  1997 is due June 1998. This has been
  extended to December 31, 1999.                 300,000  530,000
</TABLE>


                                       18
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

10.     Long  term  debt  (continued):


                                                     1998         1997
                                                  -----------  -----------
<S>                                               <C>          <C>

    The secured note bears interest at a rate of
    14% per annum and matures July 1998. The
    note is collateralized by equipment and
    accounts receivable. At the option of the
    note holder, the note was converted
    into common stock of the Company.                              300,000

    Notes which bear interest at annual
    interest rates from 9.75% to 11.75% per
    annum. The notes matured during 1998.                          117,147

    Investor notes bearing interest from
    6% to 12% per annum and maturing
    at various dates through 2000. The 1998
    amount includes accrued and unpaid interest.      430,900      535,908

    Note payable bearing interest at the rate
    of 8% per annum due upon the successful
    filing of a Regulation S Underwriting. The
    1998 amount includes accrued and unpaid
    interest.                                         314,592      150,000

    Demand note payable for the acquisition of
    Preferred Medical Services, Inc. bearing
    interest of 5.54%.                                 81,092
                                                  -----------
                                                   18,290,890   12,396,223
    Less amount due in one year                    16,191,983   10,203,425
                                                  -----------  -----------
                                                  $ 2,098,907  $ 2,192,798
                                                  ===========  ===========
</TABLE>


     The  amounts  of  principal  repayments  are  as  follows:

<TABLE>
<CAPTION>
<S>   <C>
1999  $16,191,983
2000       47,749
2001    1,646,001
2002      405,157
      -----------

      $18,290,890
      ===========
</TABLE>


                                       19
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996



11.  Commitments and contingencies:

     Operating  leases:

     Facility  leases:

     Fitness  center:

     The Company  leases its fitness  center  under a  noncancellable  operating
     lease  expiring  in  August  1997.  The  facility  has  a  month  to  month
     understanding  given the  Company's  interest in moving to a new  location.
     Monthly  lease  payments  are  $13,000.  Under the terms of the lease,  the
     Company is responsible for substantially all operating costs.

     Acquisition of ZA Consulting/Management, Inc. Lease:

     On June 30, 1997, the Company (CMI) acquired ZA Consulting/Management, Inc.
     and  assumed its office  lease.  The initial  lease  agreement  was made on
     January 8, 1993 and was amended on  February 1, 1995 and  December 4, 1997.
     The lease has a termination date of July 31, 2000 with a one time extension
     renewal option for an additional  three years.  Monthly rental payments are
     $7,152. Rent expense from the date of acquisition through December 31, 1997
     was $42,912. Rent expense for 1998 was $85,822.

     Closure of Wyndmoor, Pennsylvania Facility:

     In  December  1996,   the  Company  ceased   operations  at  its  Wyndmoor,
     Pennsylvania  facility.  The facility was leased through  December 31, 1998
     for $15,000 per month until it was modified.  Rent expense under this lease
     was $75,000 for the year ended December 31, 1997.


                                       20
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996


11.  Commitments and contingencies (continued):

     The  Company  and the lessor  agreed to  terminate  the lease on August 12,
     1997. In  consideration of the lessor allowing the Company to terminate the
     lease  agreement and in settlement  for all amounts due and  outstanding or
     owed in the future  under the  lease,  the  Company  shall pay the lessor a
     termination  settlement fee of $202,000.  The Company and the lessor agreed
     that the  Company  shall pay the  termination  fee to the lessor in monthly
     payments due the first  Thursday of each month.  The Company made  payments
     totaling  $51,190 in 1997.  Starting on April 2, 1998 and for an additional
     47 months,  a monthly  payment of $3,000  will be made to the  lessor.  The
     balance due at December 31, 1998 and 1997 is $132,032.

     The  termination  agreement  payments  were  discounted at 10%. The Company
     accrued as an expense the present value of the future payments for the year
     ended December 31, 1996.

     In addition to the lease  termination  fee, the Company accrued $20,000 for
     costs associated with the closing of the facility.

     In September,  1997, the Company  transferred  the Wyndmoor  license to its
     Kirkbride facility.

     Equipment lease:

     In January,  1998 the Company entered into equipment leases whereby it pays
     the lessor $8,096 per month for sixty months.

     The  minimum  annual  operating  lease  payments  for  the  facilities  and
     equipment are as follows:

<TABLE>
<CAPTION>
      Facilities   Equipment
      -----------  ----------
<S>   <C>          <C>
1999  $    85,040  $   97,152
2000       50,064      97,152
2001                   97,152
2002                   97,152
</TABLE>


     Litigation:

     In the ordinary course of business,  the Company and its  subsidiaries  are
     involved  in  and  subject  to  claims,   contractual  disputes  and  other
     uncertainties.  In the opinion of management, after consultation with legal
     counsel, the ultimate disposition of these matters will not have a material
     adverse effect on the Company's financial condition.


                                       21
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

12.  Description of securities:

     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, as to which the Board has the power to designate the rights,  terms,
     preferences,  etc. Of the  initially  undesignated  Preferred  Stock 10,000
     shares have been designated as Series A 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, and 6,000 shares have
     been designated as Series F Convertible Preferred Stock.

     Common stock:

     The Company is authorized to issue 50,000,000 shares of Common Stock, $.001
     par value per share.  As of  December  31,  1998 and 1997,  15,949,128  and
     12,693,528  shares were issued and  outstanding,  respectively.  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,
     fully paid, 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
     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.


                                       22
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

12.  Description of securities (continued):

     Holders of Series C, D, E and F 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.

     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
     December 31, 1998 and 1997.  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.
     No dividends  have ever been declared.  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.  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.

                                       23
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

12.  Description of securities (continued):

     Series B Convertible Preferred Stock:

     The Company has authorized  7,000 shares of Series B Convertible  Preferred
     Stock.  All  previously  outstanding  shares  of  Series B  Preferred  were
     converted  on June 30,  1996.  There  were no shares of Series B  Preferred
     outstanding as of December 31, 1998 and 1997.

     Holders of Series B  Preferred  are  entitled to receive  annual  dividends
     equal to the dividends payable on Series A Preferred Stock, no dividend has
     ever been declared, 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,  of which 8,147.3  shares are issued and  outstanding as of December
     31,  1998 and 1997.  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. No dividends have ever been declared.

     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  plus  accrued   dividends  in
     liquidation  of the Company;  and is superior in rank to all other stock of
     the Company except for Preferred Series E which shares the same 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.


                                       24
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

12.  Description of securities (continued):

     Series D Preferred Stock:

     The  Company's  Board of  Directors  has  designated  15,000  shares of its
     Preferred Stock as Series D Preferred  Stock, of which no shares are issued
     and  outstanding  as of December  31,  1998 and 1997.  Holders of shares of
     Series D Preferred  Stock (the "Series D Preferred") are 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,  of which 9,934  shares were
     issued and  outstanding  as of December 31, 1997. On December 31, 1998, the
     9,934 shares of  outstanding  Series E Preferred  Stock was converted  into
     1,192,046  shares of common stock.  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. No dividends have ever been declared.

     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  in
     liquidation  of the  Company,  and is  superior in rank to all stock of the
     Company except for Series C which shares the same 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. No dividends have ever been declared.


                                       25
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

12.  Description of securities (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  Preferred  Stock, of which 2,870.6
     shares are issued and outstanding as of December 31, 1998 and 1997. 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.
     No dividends have ever been declared.

     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.

     Stock options:

     At December 31, 1998 and 1997,  there were 1,241,105 and 1,204,445  options
     outstanding,  respectively.  The average  exercise price of $1.08 was above
     the average market price of $1.00. The options expire at various dates from
     July 6, 2001 through January 30, 2003.

     Stock warrants:

     At December 31, 1998 and 1997, there were 4,845,693 and 2,526,793  warrants
     outstanding,  respectively.  The average  exercise price of $1.82 was above
     the average market price of $1.00.  During 1997,  50,000 warrants  expired.
     During  1998,  500,000  warrants  were  converted  to a  note  payable  for
     $500,000.  The  outstanding  warrants at September 30, 1998 expire December
     31, 2000 through December 31, 2004.

13.  Obligations under capital leases:

     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  productive  lives.
     Amortization   of  the  assets  under   capital   leases  are  included  in
     depreciation and amortization expense for the years ended December 31, 1998
     and 1997. Lease payments vary according to the aggregate assets under lease
     and are  payable in monthly  installments  ($6,600 at  December  31,  1997)
     including  interest  imputed at the  approximate  rate of 10%.  The Company
     assumed current capitalized lease obligations approximately $50,000 when it
     acquired the management service company.


                                       26
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

13.  Obligations under capital leases (continued:

     As of December 31, 1997,  minimum future lease payments under these capital
     lease obligations are as follows:

<TABLE>
<CAPTION>
                                              1997
                                             -------
<S>                                          <C>
Year ending December 31, 1997                $79,736
                                             -------
Total minimum lease payments                  79,736
Less amount representing interest              7,973
                                             -------

Present value of net minimum lease payments  $71,763
                                             =======

    Current portion                          $71,763
                                             =======
</TABLE>


14.  Net patient service revenue:

     The Company books  revenue at a set charge rate.  The Company has contracts
     with its  payors.  The  contracts  have an agreed  upon per diem rate.  The
     difference  between the contractual  rate and the gross charges is recorded
     as contractual allowance.

     Net patient service revenue for the years ended December 31, 1998, 1997 and
     1996, consists of the following:

<TABLE>
<CAPTION>
                                1998         1997         1996
                             -----------  -----------  ----------
<S>                          <C>          <C>          <C>
Patient service revenue      $54,441,933  $19,799,545  $9,223,976
Contractual adjustments       37,984,482   12,128,711   3,482,082
                             -----------  -----------  ----------

Net patient service revenue  $16,457,451  $ 7,670,834  $5,741,894
                             ===========  ===========  ==========
</TABLE>

15.  Subsidiary companies' financial information:

     In 1998 and 1997, the Company has two  subsidiaries  which account for more
     than twenty percent of revenue and/or assets,  Westmeade  Healthcare,  Inc.
     and  CoreCare  Behavioral  Health  Management,   Inc.  In  1996,  Westmeade
     Healthcare,  Inc. accounted for more than twenty percent of the revenue and
     assets.


                                       27
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

15.  Subsidiary companies' financial information (continued)



     As of  December  31,  1998 and 1997,  highlights  of  subsidiary  financial
     information is summarized below.

<TABLE>
<CAPTION>
                           WESTMEADE HEALTHCARE, INC.
                            (WHOLLY OWNED SUBSIDIARY)
                       BALANCE SHEET FINANCIAL HIGHLIGHTS



                                       1998        1997
                                    ----------  ----------
<S>                                 <C>         <C>
Current assets                      $2,505,682  $2,222,422
Property, plant and equipment
 (net of accumulated depreciation)   1,453,742   1,487,889
Other assets                           291,201     325,794
                                    ----------  ----------

  Total assets                      $4,250,625  $4,036,105
                                    ==========  ==========

Current liabilities                 $  685,285  $  423,922
Long term liabilities                2,187,518   2,231,746
Shareholder Equity                   1,377,822   1,380,437
                                    ----------  ----------

                                    $4,250,625  $4,036,105
                                    ==========  ==========
</TABLE>


                                       28
<PAGE>
<TABLE>
<CAPTION>
                           WESTMEADE HEALTHCARE, INC.
                            (WHOLLY OWNED SUBSIDIARY)
                       STATEMENTS OF OPERATING HIGHLIGHTS



                                      1998         1997         1996
                                   -----------  -----------  ----------
<S>                                <C>          <C>          <C>
    Patient service revenue        $2,519,219   $1,865,388   $4,296,398
    Direct operating costs          1,023,776    1,250,481    1,907,438
                                   -----------  -----------  ----------
    Gross profit                    1,495,443      614,907    2,388,960
    Operating expenses              1,344,927      491,028    1,447,706
    Other non-operating expenses      153,133      309,817      289,397
                                   -----------  -----------  ----------

  Net income (loss)                $   (2,617)  $ (185,938)  $  651,857
                                   ===========  ===========  ==========
</TABLE>


                                       29
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996



15.  Subsidiary companies' financial information (continued):

<TABLE>
<CAPTION>
                           WESTMEADE HEALTHCARE, INC.
                            (WHOLLY OWNED SUBSIDIARY)
                       STATEMENTS OF CASH FLOWS HIGHLIGHTS



                                               1998        1997         1996
                                            ----------  ----------  ------------
<S>                                         <C>         <C>         <C>
Net income (loss)                           $  (2,617)  $(185,938)  $   651,857
Net cash provided by (used in)
 operating activities                          46,845     475,862    (1,406,473)
Net cash provided by investing activities
Net cash used by financing activities         (44,228)   (478,019)      838,128
                                            ----------  ----------  ------------
Net decrease in cash                         (188,095)     83,512
Cash, beginning                                     0     188,095       104,583
                                            ----------  ----------  ------------

Cash, ending                                $     -0-   $     -0-   $   188,095
                                            ==========  ==========  ============
</TABLE>


                                       30
<PAGE>
<TABLE>
<CAPTION>
                      CORECARE BEHAVIORAL HEALTH MANAGEMENT
                            (WHOLLY OWNED SUBSIDIARY)
                       BALANCE SHEET FINANCIAL HIGHLIGHTS


                                              1998          1997
                                          ------------  ------------
<S>                                       <C>           <C>
Current assets                            $ 4,104,899   $ 2,038,329
Property, plant and equipment, net         12,082,111     8,128,257
Other assets                                  527,988       161,460
                                          ------------  ------------

Total assets                              $16,714,998   $10,328,046
                                          ============  ============

Current liabilities                       $21,660,142   $ 3,767,003
Long term liabilities                               0     7,538,252
Shareholders equity                        (4,945,144)     (977,209)
                                          ------------  ------------

Total liabilities and shareholder equity  $16,714,998   $10,328,046
                                          ============  ============
</TABLE>


                                       31
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996


15.  Subsidiary companies' financial information (continued):

<TABLE>
<CAPTION>
                      CORECARE BEHAVIORAL HEALTH MANAGEMENT
                            (WHOLLY OWNED SUBSIDIARY)
                       STATEMENTS OF OPERATING HIGHLIGHTS



                                      1998          1997        1996
                                  ------------  ------------  --------
<S>                               <C>           <C>           <C>
    Patient service revenue       $13,018,098   $ 6,129,271   $717,423
    Rental income                   1,078,016       512,861
    Direct operating costs          7,496,288     3,101,652
                                  ------------  ------------  --------
    Gross profit                    6,599,826     3,540,480    717,423
    Operating expense               9,994,063     3,341,828    598,848
    Other non-operating expense       692,159     1,371,716
                                  ------------  ------------  --------

  Net income (loss)               $(4,086,396)  $(1,173,064)  $118,575
                                  ============  ============  ========
</TABLE>


<TABLE>
<CAPTION>
                       CORECARE BEHAVIORAL HEALTH MANAGEMENT
                             (WHOLLY OWNED SUBSIDIARY)
                        STATEMENTS OF CASH FLOWS HIGHLIGHTS



                                                1998          1997         1996
                                            ------------  ------------  ----------
<S>                                         <C>           <C>           <C>
    Net income (loss)                       $(4,086,396)  $(1,173,064)  $ 118,575

    Net cash provided by (used in)
     operating activities                     3,197,031    (9,375,075)   (118,323)

    Net cash used in investing activities    (4,317,972)

    Net cash provided by financing            4,799,651    11,070,815
                                            ------------  ------------

  Net increase (decrease) in cash              (407,686)      522,676         252
    Cash, beginning                             522,928           252
                                            ------------  ------------  ----------

  Cash, ending                              $   115,242   $   522,928   $     252
                                            ============  ============  ==========
</TABLE>


                                       32
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996


16.  Restatement:

     Subsequent  to  the  issuance  of  the  Company's   consolidated  financial
     statements for the year ended December 31, 1998, it was determined that the
     reported 1998 results were overstated.  Upon examination, it was determined
     that certain  revenue was improperly  recorded,  certain  expenses were not
     properly  accrued for and certain debt interest was not properly  accounted
     for.

     The  1998  revenue  overstatement  was  caused  by  inadequate  contractual
     allowance  calculations and inadequate reserves for retroactive changes and
     patient day  denials.  The  expenses  were  understated  due to  inadequate
     provision for accrued unpaid operating expenses and incorrect  recording of
     accrued unpaid interest on debt.

     As a result, the accompanying  consolidated  financial statements as of and
     for the year ended December 31, 1998 present the restated results.

     A summary of the effects of the restatement follows:

                                       33
<PAGE>
<TABLE>
<CAPTION>
                               CORECARE SYSTEMS, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          DECEMBER 31, 1998, 1997 AND 1996


16.  Restatement (continued):


                                     ASSETS

                                                             December 31, 1998
                                                    -------------------------------
                                                      As previously
                                                         Reported        Restated
                                                    ------------------  -----------
<S>                                                 <C>                 <C>
Current assets:
    Cash                                            $          115,242  $   115,242
    Accounts receivable,  net                                5,588,188    4,411,418
    Prepaid and other current assets                           224,215      175,659
                                                    ------------------  -----------
       Total current assets                                  5,927,645    4,702,319
                                                    ------------------  -----------
  Contract rights, net of accumulated amortization
    of $1,023,619 in 1998 and $531,011 in 1997                 265,300      265,300
                                                    ------------------  -----------

  Real estate and other assets held for sale                 1,100,000    1,100,000
                                                    ------------------  -----------

  Property, plant and equipment, net                        14,151,787   14,151,787
                                                    ------------------  -----------

  Other assets:
    Goodwill, net of accumulated amortization
      of $496,924 in 1998 and $257,598 in 1997               1,527,981    1,705,231
    Deferred finance costs, net of accumulated
      amortization of $1,759,635 in 1998 and
      $241,648 in 1997                                         443,172      443,172
    Security deposits                                          109,334       10,467
    Restricted cash                                            207,041      207,041
    Other                                                      981,436      609,610
                                                    ------------------  -----------
                                                             3,268,964    2,975,521
                                                    ------------------  -----------

                                                    $       24,713,696  $23,194,927
                                                    ==================  ===========
</TABLE>


                                       34
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996


16.  Restatement (continued):



                   LIABILITIES AND SHAREHOLDERS' EQUITY


                                                  December 31, 1998
                                       -------------------------------------
                                           As Previously
                                              Reported          As Restated
                                       ----------------------  -------------
<S>                                    <C>                     <C>
Current liabilities:
    Line of credit                     $           4,308,703   $  4,308,703
    Current portion of:
      Long-term debt                              15,199,388     16,191,983
      Lease termination fee payable                   38,565         38,565
    Account payable                                3,748,884      3,748,882
    Advances, officers-shareholders                  910,692      1,332,692
    Accrued expenses                                 840,354      1,851,026
    Payroll and payroll taxes payable              3,048,183      3,048,183
    Due to Medicare                                1,000,000      1,692,389
                                       ----------------------  -------------
                                                  29,094,769     32,212,423
                                       ----------------------  -------------

  Long term liabilities:
    Notes payable                                  2,098,907      2,098,907
    Lease termination fee                             93,467         93,467
                                       ----------------------  -------------
                                                   2,192,374      2,192,374
                                       ----------------------  -------------

  Shareholders' deficiency:
    Preferred stock                                       17             17
    Common stock                                      15,949         15,949
    Additional paid in capital                    11,374,340     11,086,340
    Accumulated deficit                          (17,963,753)   (22,312,176)
                                       ----------------------  -------------
                                                  (6,573,447)   (11,209,870)
                                       ----------------------  -------------

                                       $          24,713,696   $ 23,194,927
                                       ======================  =============
</TABLE>

                                       35
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

16.  Restatement (continued):

                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                               December 31, 1998
                                    ---------------------------------
                                       As Previously
                                         Reported          Restated
                                    -------------------  ------------
<S>                                 <C>                  <C>
                                    Revenue:
    Patient services, net           $       18,125,610   $16,457,451
    Management services                      1,962,803     1,962,803
    Health and fitness center                  450,625       450,625
    Rental income                            1,078,016     1,078,016
                                    -------------------  ------------
                                            21,617,054    19,948,895
                                    -------------------  ------------
  Direct costs:
    Patient services                         8,684,360     8,884,360
    Management services                        842,438       842,438
    Health and fitness center                  278,774       278,774
                                    -------------------  ------------
                                             9,805,572    10,005,572
                                    -------------------  ------------

  Gross profit                              11,811,482     9,943,323
                                    -------------------  ------------

  Operating expenses:
    Salaries and employee benefits           3,418,430     3,552,430
    Selling and administrative               5,906,911     6,994,583
    Amortization                             2,423,054     2,423,054
    Depreciation                               482,360       482,360
    Provision for bad debts                  1,946,140     2,147,140
    Impaired asset write down                  369,380       369,380
                                    -------------------  ------------
      Total operating expenses              14,546,275    15,968,947
                                    -------------------  ------------

  Income (loss) from operations             (2,734,793)   (6,025,624)
                                    -------------------  ------------

  Non-operating expenses:
    Interest expense                         1,855,828     2,913,420
                                    -------------------  ------------
                                             1,855,828     2,913,420
                                    -------------------  ------------

  Net loss                          $       (4,590,621)  $(8,939,044)
                                    ===================  ============

  Basic net loss per share          $            (0.33)  $     (0.65)
                                    ===================  ============

  Diluted net loss per share        $            (0.33)  $     (0.65)
                                    ===================  ============

  Weighted average number of
  common shares outstanding                 13,758,587    13,758,587
                                    ===================  ============
</TABLE>






                                       36
<PAGE>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996



17.  Restatement

     Subsequent  to  the  issuance  of  the  Company's   consolidated  financial
     statements for the year ended December 31, 1997, it was determined that the
     reported 1997 results were overstated.  Upon examination, it was determined
     that  certain   revenue  was   improperly   recorded.   The  Company's  two
     subsidiaries,   CoreCare   Behavioral   Health   Management  and  Westmeade
     Healthcare,  Inc.  over  accrued  the  amounts  due from their  third party
     provider,  Community  Behavioral  Health.  The over accrual  resulted  from
     miscalculation of the allowable per diem charges for in-patient services.

     As a result of the  miscalculation  of the  allowable  per diem charges for
     in-patient  service,   management  projected  that  the  Company  would  be
     profitable in 1998 and, in accordance  with SFAS 109, record a deferred tax
     benefit.  Had the correct per diem charges been used in the  projection for
     1998  operations,  the deferred tax benefit would not have been recognized.
     As a result, the accompanying  consolidated  financial statements as of and
     for the year ended December 31, 1997 present the restated results.

          A  summary  of  the  effects  of  the  restatement  follows:

                                       37
<PAGE>
<TABLE>
<CAPTION>
                              CORECARE SYSTEMS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                         DECEMBER 31, 1998, 1997 AND 1996


17.  Restatement (continued):



                                      ASSETS


                                                            December 31, 1997
                                                  --------------------------------
                                                    As Previously
                                                       Reported       As Restated
                                                  ------------------  ------------
<S>                                               <C>                 <C>
  Current assets:
      Cash                                        $          304,267  $    304,267
      Accounts receivable, net                             4,955,473     2,575,473
      Prepaid and other current assets                       212,367       212,367
      Deferred income taxes                                1,555,000
                                                  ------------------
                     Total current assets                  7,027,107     3,092,107
                                                  ------------------  ------------

    Contract rights, net of accumulated
      amortization of $1,023,619 in 1998
       and $531,011 in 1997                                  548,663       548,663
                                                  ------------------  ------------

    Real estate and other assets held for sale             1,513,723     1,513,723
                                                  ------------------  ------------

    Property, plant and equipment net                     10,727,385    10,727,385
                                                  ------------------  ------------

    Other assets:
      Goodwill, net of accumulated amortization
       of $496,924 in 1998 and 257,598 in 1997             1,801,155     1,801,155
      Deferred finance costs, net of accumulated
       amortization of $1,759,635 in 1998 and
       $241,648 in 1997                                      305,354       305,354
      Security deposits                                      108,468       108,468
      Restricted cash                                        197,394       197,394
      Deferred income taxes                                2,228,732
      Other                                                  247,232       247,232
                                                  ------------------  ------------
                                                           4,888,335     2,659,603
                                                  ------------------  ------------

                                                  $       24,705,213  $ 18,541,481
                                                  ==================  ============
</TABLE>


                                       38
<PAGE>
<TABLE>
<CAPTION>
                              CORECARE SYSTEMS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                         DECEMBER 31, 1998, 1997 AND 1996



17.  Restatement (continued):

                       LIABILITIES AND SHAREHOLDERS' EQUITY


                                                           December 31, 1997
                                                ----------------------------------
                                                   As Previously
                                                     Reported         As Restated
                                                -------------------  -------------
<S>                                             <C>                  <C>
    Current liabilities:
      Line of credit                            $        1,582,240   $  1,582,240
      Current portion of:
        Long-term debt                                  10,203,425     10,203,425
        Lease termination fee payable                       38,565         38,565
        Obligations under capital lease                     71,763         71,763
    Accounts payable                                     2,275,442      2,275,442
    Advances, officers-shareholders                      1,013,428      1,013,428
    Accrued expenses                                     2,091,675      2,091,675
    Payroll and payroll taxes payable                    1,688,105      1,688,105
                                                -------------------  -------------
      Total current liabilities                         18,964,643     18,964,643
                                                -------------------  -------------

    Long term liabilities:
      Notes payable                                      2,192,798      2,192,798
      Lease termination fee payable                         93,467         93,467
                                                -------------------  -------------
                                                         2,286,265      2,286,265
                                                -------------------  -------------
    Commitments and contingencies

    Company obligated mandatorily redeemable
      Series E convertible preferred stock
      (redemption value $943,400 in 19987 and
       1997)                                             1,293,271      1,293,271
                                                -------------------  -------------

    Shareholders' equity (deficiency):
      Preferred stock                                           26             26
      Common stock                                          12,694         12,694
      Additional paid in capital                         9,357,714      9,357,714
      Accumulated deficit                               (7,209,400)   (13,373,132)
                                                -------------------  -------------
                                                         2,161,034     (4,002,698)
                                                -------------------  -------------

                                                $       24,705,213   $ 18,541,481
                                                ===================  =============
</TABLE>


                                       39
<PAGE>
<TABLE>
<CAPTION>
                             CORECARE SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1998, 1997 AND 1996

17.  Restatement (continued):

                                                   December  31,  1997
                                            ------------------------------
                                             As Previously
                                               Reported       As Restated
                                            ---------------  -------------
<S>                                         <C>              <C>
    Revenue:
      Patient services, net                 $   10,050,834   $  7,670,834
      Management services                        1,760,075      1,760,075
      Health and fitness center                    521,414        521,414
      Rental income                                512,861        512,861
                                            ---------------  -------------
                                                12,845,184     10,465,184
                                            ---------------  -------------
    Direct costs:
      Patient services                           4,753,042      4,753,042
      Management services                          254,269        254,269
      Health and fitness center                    304,055        304,055
                                            ---------------  -------------
                                                 5,311,366      5,311,366
                                            ---------------  -------------

    Gross profit                                 7,533,818      5,153,818
                                            ---------------  -------------

    Operating expenses:
      Salaries and employee benefits             2,716,304      2,716,304
      Selling and administrative                 3,730,504      3,730,504
     Amortization                                  677,067        677,067
      Depreciation                                 279,546        279,546
      Provision for bad debts                      590,656        590,656
      Impaired asset write down

Total operating expenses                         7,994,077      7,994,077
                                            ---------------  -------------

    Loss from operations                          (460,259)    (2,840,259)
                                            ---------------  -------------

    Non-operating expenses:
      Interest expense                           1,844,284      1,844,284
      Factor fees                                  281,533        281,533
                                            ---------------  -------------
                                                 2,125,817      2,125,817
                                            ---------------  -------------

    Net loss before income tax benefit          (2,586,076)    (4,966,076)

    Income tax (benefit) expense                 3,783,732
                                            ---------------

    Net income (loss)                       $    1,197,656   $ (4,966,076)
                                            ===============  =============

      Basic net income (loss) per share     $          .11   $       (.44)
                                            ===============  =============

      Diluted net income (loss) per share   $          .08   $       (.44)
                                            ===============  =============

      Weighted average number of
       common shares outstanding                11,326,617     11,326,617
                                            ===============  =============
</TABLE>


                                       40
<PAGE>