##### 



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2002

OR

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

For the Transition period from ______ to ______

Commission file number 0-13849

RAMSAY YOUTH SERVICES, INC.
(Exact name of registrant as specified in its charter)

|                                                                                                             |  |                                                
|------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of incorporation or organization)                                      |  | 63-0857352
(I.R.S. Employer Identification No.)
|                                                                                                            
|Columbus Center
One Alhambra Plaza, Suite 750
Coral Gables, Florida
(Address of principal executive offices) |  | 33134
(Zip Code)                               

Registrants telephone number, including area code (305) 569-6993

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]     No [   ].

Indicate by check
mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).Yes
[   ]    No [X]

The number of shares of the Registrants Common Stock outstanding as of
November 13, 2002, follows:

Common Stock, par value $0.01 per share  9,291,081 shares





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##### 



RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

|                                                                                                            |  |     
|----------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                            |  | Page
|                                                                                                            |  |     
|Part I. FINANCIAL INFORMATION                                                                               |  |     
|                                                                                                           
|Item 1. Financial Statements (unaudited)                                                                    |  | 1   
|                                                                                                           
|Condensed Consolidated Balance Sheets  September 30, 2002 and
December 31, 2001                            |  | 2   
|                                                                                                           
|Condensed Consolidated Statements of Operations  Quarter and Nine Months
ended September 30, 2002 and 2001 |  | 3   
|                                                                                                           
|Condensed Consolidated Statements of Cash Flows  Nine Months ended
September 30, 2002 and 2001             |  | 4   
|                                                                                                           
|Notes to Condensed Consolidated Financial Statements  September 30, 2002                                   |  | 5   
|                                                                                                           
|Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations               |  | 12  
|                                                                                                           
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                          |  | 22  
|                                                                                                           
|Item 4. Controls and Procedures                                                                             |  | 22  
|                                                                                                           
|Part II. OTHER INFORMATION                                                                                  |  |     
|                                                                                                           
|Item 1. Legal Proceedings                                                                                   |  | 22  
|                                                                                                           
|Item 2. Changes in Securities and Use of Proceeds                                                           |  | 22  
|                                                                                                           
|Item 3. Defaults upon Senior Securities                                                                     |  | 22  
|                                                                                                           
|Item 4. Submission of Matters to a Vote of Securities Holders                                               |  | 23  
|                                                                                                           
|Item 5. Other Information                                                                                   |  | 23  
|                                                                                                           
|Item 6. Exhibits and Reports on Form 8-K                                                                    |  | 23  
|                                                                                                           
|SIGNATURES                                                                                                  |  | 24  





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##### 



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


|                       |                                                                                                                                                   |                      |            |               |            |              |            |            |            | 
|---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ---------- | ------------- | ---------- | ------------ | ---------- | ---------- | ---------- | 
|                       |                                                                                                                                                   |                      |            | September 30, |            | December 31,
|                       |                                                                                                                                                   |                      |            | 2002          |            | 2001        
|                       |                                                                                                                                                   |                      |            |               |            |             
|ASSETS                 |                                                                                                                                                   |                      |            |               |            |              |            |           
|Current assets         |                                                                                                                                                   |                      |            |               |            |              |            |           
|                       | Cash and cash equivalents                                                                                                                         |                      | $          | 1,608,000     |            |              | $          | 752,000    |           
|                       | Accounts receivable, less allowances for doubtful accounts of
$2,676,000 and $1,934,000 at September 30, 2002 and December
31, 2001, respectively |                      |            | 23,170,000    |            |              |            | 23,307,000 |           
|                       | Other current assets                                                                                                                              |                      |            | 5,867,000     |            |              |            | 6,091,000  |           
|                       |                                                                                                                                                   |                      |            |               |            |              |            |           
|                       |                                                                                                                                                   | Total current assets |            |               | 30,645,000 |              |            |            | 30,150,000 | 
|Other assets           |                                                                                                                                                   |                      |            |               |            |              |            |           
|                       | Cash held in trust                                                                                                                                |                      |            | 1,021,000     |            |              |            | 1,021,000  |           
|                       | Cost in excess of net asset value of purchased businesses, net                                                                                    |                      |            | 2,232,000     |            |              |            | 2,232,000  |           
|                       | Unamortized loan costs, net                                                                                                                       |                      |            | 842,000       |            |              |            | 1,077,000  |           
|                       | Deferred tax asset                                                                                                                                |                      |            | 6,708,000     |            |              |            |           |           
|                       |                                                                                                                                                   |                      |            |               |            |              |            |           
|                       |                                                                                                                                                   | Total other assets   |            |               | 10,803,000 |              |            |            | 4,330,000  | 
|Property and equipment |                                                                                                                                                   |                      |            |               |            |              |            |           
|                       | Land                                                                                                                                              |                      |            | 4,635,000     |            |              |            | 4,659,000  |           
|                       | Buildings and improvements                                                                                                                        |                      |            | 38,648,000    |            |              |            | 37,829,000 |           
|                       | Equipment, furniture and fixtures                                                                                                                 |                      |            | 13,304,000    |            |              |            | 12,580,000 |           
|                       |                                                                                                                                                   |                      |            |               |            |              |            |           
|                       |                                                                                                                                                   |                      | 56,587,000 |               |            |              | 55,068,000 |           
|                       | Less accumulated depreciation                                                                                                                     |                      |            | 22,268,000    |            |              |            | 20,537,000 |           
|                       |                                                                                                                                                   |                      |            |               |            |              |            |           
|                       |                                                                                                                                                   |                      | 34,319,000 |               |            |              | 34,531,000 |           
|                       |                                                                                                                                                   |                      |            |               |            |              |            |           
|                       |                                                                                                                                                   | $                    | 75,767,000 |               |            | $            | 69,011,000 |           
|                       |                                                                                                                                                   |                      |            |               |            |              |            |           

See notes to condensed consolidated financial statements.

1



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##### 



RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE
SHEETS  (UNAUDITED)


|                                     |                                                                                                                                                   |                           |                            |             |               |            |              |             |            |            | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------------------------- | ----------- | ------------- | ---------- | ------------ | ----------- | ---------- | ---------- | 
|                                     |                                                                                                                                                   |                           |                            |             | September 30, |            | December 31,
|                                     |                                                                                                                                                   |                           |                            |             | 2002          |            | 2001        
|                                     |                                                                                                                                                   |                           |                            |             |               |            |             
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                   |                           |                            |             |               |            |              |            
|Current liabilities                  |                                                                                                                                                   |                           |                            |             |               |            |              |            
|                                     | Accounts payable                                                                                                                                  |                           | $                          | 5,237,000   |               |            | $            | 5,604,000   |           
|                                     | Accrued and other liabilities                                                                                                                     |                           |                            | 7,970,000   |               |            |              | 6,366,000   |           
|                                     | Amounts due to third-party contractual agencies                                                                                                   |                           |                            | 978,000     |               |            |              | 1,709,000   |           
|                                     | Current portion of long-term debt                                                                                                                 |                           |                            | 3,899,000   |               |            |              | 3,372,000   |           
|                                     |                                                                                                                                                   |                           |                            |             |               |            |              |            
|                                     |                                                                                                                                                   | Total current liabilities |                            |             | 18,084,000    |            |              |             | 17,051,000 |           
|Noncurrent liabilities               |                                                                                                                                                   |                           |                            |             |               |            |              |            
|                                     | Other accrued liabilities                                                                                                                         |                           |                            | 4,110,000   |               |            |              | 4,129,000   |           
|                                     | Long-term debt, less current portion                                                                                                              |                           |                            | 17,069,000  |               |            |              | 23,506,000  |           
|                                     |                                                                                                                                                   |                           |                            |             |               |            |              |            
|                                     |                                                                                                                                                   | Total liabilities         |                            |             | 39,263,000    |            |              |             | 44,686,000 |           
|                                     |                                                                                                                                                   |                           |                            |             |               |            |              |            
|Commitments and contingencies        |                                                                                                                                                   |                           |                            |             |               |            |              |            
|Stockholders equity                 |                                                                                                                                                   |                           |                            |             |               |            |              |            
|                                     | Common stock $.01 par valueauthorized
30,000,000 shares; issued 9,484,931 shares at
September 30, 2002 and 9,445,449 shares at
December 31, 2001 |                           |                            | 95,000      |               |            |              | 94,000      |           
|                                     | Additional paid-in capital                                                                                                                        |                           |                            | 127,130,000 |               |            |              | 127,047,000 |           
|                                     | Accumulated deficit                                                                                                                               |                           |                            | (86,822,000 | )             |            |              | (98,917,000 | )         
|                                     | Treasury stock193,850 common shares at
September 30, 2002 and December 31, 2001, at
cost                                                         |                           |                            | (3,899,000  | )             |            |              | (3,899,000  | )         
|                                     |                                                                                                                                                   |                           |                            |             |               |            |              |            
|                                     |                                                                                                                                                   |                           | Total stockholders equity |             |               | 36,504,000 |              |             |            | 24,325,000 | 
|                                     |                                                                                                                                                   |                           |                            |             |               |            |              |            
|                                     |                                                                                                                                                   | $                         | 75,767,000                 |             |               | $          | 69,011,000   |            
|                                     |                                                                                                                                                   |                           |                            |             |               |            |              |            

See notes to condensed consolidated financial statements.

2



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##### 



RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS  (UNAUDITED)


|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |            |           | 
|----------------------------------------------------- | ----------------------------------------- | --------------------------------- | ---------- | ------------- | ------- | ----------------- | ---------- | ---------- | ------- | ---- | ----------- | ---------- | --------- | - | ---------- | ---------- | --------- | 
|                                                      |                                           |                                   |            | Quarter Ended |         | Nine Months Ended
|                                                      |                                           |                                   |            | September 30, |         | September 30,    
|                                                      |                                           |                                   |            |               |         |                  
|                                                      |                                           |                                   |            | 2002          |         | 2001              |            | 2002       |         | 2001
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |     
|Revenues                                              |                                           | $                                 | 36,323,000 |               |         | $                 | 33,638,000 |            |         | $    | 108,863,000 |            |           | $ | 99,267,000 |           
|Operating Expenses:                                   |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|                                                      | Salaries, wages and benefits              |                                   |            | 22,671,000    |         |                   |            | 21,283,000 |         |      |             | 67,706,000 |           |   |            | 61,846,000 |          
|                                                      | Other operating expenses                  |                                   |            | 9,971,000     |         |                   |            | 9,457,000  |         |      |             | 29,516,000 |           |   |            | 28,087,000 |          
|                                                      | Provision for doubtful accounts           |                                   |            | 401,000       |         |                   |            | 264,000    |         |      |             | 1,839,000  |           |   |            | 2,183,000  |          
|                                                      | Depreciation and amortization             |                                   |            | 679,000       |         |                   |            | 639,000    |         |      |             | 1,928,000  |           |   |            | 1,824,000  |          
|                                                      | Asset impairment charges                  |                                   |            |              |         |                   |            |           |         |      |             | 125,000    |           |   |            |           |          
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|Total operating expenses                              |                                           |                                   | 33,722,000 |               |         |                   | 31,643,000 |            |         |      | 101,114,000 |            |           |   | 93,940,000 |           
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|                                                     
|Income from operations                                |                                           |                                   | 2,601,000  |               |         |                   | 1,995,000  |            |         |      | 7,749,000   |            |           |   | 5,327,000  |           
|                                                     
|Non-operating expenses:                               |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|                                                      | Interest and other financing charges, net |                                   |            | 576,000       |         |                   |            | 746,000    |         |      |             | 1,871,000  |           |   |            | 2,597,000  |          
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|                                                      |                                           | Total non-operating expenses, net |            |               | 576,000 |                   |            |            | 746,000 |      |             |            | 1,871,000 |   |            |            | 2,597,000 | 
|Income before income taxes                            |                                           |                                   | 2,025,000  |               |         |                   | 1,249,000  |            |         |      | 5,878,000   |            |           |   | 2,730,000  |           
|Provision (benefit) for income taxes                  |                                           |                                   | 763,000    |               |         |                   | 171,000    |            |         |      | (6,215,000  | )          |           |   | 472,000    |           
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|Net income                                            |                                           | $                                 | 1,262,000  |               |         | $                 | 1,078,000  |            |         | $    | 12,093,000  |            |           | $ | 2,258,000  |           
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|Income attributable to common stockholders            |                                           | $                                 | 1,262,000  |               |         | $                 | 1,078,000  |            |         | $    | 12,093,000  |            |           | $ | 2,258,000  |           
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|Income per common share:                              |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|                                                      | Basic                                     |                                   | $          | 0.14          |         |                   | $          | 0.12       |         |      | $           | 1.30       |           |   | $          | 0.25       |          
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|                                                      | Diluted                                   |                                   | $          | 0.11          |         |                   | $          | 0.10       |         |      | $           | 1.06       |           |   | $          | 0.23       |          
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|Weighted average number of common shares
outstanding: |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|                                                      | Basic                                     |                                   |            | 9,279,000     |         |                   |            | 9,056,000  |         |      |             | 9,272,000  |           |   |            | 8,977,000  |          
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           
|                                                      | Diluted                                   |                                   |            | 11,493,000    |         |                   |            | 11,059,000 |         |      |             | 11,444,000 |           |   |            | 9,977,000  |          
|                                                      |                                           |                                   |            |               |         |                   |            |            |         |      |             |            |           |   |            |           

See notes to condensed consolidated financial statements.

3



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##### 



RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS  (UNAUDITED)


|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |            |           |            |            |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------------------------- | --------------------------------------------------- | --------- | ----------------- | ---------- | ---------- | --------- | ---------- | ---------- | -
|                                                     |                                                                                             |                                             |                                                 |                                                     |           | Nine Months Ended
|                                                     |                                                                                             |                                             |                                                 |                                                     |           | September 30,    
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                  
|                                                     |                                                                                             |                                             |                                                 |                                                     |           | 2002              |            | 2001      
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|Cash flows from operating activities:                |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     | Net income                                                                                  |                                             | $                                               | 12,093,000                                          |           |                   | $          | 2,258,000  |          
|                                                     | Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |                                             |                                                 |                                                     |           |                   |            |            |          
|                                                     |                                                                                             | Depreciation                                |                                                 |                                                     | 1,928,000 |                   |            |            | 1,723,000 |           
|                                                     |                                                                                             | Amortization, including loan costs          |                                                 |                                                     | 400,000   |                   |            |            | 526,000   |           
|                                                     |                                                                                             | Provision for doubtful accounts             |                                                 |                                                     | 1,839,000 |                   |            |            | 2,183,000 |           
|                                                     |                                                                                             | Asset impairment charges                    |                                                 |                                                     | 125,000   |                   |            |            |          |           
|                                                     |                                                                                             | Loss on sale of assets                      |                                                 |                                                     | 17,000    |                   |            |            |          |           
|                                                     |                                                                                             | Change in operating assets and liabilities: |                                                 |                                                     |           |                   |            |            |           |           
|                                                     |                                                                                             |                                             | Accounts receivable                             |                                                     |           | (1,702,000        | )          |            |           | (5,819,000 | )         
|                                                     |                                                                                             |                                             | Other current assets                            |                                                     |           | 371,000           |            |            |           | (829,000   | )         
|                                                     |                                                                                             |                                             | Deferred tax assets                             |                                                     |           | (6,708,000        | )          |            |           |           |           
|                                                     |                                                                                             |                                             | Accounts payable                                |                                                     |           | (367,000          | )          |            |           | (2,146,000 | )         
|                                                     |                                                                                             |                                             | Accrued and other liabilities                   |                                                     |           | 1,585,000         |            |            |           | 2,851,000  |           
|                                                     |                                                                                             |                                             | Amounts due to third-party contractual agencies |                                                     |           | (731,000          | )          |            |           | (1,890,000 | )         
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     |                                                                                             |                                             |                                                 | Total adjustments                                   |           |                   | (3,243,000 | )          |           |            | (3,401,000 | )
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     |                                                                                             |                                             |                                                 | Net cash provided by (used in) operating activities |           |                   | 8,850,000  |            |           |            | (1,143,000 | )
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|Cash flows from investing activities:                |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     | Proceeds from the sale of assets                                                            |                                             |                                                 | 159,000                                             |           |                   |            | 472,000    |          
|                                                     | Expenditures for property and equipment                                                     |                                             |                                                 | (2,164,000                                          | )         |                   |            | (1,826,000 | )        
|                                                     | Cash held in trust                                                                          |                                             |                                                 |                                                    |           |                   |            | 30,000     |          
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     |                                                                                             |                                             |                                                 | Net cash used in investing activities               |           |                   | (2,005,000 | )          |           |            | (1,324,000 | )
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|Cash flows from financing activities:                |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     | Loan costs                                                                                  |                                             |                                                 | (82,000                                             | )         |                   |            | (41,000    | )        
|                                                     | Proceeds from issuance of debt and warrants                                                 |                                             |                                                 | 1,528,000                                           |           |                   |            | 4,705,000  |          
|                                                     | Payments on debt                                                                            |                                             |                                                 | (7,521,000                                          | )         |                   |            | (2,401,000 | )        
|                                                     | Net proceeds from exercise of options and stock purchases                                   |                                             |                                                 | 99,000                                              |           |                   |            | 26,000     |          
|                                                     | Registration costs                                                                          |                                             |                                                 | (13,000                                             | )         |                   |            |           |          
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     |                                                                                             |                                             |                                                 | Net cash (used in) provided by financing activities |           |                   | (5,989,000 | )          |           |            | 2,289,000  |  
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|Net increase (decrease) in cash and cash equivalents |                                                                                             |                                             | 856,000                                         |                                                     |           |                   | (178,000   | )         
|Cash and cash equivalents at beginning of period     |                                                                                             |                                             | 752,000                                         |                                                     |           |                   | 1,539,000  |           
|Cash and cash equivalents at end of period           |                                                                                             | $                                           | 1,608,000                                       |                                                     |           | $                 | 1,361,000  |           
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|Cash paid during the period for:                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     | Interest                                                                                    |                                             | $                                               | 1,446,000                                           |           |                   | $          | 2,249,000  |          
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           
|                                                     | Income taxes                                                                                |                                             | $                                               | 443,000                                             |           |                   | $          | 417,000    |          
|                                                     |                                                                                             |                                             |                                                 |                                                     |           |                   |            |           

See notes to condensed consolidated financial statements.

4



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##### 



RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (UNAUDITED)
SEPTEMBER 30, 2002


NOTE 1. BASIS OF PRESENTATION

Ramsay Youth Services, Inc. (the Company) is a provider and manager of
mental health, substance abuse and behavioral health programs and services in
residential and non-residential settings in Alabama, Florida, Georgia, Hawaii,
Missouri, Michigan, Nevada, North Carolina, South Carolina, Texas, Utah and the
Commonwealth of Puerto Rico.

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the interim information are,
unless otherwise discussed in this report, of a normal recurring nature and
have been included. The Companys business is seasonal in nature and subject
to general economic conditions and other factors. Accordingly, operating
results for the quarter and nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year. The
balance sheet at December 31, 2001 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Significant estimates include valuation reserves for
accounts receivable, estimates of revenue to be received from government and
other contract reimbursement programs, self-insurance reserves, and estimates
related to allocating purchase price to assets and liabilities for prior or
future acquisitions. For further information, refer to the consolidated
financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2001.

NOTE 2. ASSET SALES

On May 15, 2001, the Company sold the Palm Bay facility for $2,300,000.
Proceeds from the sale included a $500,000 cash payment at closing and a
$1,800,000, 8% promissory note, due and payable on June 30, 2003. During the
year ended December 31, 2001, the Company agreed to accept a discount of
$130,000 for the full payment of the promissory note and accrued interest,
however, the borrower was unable to close the transaction by the agreed upon
date. As a result, the Company does not expect to receive full payment for the
promissory note until the original maturity date of June 30, 2003.

NOTE 3. TRANSACTIONS WITH AFFILIATES

In September 2002, the Company entered into a lease agreement for a
110-bed facility in Macon, Georgia (the Macon Facility) with a corporate
affiliate of Mr. Paul J. Ramsay, Chairman of the Board of the
Company and beneficial owner of approximately 60% of our outstanding
common stock. The
lease has a primary term of five years and two successive five year renewal
options. The lease payments are approximately $480,000 per annum and at each
renewal option are subject to adjustments based on the change in the Consumer
Price Index during the preceding period. In accordance with the terms of the
lease, the Company is responsible for all costs of ownership, including taxes,
insurance, maintenance and repairs. In addition, the Company has the option to
purchase the facility at any time for an amount equal to the aggregate cost of
the facility (as defined in the lease agreement) adjusted for the increase in
the Consumer Price Index between the commencement of the lease and the purchase
date.

5



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. LONG-TERM DEBT

The Companys long-term debt is as follows:

|                                                                      |  |               |            |              |  |   |            | 
|--------------------------------------------------------------------- |  | ------------- | ---------- | ------------ |  | - | ---------- | 
|                                                                      |  | September 30, |            | December 31,
|                                                                      |  | 2002          |            | 2001        
|                                                                      |  |               |            |             
|Variable rate Term Loan, due October 30, 2003                         |  | $             | 6,946,000  |              |  | $ | 8,134,000  | 
|Revolver, due October 30, 2003                                        |  |               | 4,178,000  |              |  |   | 7,503,000  | 
|Acquisition Loan, due October 30, 2003                                |  |               | 365,000    |              |  |   | 1,849,000  | 
|Subordinated Note (net of discount of
$303,000), due January 24, 2007 |  |               | 4,697,000  |              |  |   | 4,660,000  | 
|Subordinated Note (net of discount of
$315,000), due January 24, 2007 |  |               | 4,685,000  |              |  |   | 4,640,000  | 
|Other                                                                 |  |               | 97,000     |              |  |   | 92,000     | 
|                                                                      |  |               |            |              |  |   |            | 
|                                                                      |  |               | 20,968,000 |              |  |   | 26,878,000 | 
|Less current portion                                                  |  |               | 3,899,000  |              |  |   | 3,372,000  | 
|                                                                      |  |               |            |              |  |   |            | 
|                                                                      |  | $             | 17,069,000 |              |  | $ | 23,506,000 | 
|                                                                      |  |               |            |              |  |   |            | 

The Companys amended senior credit facility (the Senior Credit
Facility) consists of a term loan (the Term Loan) payable in monthly
installments ranging from $83,000 to $302,000 with a final installment of
$3,600,000 due on October 30, 2003 and a revolving credit facility (the
Revolver) for an amount up to the lesser of $15,000,000 or the borrowing base
of the Companys receivables (as defined in the agreement).

On September 6, 2002, the Companys senior credit facility and
subordinated debt was amended to consent to a commercial lease for the Macon
Facility between the Company and a corporate affiliate of Mr. Paul J. Ramsay.

During the twelve months ended December 31, 2001, the Company exceeded the
capital expenditure limitation in the Senior Credit Facility. On February 25,
2002, the Companys lender agreed to amend the Senior Credit Facility,
retroactive to December 31, 2001, to provide for among other items: (i) an
increase in the permitted capital expenditures, (ii) a $3.0 million increase in
the revolving credit loan commitment, and (iii) a $1.5 million additional
advance on the term loan. At September 30, 2002, the Company was in compliance
with all covenants stipulated in the Senior Credit Facility.

On January 25, 2000 and June 19, 2000, the Company entered into
subordinated note and warrant purchase agreements with two unrelated financial
institutions for an aggregate principal amount of $5.0 million each (the
Subordinated Notes). The Subordinated Notes permit each of the financial
institutions to exercise, under certain conditions, up to 475,000 warrants,
which are convertible into the Companys common stock. Borrowings under the
Subordinated Notes bear interest at a rate of 12.5% per annum. The interest is
payable quarterly, and the principal balance and any unpaid interest is due
January 24, 2007. The aggregate value of the warrants at the time of issuance
was $844,000. On August 17, 2001, one of the financial institutions exercised
its warrant purchase agreement and converted 475,000 warrants into 294,597
shares of common stock utilizing the cashless exercise provision outlined in
the warrant agreement.

6



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |           |           |           | 
|-------------------------- | --------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ----------------------------------------------------------------------------------------------------- | --------- | ------------- | ---------- | ----------------- | --------- | --------- | ---------- | ---- | ---------- | ---------- | ---------- | ---- | --------- | --------- | --------- | 
|                           |                                                                                                                 |                                     |                                                                                                       |           | Quarter Ended |            | Nine Months Ended
|                           |                                                                                                                 |                                     |                                                                                                       |           | September 30, |            | September 30,    
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                  
|                           |                                                                                                                 |                                     |                                                                                                       |           | 2002          |            | 2001              |           | 2002      |            | 2001
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |     
|                           |                                                                                                                 |                                     |                                                                                                       |           | (unaudited)   |            | (unaudited)      
|Numerator:                 |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|                           | Numerator for basic earnings per
share  income attributable to common
stockholders                             |                                     | $                                                                                                     | 1,262,000 |               |            | $                 | 1,078,000 |           |            | $    | 12,093,000 |            |            | $    | 2,258,000 |          
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|                           |                                                                                                                 | Effect of dilutive securities       |                                                                                                       | $         | 1,262,000     |            |                   | $         | 1,078,000 |            |      | $          | 12,093,000 |            |      | $         | 2,258,000 |          
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|                           | Numerator for diluted earnings per
share  income attributable to common
stockholders after assumed
conversions |                                     | $                                                                                                     | 1,262,000 |               |            | $                 | 1,078,000 |           |            | $    | 12,093,000 |            |            | $    | 2,258,000 |          
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|Denominator:               |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|                           | Denominator for basic earnings per
share  weighted-average shares                                              |                                     |                                                                                                       | 9,279,000 |               |            |                   | 9,056,000 |           |            |      | 9,272,000  |            |            |      | 8,977,000 |          
|                           | Effect of dilutive securities:                                                                                  |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |           |          
|                           |                                                                                                                 | Employee stock options and warrants |                                                                                                       |           | 2,214,000     |            |                   |           | 2,003,000 |            |      |            | 2,172,000  |            |      |           | 1,000,000 |          
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|                           | Dilutive potential common shares                                                                                |                                     |                                                                                                       | 2,214,000 |               |            |                   | 2,003,000 |           |            |      | 2,172,000  |            |            |      | 1,000,000 |          
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|                           |                                                                                                                 |                                     | Denominator for diluted earnings
per share  adjusted
weighted-average shares and
assumed conversions |           |               | 11,493,000 |                   |           |           | 11,059,000 |      |            |            | 11,444,000 |      |           |           | 9,977,000 | 
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|Basic earnings per share   |                                                                                                                 | $                                   | 0.14                                                                                                  |           |               | $          | 0.12              |           |           | $          | 1.30 |            |            | $          | 0.25 |          
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          
|Diluted earnings per share |                                                                                                                 | $                                   | 0.11                                                                                                  |           |               | $          | 0.10              |           |           | $          | 1.06 |            |            | $          | 0.23 |          
|                           |                                                                                                                 |                                     |                                                                                                       |           |               |            |                   |           |           |            |      |            |            |            |      |          

For both the quarter and the nine months ended September 30, 2002, options
and warrants totalling 591,781 were excluded from the above computation because
their effect would be antidilutive.

For both the quarter
and the nine months ended September 30, 2001, options and warrants
totalling 591,781 and 786,281, respectively, were excluded from the
above computation because their effect would be antidilutive.

NOTE 6. SEGMENT INFORMATION

The Company is a provider and manager of mental health and behavioral
health programs and services in residential and non-residential settings in
eleven states and the Commonwealth of Puerto Rico. During the quarter ended
June 30, 2001, the Company refined its segment definitions to more
appropriately reflect its business operations and management responsibilities.
The primary change from the segment information originally presented as of June
30, 2001 consists of a change in the names of the segments and the
classification of certain items within the segments. Accordingly, the
corresponding information for earlier periods has been reclassified to reflect
its new reportable business segments, owned operations and management contract
operations.

Owned Operations

The Company offers its mental health and behavioral health programs and
services at its owned and leased facilities in residential and non-residential
settings.

The residential
setting is designed to provide a safe, secure and highly structured
environment for the evaluation and development of long-term intensive treatment
services. The programs focus on a cognitive behavioral model with family,
group and individual counseling, social and life skills development, and
educational and

7



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

recreational programs. The primary focus of these services is to reshape
antisocial behaviors by stressing responsibility and achievement of performance
and treatment goals.

The non-residential setting is designed to meet the special needs of
patients requiring a less structured environment than the residential setting,
but providing the necessary level of treatment, support and assistance to
transition back into society. The primary focus of this program is to provide
patients, with a clinically definable emotional, psychiatric or dependency
disorder, with therapeutic and intensive treatment services. Patients
who are assisted through this program have either transitioned out of a residential
treatment program, or do not require the intensive services of a residential
treatment program.

Many of the Companys programs are complemented with specialized
educational services designed to modify behavior and assist individuals in
developing their academic, social, living and vocational skills necessary to
participate successfully in society.

Management Contract Operations

The Companys programs and services in its management contract operations
are similar in nature to the programs and services offered by the Company at
its owned or leased operations; however, the programs and services are provided at
facilities owned by the contracting governmental agency. These programs and
services focus on solving the specialized needs of the respective agency by
providing treatment interventions, including counseling, social
interests, substance abuse education and treatment, mental health services,
cognitive and life skills development, accredited education and vocational
skills. The Company believes that a comprehensive approach, which develops the
social, educational, and vocational skills of the individual, creates
responsible, contributing, pro-social individuals. This comprehensive approach
is essential to achieving the programs objective of reducing recidivism and
integrating the youth into their communities as responsible and productive
individuals.

The following table sets forth, for each of the periods indicated, certain
information about segment results of operations and segment assets. There are
no inter-segment sales or transfers. Segment profit consists of revenue less
operating expenses, and does not include investment income and other, interest
and other financing charges, non-recurring items and income taxes. Total
assets are those assets used in the operations in each segment. Corporate
assets include cash and cash equivalents, property and equipment, intangible
assets and notes receivable. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.

8



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |            |  
|------------------------------------------------ | --------------------------------------- | - | ------------- | ---------- | ----------------- | - | ---------- | ---------- | ---- | - | ----------- | ---------- | - | - | ---------- | ---------- | -
|                                                 |                                         |   | Quarter Ended |            | Nine Months Ended
|                                                 |                                         |   | September 30, |            | September 30,    
|                                                 |                                         |   |               |            |                  
|                                                 |                                         |   | 2002          |            | 2001              |   | 2002       |            | 2001
|                                                 |                                         |   |               |            |                   |   |            |            |     
|Segment revenue                                  |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 | Owned operations                        |   | $             | 29,124,000 |                   |   | $          | 26,415,000 |      |   | $           | 87,380,000 |   |   | $          | 78,683,000 |  
|                                                 | Management contracts                    |   |               | 7,199,000  |                   |   |            | 7,223,000  |      |   |             | 21,483,000 |   |   |            | 20,584,000 |  
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|Total consolidated revenues                      |                                         | $ | 36,323,000    |            |                   | $ | 33,638,000 |            |      | $ | 108,863,000 |            |   | $ | 99,267,000 |           
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|Segment depreciation and amortization            |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 | Owned operations                        |   | $             | 613,000    |                   |   | $          | 569,000    |      |   | $           | 1,736,000  |   |   | $          | 1,626,000  |  
|                                                 | Management contracts                    |   |               | 37,000     |                   |   |            | 28,000     |      |   |             | 107,000    |   |   |            | 78,000     |  
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 |                                         |   | 650,000       |            |                   |   | 597,000    |            |      |   | 1,843,000   |            |   |   | 1,704,000  |           
|Reconciling items                                |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 | Corporate depreciation and amortization |   |               | 29,000     |                   |   |            | 42,000     |      |   |             | 85,000     |   |   |            | 120,000    |  
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|Total consolidated depreciation and amortization |                                         | $ | 679,000       |            |                   | $ | 639,000    |            |      | $ | 1,928,000   |            |   | $ | 1,824,000  |           
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|SEGMENT PROFIT                                   |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 | Owned operations                        |   | $             | 3,347,000  |                   |   | $          | 2,131,000  |      |   | $           | 10,560,000 |   |   | $          | 7,533,000  |  
|                                                 | Management contracts                    |   |               | 703,000    |                   |   |            | 1,244,000  |      |   |             | 1,945,000  |   |   |            | 2,309,000  |  
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 |                                         |   | 4,050,000     |            |                   |   | 3,375,000  |            |      |   | 12,505,000  |            |   |   | 9,842,000  |           
|Reconciling items                                |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 | Corporate expenses                      |   |               | (1,449,000 | )                 |   |            | (1,380,000 | )    |   |             | (4,631,000 | ) |   |            | (4,515,000 | )
|                                                 | Asset impairment charges                |   |               |           |                   |   |            |           |      |   |             | (125,000   | ) |   |            |           |  
|                                                 | Interest and other financing charges    |   |               | (576,000   | )                 |   |            | (746,000   | )    |   |             | (1,871,000 | ) |   |            | (2,597,000 | )
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|Total consolidated income before income taxes    |                                         | $ | 2,025,000     |            |                   | $ | 1,249,000  |            |      | $ | 5,878,000   |            |   | $ | 2,730,000  |           
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|SEGMENT CAPITAL EXPENSES                         |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 | Owned operations                        |   | $             | 528,000    |                   |   | $          | 522,000    |      |   | $           | 1,950,000  |   |   | $          | 1,488,000  |  
|                                                 | Management contracts                    |   |               | 33,000     |                   |   |            | 42,000     |      |   |             | 159,000    |   |   |            | 174,000    |  
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 |                                         |   | 561,000       |            |                   |   | 564,000    |            |      |   | 2,109,000   |            |   |   | 1,662,000  |           
|Reconciling items                                |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|                                                 | Corporate assets                        |   |               | 1,000      |                   |   |            | 33,000     |      |   |             | 54,000     |   |   |            | 164,000    |  
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           
|Total consolidated capital expenditures          |                                         | $ | 562,000       |            |                   | $ | 597,000    |            |      | $ | 2,163,000   |            |   | $ | 1,826,000  |           
|                                                 |                                         |   |               |            |                   |   |            |            |      |   |             |            |   |   |            |           

|                          |                      |   |                    |            |                   |   |            |            |  |  |  |  |  |  |  |  | 
|------------------------- | -------------------- | - | ------------------ | ---------- | ----------------- | - | ---------- | ---------- |  |  |  |  |  |  |  |  | 
|                          |                      |   | Year Ended         |            |                   |   |            |            |  |  | 
|                          |                      |   |                    |            |                   |   |            |            |  |  | 
|                          |                      |   | September 30, 2002 |            | December 31, 2001 |   |            |            |  |  |  |  | 
|                          |                      |   |                    |            |                   |   |            |            |  |  |  |  | 
|Segment assets            |                      |   |                    |            |                   |   |            |            |  |  |  |  |  |  |  | 
|                          | Owned operations     |   | $                  | 59,449,000 |                   |   | $          | 57,893,000 |  |  |  |  |  |  |  |  | 
|                          | Management contracts |   |                    | 6,114,000  |                   |   |            | 6,729,000  |  |  |  |  |  |  |  |  | 
|                          |                      |   |                    |            |                   |   |            |            |  |  |  |  |  |  |  | 
|Total segment assets      |                      |   | 65,563,000         |            |                   |   | 64,622,000 |            |  |  |  |  |  |  |  | 
|Reconciling items         |                      |   |                    |            |                   |   |            |            |  |  |  |  |  |  |  | 
|                          | Corporate assets     |   |                    | 10,204,000 |                   |   |            | 4,389,000  |  |  |  |  |  |  |  |  | 
|                          |                      |   |                    |            |                   |   |            |            |  |  |  |  |  |  |  | 
|Total consolidated assets |                      | $ | 75,767,000         |            |                   | $ | 69,011,000 |            |  |  |  |  |  |  |  | 
|                          |                      |   |                    |            |                   |   |            |            |  |  |  |  |  |  |  | 

NOTE 7. ACCOUNTS RECEIVABLE

The Company has experienced delays in the collection of receivables from
its contracts in Puerto Rico. As of September 30, 2002, the Company had
approximately $3.3 million in outstanding receivables due from the Commonwealth
of Puerto Rico, of which $2.0 million was over 120 days past due. Reserves
against outstanding Puerto Rico receivables were $1.4 million as of September
30, 2002. The Company and its advisors are in active discussions with the
Government of Puerto Rico with respect to the payment

9



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

of the outstanding receivables. The Company believes that it has fully
performed its obligations under the Puerto Rico contracts and is entitled to
receive payment of these receivables in full. Although the Company has been
advised by its legal counsel that the net receivables due on the Puerto Rico
contracts are collectable, there can be no assurances that future transactions
or events will not result in the need for additional reserves for these
accounts receivable. If the Company were to record additional reserves, it
would adversely affect earnings in the period in which the reserves are
recorded.

NOTE 8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. This Statement requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset and
subsequently allocated to expense using a systematic and rational method. This
Statement is required to be adopted in fiscal years beginning after June 15,
2002. The Company does not anticipate a significant impact to the results of
operations from the adoption of this Statement.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Correction.This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarifies
meanings, or describes their applicability under changed conditions. The
provisions of this Statement are effective for the Company with the beginning
of fiscal year 2003; however, early application of the Statement is encouraged.
Debt extinguishments reported as extraordinary items prior to scheduled or
early adoption of this Statement would be reclassified in most cases following
adoption. The Company does not anticipate a significant impact on its results
of operations from adopting this Statement.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management commitment to an exit plan. Adoption of this Statement
is required with the beginning of fiscal year 2003. The Company has not yet
completed its evaluation of the impact of adopting this Statement.

NOTE 9. INCOME TAXES

During the quarter ended June 30, 2002, the Company reversed $7.4 million
of the valuation allowance placed on its deferred tax assets relating to
temporary differences that will result in deductible amounts in future years
and net operating loss carryforwards. During the quarter ended
September 30, 2002, the Company amortized $0.7 million of its
deferred tax asset, resulting in a net deferred tax asset of $6.7
million at September 30, 2002. Future realization of the tax benefit of
an existing deductible temporary difference or carryforward ultimately depends
on the existence of sufficient taxable income within the carryforward period
available under tax law. The Company has reversed a portion of the valuation
allowance because, based on a current review of available objective and
verifiable evidence, it is managements judgment that a portion of the tax
benefits associated with the Companys deferred tax assets will more likely
than not be realized. Such evidence includes updated expectations about
sufficient future years taxable income which reflect the continuing
improvement in the Companys operating results.

10



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has available federal net operating loss carryforwards
totaling approximately $33.0 million, which expire in the years 2010 to 2018.
The Company also has available alternative minimum tax credit carryforwards of
approximately $1.2 million which may be carried forward indefinitely.

The net deferred tax asset represents managements best estimate of the
tax benefits that will more likely than not be realized in future years at each
reporting date. However, there can be no assurance that the Company can
generate taxable income to realize the net deferred tax asset. In addition,
under the Tax Reform Act of 1986, certain future changes in ownership resulting
from the sale of stock may limit the amount of net operating loss carryforwards
that can be utilized on an annual basis. The Company has and continues to
evaluate compliance relating to the utilization of the net operating loss
carryforwards, and believes it has complied in all material respects. A failure to meet
the requirements could result in a loss or limitation of the utilization of
carryforwards, which could have a material adverse effect on the Companys
financial position and results of operations in future periods.

Deferred taxes as of September 30, 2002 and December 31, 2001 are
summarized as follows:

|                                            |                                              |                                                 |             |               |            |              |             |            |            | 
|------------------------------------------- | -------------------------------------------- | ----------------------------------------------- | ----------- | ------------- | ---------- | ------------ | ----------- | ---------- | ---------- | 
|                                            |                                              |                                                 |             | September 30, |            | December 31,
|                                            |                                              |                                                 |             | 2002          |            | 2001        
|                                            |                                              |                                                 |             |               |            |             
|Deferred tax liabilities:                   |                                              |                                                 |             |               |            |              |             |           
|                                            | Book basis of fixed assets over tax basis    |                                                 | $           | 57,000        |            |              | $           | 57,000     |           
|                                            | Prepaid maintenance                          |                                                 |             | 95,000        |            |              |             | 396,000    |           
|                                            | Other                                        |                                                 |             |              |            |              |             | 248,000    |           
|                                            |                                              |                                                 |             |               |            |              |             |           
|                                            |                                              | Total deferred tax liabilities                  |             |               | 152,000    |              |             |            | 701,000    | 
|Deferred tax assets:                        |                                              |                                                 |             |               |            |              |             |           
|                                            | Allowance for doubtful accounts              |                                                 |             | 668,000       |            |              |             | 735,000    |           
|                                            | General and professional liability insurance |                                                 |             | 910,000       |            |              |             | 1,806,000  |           
|                                            | Accrued employee benefits                    |                                                 |             | 824,000       |            |              |             | 816,000    |           
|                                            | Capital loss carryovers                      |                                                 |             | 423,000       |            |              |             | 445,000    |           
|                                            | Other accrued liabilities                    |                                                 |             | 2,320,000     |            |              |             | 2,568,000  |           
|                                            | Other                                        |                                                 |             |              |            |              |             | 2,000      |           
|                                            | Net operating loss carryovers                |                                                 |             | 13,297,000    |            |              |             | 15,899,000 |           
|                                            | Alternative minimum tax credit carryovers    |                                                 |             | 1,150,000     |            |              |             | 1,150,000  |           
|                                            |                                              |                                                 |             |               |            |              |             |           
|                                            |                                              | Total deferred tax assets                       |             |               | 19,592,000 |              |             |            | 23,421,000 | 
|Valuation allowance for deferred tax assets |                                              |                                                 | (12,732,000 | )             |            |              | (22,720,000 | )         
|                                            |                                              |                                                 |             |               |            |              |             |           
|                                            |                                              | Deferred tax assets, net of valuation allowance |             |               | 6,860,000  |              |             |            | 701,000    | 
|                                            |                                              |                                                 |             |               |            |              |             |           
|                                            |                                              | Net deferred tax assets                         |             | $             | 6,708,000  |              |             | $          |           | 
|                                            |                                              |                                                 |             |               |            |              |             |           

11



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##### 



RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

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

The Company receives revenues primarily from the delivery of mental
health, substance abuse and behavioral health programs and services in
residential and non-residential settings. The Company receives revenues based
on per diem rates, fixed fee contracts or flat or cost-based rate contracts.
In addition, the Company also receives revenues from management contracts with
other entities. Revenues under the Companys programs are recognized as
services are rendered. Revenues of the Companys programs and services are
affected by changes in the rates the Company charges, changes in reimbursement
rates by third-party payors, the volume of individuals treated and changes in
the mix of payors.

Salaries, wages and benefits include facility and program payrolls and
related taxes, as well as employee benefits, including insurance and workers
compensation coverage. Employee compensation and benefits also includes
general and administrative payroll and related benefit costs, including
salaries and supplemental compensation of officers.

Other operating expenses include all expenses not otherwise presented
separately in the Companys statements of operations. Significant components
of these expenses at the operating level include items such as food, utilities,
supplies, rent and insurance. Significant components of these expenses at the
administrative level include legal, accounting, investor relations, marketing,
consulting and travel expense.

The Companys quarterly results may fluctuate significantly as a result of
a variety of factors, including the timing of the opening of new programs.
When the Company opens a new program, the program may be unprofitable until the
programs population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in
anticipation of achieving such levels. The Companys quarterly results may
also be impacted by seasonality, as revenues generated by youth treatment
services are generally seasonal in nature.

In connection with the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that this Quarterly Report on
Form 10-Q contains forward-looking statements about the Company. The Company
is hereby setting forth cautionary statements identifying important factors
that may cause the Companys actual results to differ materially from those set
forth in any forward-looking statements or information made by or on behalf of
or concerning the Company. These factors are set forth in the Companys Form
10-K for the year ended December 31, 2001, and include (i) accelerating changes
occurring in the at-risk youth industry, including competition from
consolidating and integrated provider systems and limitations on reimbursement
rates, (ii) federal and state governmental budgetary constraints which could
have the effect of limiting the amount of funds available to support
governmental programs, (iii) statutory, regulatory and administrative changes
or interpretations of existing statutory and regulatory provisions affecting
the conduct of the Companys business and affecting current and prior
reimbursement for the Companys services, (iv) uncertainties regarding
issues in the Puerto Rico market serviced by the Company and (v) our
ability to utilize our net operating loss carryforwards. There can be no
assurance that any anticipated future results will be achieved. As a result of
the factors identified above and including any other factors, the Companys
actual results or financial or other condition could vary significantly from
the performance or expectation set forth in any forward-looking statements or
information. The Company undertakes no obligations to update these
forward-looking statements.

12



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RAYMSAY YOUTH SERVICES, INC. AND
SUBSIDIARIES

RESULTS OF OPERATIONS

Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001

OWNED OPERATIONS SEGMENT

The following table states for the periods indicated the results of our
owned operations in dollar and percentage of revenue terms (dollars in
thousands):

|                       |                                 |                          |        |                             |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |      |      |  
|---------------------- | ------------------------------- | ------------------------ | ------ | --------------------------- | ------ | ---- |  |  |  |  | ----- | ---- | ---- | - | ------ | ------ | ------ |  |  |  |  |  | ----- | ---- | ---- | -
|                       |                                 |                          |        | Quarter Ended September 30, |        |      |  | 
|                       |                                 |                          |        |                             |        |      |  | 
|                       |                                 |                          |        | 2002                        |        | 2001
|                       |                                 |                          |        |                             |        |     
|Revenues               |                                 | $                        | 29,124 |                             |        |      |  |  |  |  | 100.0 | %    |      | $ | 26,415 |        |        |  |  |  |  |  | 100.0 | %   
|Expenses:              |                                 |                          |        |                             |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|                       | Salaries, wages and benefits    |                          |        | 17,069                      |        |      |  |  |  |  |       | 58.6 | %    |   |        | 16,037 |        |  |  |  |  |  |       | 60.7 | %   
|                       | Other operating expenses        |                          |        | 7,702                       |        |      |  |  |  |  |       | 26.5 | %    |   |        | 7,130  |        |  |  |  |  |  |       | 27.0 | %   
|                       | Provision for doubtful accounts |                          |        | 393                         |        |      |  |  |  |  |       | 1.3  | %    |   |        | 548    |        |  |  |  |  |  |       | 2.0  | %   
|                       | Depreciation and amortization   |                          |        | 613                         |        |      |  |  |  |  |       | 2.1  | %    |   |        | 569    |        |  |  |  |  |  |       | 2.2  | %   
|                       |                                 |                          |        |                             |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|                       |                                 | Total operating expenses |        |                             | 25,777 |      |  |  |  |  |       |      | 88.5 | % |        |        | 24,284 |  |  |  |  |  |       |      | 91.9 | %
|                       |                                 |                          |        |                             |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|Income from operations |                                 | $                        | 3,347  |                             |        |      |  |  |  |  | 11.5  | %    |      | $ | 2,131  |        |        |  |  |  |  |  | 8.1   | %   
|                       |                                 |                          |        |                             |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     

REVENUES

Revenues increased by 10.3%, or $2.7 million, to $29.1 million in 2002
compared to $26.4 million in 2001. The increase in revenues during the period
is primarily a result of (i) an increase of 1.5% in resident days (from 87,455
days in 2001 to 88,728 days in 2002), resulting in an increase in revenues of
$1.5 million, (ii) an increase in average rates due to increases in per diems
and a favorable per diem mix, which increased revenues by $0.9 million, (iii) a
new contract awarded to one of the Companys facilities which
began on February
18, 2002 and generated $0.4 million in revenues during the quarter ended
September 30, 2002 and (iv) a reduction in the general cost report reserves as
a result of favorable cost report settlements which resulted in an increase in
revenue of $0.4 million. The aforementioned increases were partially offset by
the closure of a 20-bed facility in Puerto Rico, which decreased revenues by
$0.5 million.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were $17.1 million, or 58.6% of revenues in
2002, compared to $16.0 million, or 60.7% in 2001. The decrease as a
percentage of revenues was primarily attributable to the aforementioned
increase in revenues and related efficiencies in staffing primarily
in the Companys Texas and Michigan facilities.

OTHER OPERATING EXPENSES

Other operating expenses were $7.7 million, or 26.5% of revenues in 2002,
compared to $7.1 million, or 27.0% of revenues in 2001. The decrease as a
percentage of revenues was primarily a result of the aforementioned increase in
revenues and related operating efficiencies gained by the Company primarily in
its Texas and Michigan facilities.

PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts was $0.4 million, or 1.3% of revenues
in 2002, compared to $0.5 million, or 2.0% of revenues in 2001. The decrease as a
percentage of revenues was a result of additional reserves

13



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RAYMSAY YOUTH SERVICES, INC. AND
SUBSIDIARIES

recorded in 2001 related to payment delays experienced by the Company from
one of its payor sources in its Jacksonville, North Carolina facility.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.6 million, or 2.1% of revenues in
2002, compared to $0.6 million, or 2.2% of revenues in 2001. Depreciation and
amortization did not fluctuate as a percentage of revenue when compared to the
same period in the prior year.

MANAGEMENT CONTRACT SEGMENT

The following table states for the periods indicated the results of our
management contract operations in dollar and percentage of revenue terms
(dollars in thousands):

|                       |                                 |                          |       |                             |       |      |  |  |  |  |       |      |      |   |       |       |       |  |  |  |  |  |       |      |      |  
|---------------------- | ------------------------------- | ------------------------ | ----- | --------------------------- | ----- | ---- |  |  |  |  | ----- | ---- | ---- | - | ----- | ----- | ----- |  |  |  |  |  | ----- | ---- | ---- | -
|                       |                                 |                          |       | Quarter Ended September 30, |       |      |  | 
|                       |                                 |                          |       |                             |       |      |  | 
|                       |                                 |                          |       | 2002                        |       | 2001
|                       |                                 |                          |       |                             |       |     
|Revenues               |                                 | $                        | 7,199 |                             |       |      |  |  |  |  | 100.0 | %    |      | $ | 7,223 |       |       |  |  |  |  |  | 100.0 | %   
|Expenses:              |                                 |                          |       |                             |       |      |  |  |  |  |       |      |      |   |       |       |       |  |  |  |  |  |       |     
|                       | Salaries, wages and benefits    |                          |       | 4,913                       |       |      |  |  |  |  |       | 68.2 | %    |   |       | 4,677 |       |  |  |  |  |  |       | 64.7 | %   
|                       | Other operating expenses        |                          |       | 1,538                       |       |      |  |  |  |  |       | 21.4 | %    |   |       | 1,558 |       |  |  |  |  |  |       | 21.6 | %   
|                       | Provision for doubtful accounts |                          |       | 8                           |       |      |  |  |  |  |       | 0.1  | %    |   |       | (284  | )     |  |  |  |  |  |       | (3.9 | %)  
|                       | Depreciation and amortization   |                          |       | 37                          |       |      |  |  |  |  |       | 0.5  | %    |   |       | 28    |       |  |  |  |  |  |       | 0.4  | %   
|                       |                                 |                          |       |                             |       |      |  |  |  |  |       |      |      |   |       |       |       |  |  |  |  |  |       |     
|                       |                                 | Total operating expenses |       |                             | 6,496 |      |  |  |  |  |       |      | 90.2 | % |       |       | 5,979 |  |  |  |  |  |       |      | 82.8 | %
|                       |                                 |                          |       |                             |       |      |  |  |  |  |       |      |      |   |       |       |       |  |  |  |  |  |       |     
|Income from operations |                                 | $                        | 703   |                             |       |      |  |  |  |  | 9.8   | %    |      | $ | 1,244 |       |       |  |  |  |  |  | 17.2  | %   
|                       |                                 |                          |       |                             |       |      |  |  |  |  |       |      |      |   |       |       |       |  |  |  |  |  |       |     

REVENUES

Revenues during 2002 of $7.2 million approximated revenues in 2001 as
increases in revenues from a new contract awarded to the Company in Florida
were offset by decreases resulting from the termination of two contracts in
Puerto Rico.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were $4.9 million, or 68.2% of revenues in
2002, compared to $4.7 million, or 64.7% in 2001. The increase as a percentage
of revenues was primarily attributable to the termination of one of the
Companys Puerto Rico contracts in December 2001 which had a lower than
segment-average salary cost as a percentage of revenues.

OTHER OPERATING EXPENSES

Other operating expenses were $1.5 million, or 21.4% of revenues in 2002,
compared to $1.6 million, or 21.6% of revenues in 2001. Other operating
expenses did not fluctuate significantly as a percentage of revenue when
compared to the same period in the prior year.

PROVISION FOR DOUBTFUL ACCOUNTS

Fluctuations in the provision for doubtful accounts relate primarily to
the Companys management contracts in Puerto Rico. Due to the termination of
its Puerto Rico contracts, the Company did not increase its provision for
doubtful accounts in its Puerto Rico market during the quarter ended September
30, 2002.

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RAYMSAY YOUTH SERVICES, INC. AND
SUBSIDIARIES

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.04 million, or 0.5% of revenues in
2002, compared to $0.03 million, or 0.4% of revenues in 2001. Depreciation and
amortization did not fluctuate significantly as a percentage of revenue when
compared to the same period in the prior year.

CORPORATE AND OTHER

The following table states for the periods indicated total revenues and
corporate office expenses in dollar and percentage of revenue terms (dollars in
thousands):

|          |                                      |                |   |                             |        |      |  |  |  |  |  |     |       |   |   |        |        |  |  |  |  |  |  |     |       |  
|--------- | ------------------------------------ | -------------- | - | --------------------------- | ------ | ---- |  |  |  |  |  | --- | ----- | - | - | ------ | ------ |  |  |  |  |  |  | --- | ----- | -
|          |                                      |                |   | Quarter Ended September 30, |        |      |  | 
|          |                                      |                |   |                             |        |      |  | 
|          |                                      |                |   | 2002                        |        | 2001
|          |                                      |                |   |                             |        |     
|Revenues: |                                      |                |   |                             |        |      |  |  |  |  |  |     |       |   |   |        |        |  |  |  |  |  |  |    
|          | Owned operations                     |                | $ | 29,124                      |        |      |  |  |  |  |  |     |       |   | $ | 26,415 |        |  |  |  |  |  |  |     |      
|          | Management contracts                 |                |   | 7,199                       |        |      |  |  |  |  |  |     |       |   |   | 7,223  |        |  |  |  |  |  |  |     |      
|          |                                      |                |   |                             |        |      |  |  |  |  |  |     |       |   |   |        |        |  |  |  |  |  |  |    
|          |                                      | Total revenues |   | $                           | 36,323 |      |  |  |  |  |  |     | 100.0 | % |   | $      | 33,638 |  |  |  |  |  |  |     | 100.0 | %
|Expenses: |                                      |                |   |                             |        |      |  |  |  |  |  |     |       |   |   |        |        |  |  |  |  |  |  |    
|          | Salaries, wages and benefits         |                |   | 689                         |        |      |  |  |  |  |  | 1.9 | %     |   |   | 569    |        |  |  |  |  |  |  | 1.7 | %    
|          | Other operating expenses             |                |   | 731                         |        |      |  |  |  |  |  | 2.0 | %     |   |   | 769    |        |  |  |  |  |  |  | 2.3 | %    
|          | Depreciation and amortization        |                |   | 29                          |        |      |  |  |  |  |  | 0.1 | %     |   |   | 42     |        |  |  |  |  |  |  | 0.1 | %    
|          | Interest and other financing charges |                |   | 576                         |        |      |  |  |  |  |  | 1.6 | %     |   |   | 746    |        |  |  |  |  |  |  | 2.2 | %    
|          | Provision for income taxes           |                |   | 763                         |        |      |  |  |  |  |  | 2.1 | %     |   |   | 171    |        |  |  |  |  |  |  | 0.5 | %    

SALARIES, WAGES AND BENEFITS

Corporate salaries, wages and benefits were $0.7 million, or 1.9% of
revenues in 2002, compared to $0.6 million, or 1.7% in 2001. Corporate
salaries did not fluctuate significantly as a percentage of revenue when
compared to the same period in the prior year.

OTHER OPERATING EXPENSES

Other operating expenses were $0.7 million, or 2.0% of revenues in 2002,
compared to $0.8 million, or 2.3% of revenues in 2001. The decrease as a
percentage of revenues is primarily attributable to the aforementioned increase
in revenues and a reduction in various corporate office expenses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.03 million, or 0.1% of revenues in
2002, compared to $0.04 million, or 0.1% of revenues in 2001. Depreciation and
amortization did not fluctuate as a percentage of revenue when compared to the
same period in the prior year.

INTEREST AND OTHER FINANCING CHARGES

Interest and other financing charges was $0.6 million, or 1.6% of total
consolidated revenues in 2002, compared to $0.7 million, or 2.2% of total
consolidated revenues in 2001. The decrease in interest and other financing
charges is primarily attributable to a decrease in the Companys average
outstanding borrowings and a decrease in interest rates on the Companys Senior
Credit Facility between periods.

PROVISION FOR INCOME TAXES

The increase in the provision for income taxes is due to the increase in
the Companys effective tax rate from 13.7% to 37.7%. During the quarter ended
June 30, 2002, the Company reversed $7.4 million

15



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RAYMSAY YOUTH SERVICES, INC. AND
SUBSIDIARIES

of the valuation allowance placed on its deferred tax assets relating to
temporary differences that will result in deductible amounts in future years
and net operating loss carryforwards. Future realization of the tax benefit of
an existing deductible temporary difference or carryforward ultimately depends
on the existence of sufficient taxable income within the carryforward period
available under tax law. The Company has reversed a portion of the valuation
allowance because, based on a current review of available objective and
verifiable evidence, it is managements judgment that a portion of the tax
benefits associated with the Companys deferred tax assets will more likely
than not be realized. Such evidence includes updated expectations about
sufficient future years taxable income which reflect the continuing
improvement in the Companys operating results.

The Company has available federal net operating loss carryforwards
totaling approximately $33.0 million, which expire in the years 2010 to 2018.
The Company also has available alternative minimum tax credit carryforwards of approximately $1.2
million which may be carried forward indefinitely.

The net deferred tax asset represents managements best estimate of the
tax benefits that will more likely than not be realized in future years at each
reporting date. However, there can be no assurance that the Company can
generate taxable income to realize the net deferred tax asset. In addition,
under the Tax Reform Act of 1986, certain future changes in ownership resulting
from the sale of stock may limit the amount of net operating loss carryforwards
that can be utilized on an annual basis. The Company has and continues to
evaluate compliance relating to the utilization of the net operating loss
carryforwards, and believes it has complied in all material respects. A failure to meet
the requirements could result in a loss or limitation of the utilization of
carryforwards, which could have a material adverse effect on the Companys
financial position and results of operations in future periods.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

OWNED OPERATIONS SEGMENT

The following table states for the periods indicated the results of our
owned operations in dollar and percentage of revenue terms (dollars in
thousands):

|                       |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |      |      |  
|---------------------- | ------------------------------- | ------------------------ | ------ | ------------------------------- | ------ | ---- |  |  |  |  | ----- | ---- | ---- | - | ------ | ------ | ------ |  |  |  |  |  | ----- | ---- | ---- | -
|                       |                                 |                          |        | Nine
Months Ended September 30, |        |      |  | 
|                       |                                 |                          |        |                                 |        |      |  | 
|                       |                                 |                          |        | 2002                            |        | 2001
|                       |                                 |                          |        |                                 |        |     
|Revenues               |                                 | $                        | 87,380 |                                 |        |      |  |  |  |  | 100.0 | %    |      | $ | 78,683 |        |        |  |  |  |  |  | 100.0 | %   
|Expenses:              |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|                       | Salaries, wages and benefits    |                          |        | 50,704                          |        |      |  |  |  |  |       | 58.0 | %    |   |        | 46,288 |        |  |  |  |  |  |       | 58.8 | %   
|                       | Other operating expenses        |                          |        | 23,002                          |        |      |  |  |  |  |       | 26.3 | %    |   |        | 21,273 |        |  |  |  |  |  |       | 27.0 | %   
|                       | Provision for doubtful accounts |                          |        | 1,378                           |        |      |  |  |  |  |       | 1.6  | %    |   |        | 1,963  |        |  |  |  |  |  |       | 2.5  | %   
|                       | Depreciation and amortization   |                          |        | 1,736                           |        |      |  |  |  |  |       | 2.0  | %    |   |        | 1,626  |        |  |  |  |  |  |       | 2.1  | %   
|                       |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|                       |                                 | Total operating expenses |        |                                 | 76,820 |      |  |  |  |  |       |      | 87.9 | % |        |        | 71,150 |  |  |  |  |  |       |      | 90.4 | %
|                       |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|Income from operations |                                 | $                        | 10,560 |                                 |        |      |  |  |  |  | 12.1  | %    |      | $ | 7,533  |        |        |  |  |  |  |  | 9.6   | %   
|                       |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     

REVENUES

Revenues increased by
11.1%, or $8.7 million, to $87.4 million in 2002
compared to $78.7 million in 2001. The increase in revenues during the period
is primarily a result of (i) an increase of 1.6% in resident days (from 262,746
days in 2001 to 266,898 days in 2002) resulting in an increase in revenues of
$3.2 million, (ii) an increase in the rates and a favorable payor mix at
several Company facilities which increased revenues by $3.9 million, (iii)
positive cost report final settlements which resulted in an increase in
revenues of $0.9 million, (iv) a new contract awarded to the Company which
began on February 18, 2002 and generated $1.0 million in revenues during the
nine-month period, and (v) the full nine-month effect of a Florida program
begun in July 2001, which increased revenues by $0.7 million. The

16



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RAYMSAY YOUTH SERVICES, INC. AND
SUBSIDIARIES

aforementioned increases were partially offset by the closure of a 20-bed
facility in Puerto Rico which decreased revenues by $1.0 million.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were $50.7 million, or 58.0% of revenues in
2002, compared to $46.3 million, or 58.8% in 2001. The decrease as a
percentage of revenues is primarily attributable to the aforementioned increase
in revenues as a result of the reduction in general cost report reserves and
related efficiencies in staffing primarily at its Michigan and Central Florida
facilities.

OTHER OPERATING EXPENSES

Other operating expenses were $23.0 million, or 26.3% of revenues in 2002,
compared to $21.3 million, or 27.0% of revenues in 2001. The decrease as a
percentage of revenues was primarily a result of the aforementioned increase
in revenues as a result of the reduction in general cost report reserves and
the related operating efficiencies gained by the Company as a result of its new
contracts in the Florida market and its Texas operations.

PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts was $1.4 million, or 1.6% of revenues
in 2002, compared to $2.0 million, or 2.5% in 2001. The decrease as a
percentage of revenues was primarily a result of additional reserves recorded
in 2001 related to payment delays experienced by the Company from one of its
payors in its Jacksonville, North Carolina facility, as well as reserves
recorded by the Company related to financial difficulties experienced by one of
the Companys former referral sources to its Nevada, Missouri facility.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $1.7 million or 2.0% of revenues in
2002, compared to $1.6 million, or 2.1% of revenues in 2001. Depreciation and
amortization did not fluctuate significantly as a percentage of revenue during
the nine months ended September 30, 2002 when compared to the same period in
the prior year.

MANAGEMENT CONTRACT SEGMENT

The following table states for the periods indicated the results of our
management contract operations in dollar and percentage of revenue terms
(dollars in thousands):

|                       |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |      |      |  
|---------------------- | ------------------------------- | ------------------------ | ------ | ------------------------------- | ------ | ---- |  |  |  |  | ----- | ---- | ---- | - | ------ | ------ | ------ |  |  |  |  |  | ----- | ---- | ---- | -
|                       |                                 |                          |        | Nine
Months Ended September 30, |        |      |  | 
|                       |                                 |                          |        |                                 |        |      |  | 
|                       |                                 |                          |        | 2002                            |        | 2001
|                       |                                 |                          |        |                                 |        |     
|Revenues               |                                 | $                        | 21,483 |                                 |        |      |  |  |  |  | 100.0 | %    |      | $ | 20,584 |        |        |  |  |  |  |  | 100.0 | %   
|Expenses:              |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|                       | Salaries, wages and benefits    |                          |        | 14,442                          |        |      |  |  |  |  |       | 67.2 | %    |   |        | 13,488 |        |  |  |  |  |  |       | 65.5 | %   
|                       | Other operating expenses        |                          |        | 4,528                           |        |      |  |  |  |  |       | 21.1 | %    |   |        | 4,489  |        |  |  |  |  |  |       | 21.8 | %   
|                       | Provision for doubtful accounts |                          |        | 461                             |        |      |  |  |  |  |       | 2.1  | %    |   |        | 220    |        |  |  |  |  |  |       | 1.1  | %   
|                       | Depreciation and amortization   |                          |        | 107                             |        |      |  |  |  |  |       | 0.5  | %    |   |        | 78     |        |  |  |  |  |  |       | 0.4  | %   
|                       |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|                       |                                 | Total operating expenses |        |                                 | 19,538 |      |  |  |  |  |       |      | 90.9 | % |        |        | 18,275 |  |  |  |  |  |       |      | 88.8 | %
|                       |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     
|Income from operations |                                 | $                        | 1,945  |                                 |        |      |  |  |  |  | 9.1   | %    |      | $ | 2,309  |        |        |  |  |  |  |  | 11.2  | %   
|                       |                                 |                          |        |                                 |        |      |  |  |  |  |       |      |      |   |        |        |        |  |  |  |  |  |       |     

17



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

REVENUES

Revenues increased by 4.4%, or $0.9 million, to $21.5 million in 2002
compared to $20.6 million in 2001. The revenue increase is a result of (i) the
full nine-month effect of the expansion of two Florida programs started in June
2001, which increased revenues by $1.9 million, and (ii) a new contract awarded
to the Company which began operations on February 18, 2002 and generated $1.7
million in revenues during the nine-month period. The aforementioned increases
were partially offset by the termination of two of the Companys Puerto Rico
contracts, which decreased revenues by $1.7 million and a decrease in billings
at two of the Companys Florida contracts which decreased revenues by $1.0
million.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were $14.4 million, or 67.2% of revenues in
2002, compared to $13.5 million, or 65.5% in 2001. The increase as a
percentage of revenues was primarily attributable to the termination of one of
the Companys Puerto Rico contracts in December 2001 which had a lower than
segment-average salary cost as a percentage of revenues.

OTHER OPERATING EXPENSES

Other operating expenses were $4.5 million or 21.1% of revenues in 2002,
compared to $4.5 million or 21.8% of revenues in 2001. Other operating
expenses did not fluctuate significantly as a percentage of revenue when
compared to the same period in the prior year.

PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts was $0.5 million, or 2.1% of revenues
in 2002, compared to $0.2 million, or 1.1% in 2001. Fluctuations in the
provision for doubtful accounts relate primarily to the increase in reserves
related to the Companys management contracts in Puerto Rico. The Company
increased its provision for doubtful accounts by $0.3 million during the nine
month period ended September 30, 2002, when compared to the same period in the
prior year.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.1 million, or 0.5% of revenues in
2002, compared to $0.08 million, or 0.4% of revenues in 2001. Depreciation and
amortization did not fluctuate significantly as a percentage of revenues.

18



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CORPORATE AND OTHER

The following table states for the periods indicated total revenues and
corporate office expenses in dollar and percentage of revenue terms (dollars in
thousands):

|          |                                      |                |   |                                 |         |      |  |      |       |   |   |        |        |  |  |  |  |  |  |     |       |  
|--------- | ------------------------------------ | -------------- | - | ------------------------------- | ------- | ---- |  | ---- | ----- | - | - | ------ | ------ |  |  |  |  |  |  | --- | ----- | -
|          |                                      |                |   | Nine Months Ended September 30, |        
|          |                                      |                |   |                                 |        
|          |                                      |                |   | 2002                            |         | 2001 |  |      |      
|          |                                      |                |   |                                 |         |     
|Revenues: |                                      |                |   |                                 |         |      |  |      |       |   |   |        |        |  |  |  |  |  |  |    
|          | Owned operations                     |                | $ | 87,380                          |         |      |  |      |       |   | $ | 78,683 |        |  |  |  |  |  |  |     |      
|          | Management contracts                 |                |   | 21,483                          |         |      |  |      |       |   |   | 20,584 |        |  |  |  |  |  |  |     |      
|          |                                      |                |   |                                 |         |      |  |      |       |   |   |        |        |  |  |  |  |  |  |    
|          |                                      | Total revenues |   | $                               | 108,863 |      |  |      | 100.0 | % |   | $      | 99,267 |  |  |  |  |  |  |     | 100.0 | %
|Expenses: |                                      |                |   |                                 |         |      |  |      |       |   |   |        |        |  |  |  |  |  |  |    
|          | Salaries, wages and benefits         |                |   | 2,560                           |         |      |  | 2.4  | %     |   |   | 2,070  |        |  |  |  |  |  |  | 21. | %    
|          | Other operating expenses             |                |   | 1,986                           |         |      |  | 1.8  | %     |   |   | 2,325  |        |  |  |  |  |  |  | 2.3 | %    
|          | Depreciation and amortization        |                |   | 85                              |         |      |  | 0.1  | %     |   |   | 120    |        |  |  |  |  |  |  | 0.1 | %    
|          | Interest and other financing charges |                |   | 1,871                           |         |      |  | 1.7  | %     |   |   | 2,597  |        |  |  |  |  |  |  | 2.6 | %    
|          | Asset impairment charges             |                |   | 125                             |         |      |  | 0.1  | %     |   |   |       |        |  |  |  |  |  |  |    |      
|          | Provision for income taxes           |                |   | (6,215                          | )       |      |  | (5.7 | %)    |   |   | 472    |        |  |  |  |  |  |  | 0.5 | %    

SALARIES, WAGES AND BENEFITS

Corporate salaries, wages and benefits were $2.6 million, or 2.4% of
revenues in 2002, compared to $2.1 million, or 2.1% in 2001. The increase as a
percentage of revenues is attributable to a $0.5 million charge for the
restructuring of an employment contract for one of the Companys executives
during the quarter ended June 30, 2002.

OTHER OPERATING EXPENSES

Other operating expenses were $2.0 million, or 1.8% of revenues in 2002,
compared to $2.3 million, or 2.3% of revenues in 2001. The decrease as a
percentage of revenues is primarily attributable to a reduction in professional
fees, travel and various other corporate office expenses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.09 million, or 0.1% of revenues in
2002, compared to $0.1 million, or 0.1% of revenues in 2001. Depreciation and
amortization did not fluctuate as a percentage of revenue when compared to the
same period in the prior year.

INTEREST AND OTHER FINANCING CHARGES

Interest and other financing charges was $1.9 million, or 1.7% of total
consolidated revenues in 2002, compared to $2.6 million, or 2.6% of total
consolidated revenues in 2001. The decrease in interest and other financing
charges is primarily attributable to a decrease in the Companys average
outstanding borrowings and a decrease in interest rates on the Companys Senior
Credit Facility between periods.

ASSET IMPAIRMENT CHARGES

During the nine
months ended September 30, 2002, the Company recorded asset
impairment charges of $0.1 million in connection with assets held for
sale in South Carolina. The asset impairment charge was determined
based on the difference between the carrying value of the asset and
expected net proceeds from the sale.

PROVISION FOR INCOME TAXES

During the nine months ended September 30, 2002, the Company reversed $6.7
million of the valuation allowance placed on its deferred tax assets relating
to temporary differences that will result in deductible amounts in future years
and net operating loss carryforwards. Future realization of the tax benefit of
an existing deductible temporary difference or carryforward ultimately depends
on the existence of sufficient taxable income within the carryforward period
available under tax law. The Company has reversed a portion of the valuation
allowance because, based on a current review of available objective and

19



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RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

verifiable evidence, it is managements judgment that a portion of the tax
benefits associated with the Companys deferred tax assets will more likely
than not be realized. Such evidence includes updated expectations about
sufficient future years taxable income which reflect the continuing
improvement in the Companys operating results.

The Company has available federal net operating loss carryforwards
totaling approximately $33.0 million, which expire in the years 2010 to 2018.
The Company also has available alternative minimum tax credit carryforwards of approximately $1.2
million which may be carried forward indefinitely.

The net deferred tax asset represents managements best estimate of the
tax benefits that will more likely than not be realized in future years at each
reporting date. However, there can be no assurance that the Company can
generate taxable income to realize the net deferred tax asset. In addition,
under the Tax Reform Act of 1986, certain future changes in ownership resulting
from the sale of stock may limit the amount of net operating loss carryforwards
that can be utilized on an annual basis. The Company has and continues to
evaluate compliance relating to the utilization of the net operating loss
carryforwards, and believes it has complied in all respects. A failure to meet
the requirements could result in a loss or limitation of the utilization of
carryforwards, which could have a material adverse effect on the Companys
financial position and results of operations in future periods.

NEW ACCOUNTING REQUIREMENTS

In July 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. This Statement requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset and
subsequently allocated to expense using a systematic and rational method. This
Statement is required to be adopted in fiscal years beginning after June 15,
2002. The Company does not anticipate a significant impact to the results of
operations from the adoption of this Statement.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Correction.This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarifies
meanings, or describes their applicability under changed conditions. The
provisions of this Statement are effective for the Company with the beginning
of fiscal year 2003; however, early application of the Statement is encouraged.
Debt extinguishments reported as extraordinary items prior to scheduled or
early adoption of this Statement would be reclassified in most cases following
adoption. The Company does not anticipate a significant impact on its results
of operations from adopting this Statement.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management commitment to an exit plan. Adoption of this Statement
is required with the beginning of fiscal year 2003. The Company has not yet
completed its evaluation of the impact of adopting this Statement.

20



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

The Companys primary liquidity needs are for working capital, capital
expenditures, and debt service. The Companys primary sources of liquidity are
cash flows from operations and borrowings under its revolving credit line.

At September 30, 2002 and December 31, 2001, the Company had $12.6 million
and $13.1 million, respectively, in working capital and $1.6 million and $0.8
million, respectively, in cash and cash equivalents. Working capital as of
September 30, 2002 consisted primarily of $1.6 million in cash and cash
equivalents, $23.2 million in accounts receivable and $5.9 million in other
current assets, net of $18.1 million in current liabilities. The decrease in
working capital between periods is primarily a result of a decrease in net
accounts receivable and other current assets, partially offset by an increase
in current liabilities resulting primarily from year end timing differences in
the payment of certain liabilities.

Net cash provided by operating activities increased to $8.9 million during
the nine months ended September 30, 2002. The increase in cash provided by
operating activities was primarily attributable to the increase in net income
during the period and favorable variances in operating assets and liabilities.

Cash used in investing activities was $2.0 million for the nine months
ended September 30, 2002 as compared to cash used in investing activities of
$1.3 million during the nine months ended September 30, 2001. The increase in
investing activities was primarily attributable to $2.2 million used in
expenditures for property and equipment, offset by approximately $0.2 million
in proceeds from the sale of certain assets. Cash used in investing
activities during 2001 was primarily attributable to $1.8 million
used in expenditures for property and equipment, offset by
approximately $0.5 million in proceeds from the sale of certain
assets.

Net cash used in financing activities was $6.0 million for the nine months
ended September 30, 2002 as compared to cash provided by financing activities
of $2.3 million during the nine months ended September 30, 2001. Cash used in
financing activities in 2002 and 2001 related primarily to repayments of
borrowings under the Companys term loan offset by proceeds from borrowing
under the revolving credit facility.

The Company has experienced delays in the collection of receivables from
its contracts in Puerto Rico. As of September 30, 2002, the Company had
approximately $3.3 million in outstanding receivables due from the Commonwealth
of Puerto Rico, of which $2.0 million was over 120 days past due. Reserves
against outstanding Puerto Rico receivables were $1.4 million as of September
30, 2002. The Company and its advisors are in active discussions with the
Government of Puerto Rico with respect to the payment of the outstanding
receivables. The Company believes that it has fully performed its obligations
under the Puerto Rico contracts and is entitled to receive payment of these
receivables in full. Although the Company has been advised by its legal
counsel that the net receivables due on the Puerto Rico contracts are
collectable, there can be no assurances that future transactions or events will
not result in the need for additional reserves for these accounts receivable.
If the Company were to record additional reserves, it would adversely affect
earnings in the period in which the reserves are recorded.

The Government of Puerto Rico has informed the Company that, as a result
of budgetary constraints, it will cancel various contracts with private sector
providers. In connection therewith, the Company has agreed with the Government
of Puerto Rico to terminate its contract to provide educational services to
juveniles in Puerto Rico effective August 14, 2002. On April 16, 2002, the
Company and the Government of Puerto Rico agreed to the cancellation of the
Companys contract to provide a 20-bed specialized mental health treatment
program for youth referred by the Mental Health and Anti-Addiction Services
Administration of Puerto Rico. Total revenues and operating losses from these
contracts during the nine-month period ended September 30, 2002 were $2.0
million and $0.4 million, respectively.

The Companys
amended senior credit facility (the Senior Credit
Facility) consists of a term loan (the Term Loan)
payable in monthly installments ranging from $83,000 to $302,000 with
a final installment of $3,600,000 due on October 30, 2003 and a
revolving credit facility (the Revolver) for an amount up
to the lesser of $15,000,000 or the borrowing base of the
Companys receivables (as defined in the agreement). As of
September 30, 2002, the availability under the Revolver was
approximately $9.2 million.

Management of the Company believes that it can meet its current cash
requirements and future identifiable needs with internally generated funds from
operations and funds available under its Senior Credit Facility. However, if
the Company should need to obtain liquidity through other sources of debt or

21



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RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

equity, the following factors, in addition to the risk factors discussed
in the Companys Form 10-K for December 31, 2001, should be considered:



| |  | Ability to Raise Additional Capital. Although the Company believes
that it can obtain additional liquidity, there can be no assurances
that the Company will be able to raise debt or equity capital through
other sources, or if obtained, that it will be on terms acceptable to
the Company. The incurring or assumption by the Company of additional
indebtedness could result in the issuance of additional equity and/or
debt, which could have a dilutive effect on current shareholders and a
significant effect on the Companys operations.                                                                                                                                              
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Ability to Borrow Funds under Senior Credit Facility. The Companys
ability to borrow funds under its Senior Credit Facility may be
terminated if the Company fails to comply with the restrictive
financial and operating covenants contained in the Senior Credit
Facility. If the Company is unable to operate its business within the
covenants specified in the Senior Credit Facility, the Companys
ability to obtain future amendments to the covenants is not assured,
and the Companys ability to make borrowings required to operate its
business could be restricted or terminated. Such a restriction or
termination would have a material adverse effect on the Companys
liquidity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

While the Company is exposed to changes in interest rates as a result of
its outstanding variable rate debt, the Company does not currently utilize any
derivative financial instruments related to its interest rate exposure. The
Company believes that its exposure to market risk will not result in a material
adverse effect on the Companys consolidated financial condition, results of
operations or liquidity.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures within the last ninety days and have concluded that the disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company and its subsidiaries required to be
included in our periodic filings with the Securities and Exchange Commission.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the last day they
were evaluated by our Chief Executive Officer and Chief Financial Officer, nor
were there any corrective actions required with regard to significant
deficiencies and material weaknesses.

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to certain claims, suits and complaints, whether
arising from the acts or omissions of its employees, providers or others, which
arise in the ordinary course of business. The Company has established reserves
at June 30, 2002 for the estimated amounts, which might be recovered from the
Company as a result of all outstanding legal proceedings. In the opinion of
management, the ultimate resolution of these pending legal proceedings is not
expected to have a material adverse effect on the Companys financial position,
results of operations or liquidity.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

22



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RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

Item 4. Submission of Matters to a Vote of Securities Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

The Exhibits required to be filed as part of this Quarterly Report
on Form 10-Q are as follows:

|             |  |                                                                                                                                                                                                                                                             
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Ninth Amendment to Loan and Security Agreement and
Consent dated as of September 6, 2002 by and among the
Company, the subsidiaries of the Company and Fleet Capital
Corporation, as agent and lender.                                                      
|            
|Exhibit 10.2 |  | Fourth Amendment to Amended and Restated Subordinated
Note and Warrant Purchase Agreement dated as of September 6,
2002 by and among the Company, the subsidiaries of the
Company as Guarantors and SunTrust Banks, Inc. and ING
Capital, LLC as Purchasers.
|            
|Exhibit 10.3 |  | Commercial Lease Agreement dated as of September,
2002 between Ramsay Hospital Properties, Inc. and Ramsay
Youth Services of Georgia, Inc.                                                                                                                  
|            
|Exhibit 10.4 |  | Guarantee of Obligation Pursuant to Lease Agreement
described in Exhibit 10.3 above dated as of September,
2002 by the Company in favor of Ramsay Hospital Properties,
Inc.                                                                                 
|            
|Exhibit 11   |  | Computation of Net Income Per Share.                                                                                                                                                                                                                        
|            
|Exhibit 99.1 |  | Chief Executive Officer Certification Pursuant to 18
U.S.C. Section 1350                                                                                                                                                                                    
|            
|Exhibit 99.2 |  | Chief Financial Officer Certification Pursuant to 18
U.S.C. Section 1350                                                                                                                                                                                    
|            
|Exhibit 99.3 |  | Press Release dated November 8, 2002                                                                                                                                                                                                                        

(b)  Current Reports on Form 8-K

The Company did not file any Current Reports on Form 8-K during
the quarter ended September 30, 2002.

23



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##### 



RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

SIGNATURES

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

| |  |                                                                       
| |  | ----------------------------------------------------------------------
| |  | RAMSAY YOUTH SERVICES, INC.
Registrant                                
|
| |  | /s/ Marcio C. Cabrera                                                 
| |  |                                                                       
| |  | Marcio C. Cabrera
Executive Vice President and
Chief Financial Officer

Date: November 13, 2002

24



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##### 



CERTIFICATION

I, Luis E. Lamela, Chief Executive Officer of Ramsay Youth Services, Inc. (the
Company), certify that:

1.     I have reviewed this quarterly report on Form 10-Q of the Company;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;

4.     The Companys Chief Financial Officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the Company and we have:



| |                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) evaluated the effectiveness of the Companys disclosure controls and
procedures as of a date within 90 days prior to the filing date of the date of
this quarterly report (the Evaluation Date); and



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The Companys Chief Financial Officer and I have disclosed, based on our
most recent evaluation, to the Companys auditors and to the audit committee of
the Companys board of directors:



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Companys ability to record, process,
summarize and report financial data and have identified for the Companys
auditors any material weaknesses in internal controls; and



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Companys internal controls; and

6.     The Companys Chief Financial Officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                        |  |                        
|----------------------- |  | -----------------------
|Date: November 13, 2002 |  |                        
|                        |  | By: /s/ Luis E. Lamela 
|                        |  |                        
|                        |  | Chief Executive Officer

25



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##### 



CERTIFICATION

I, Marcio C. Cabrera, Chief Financial Officer of Ramsay Youth Services, Inc.
(the Company), certify that:

1.     I have reviewed this quarterly report on Form 10-Q of the Company;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this report; and

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report.

4.     The Companys Chief Executive Officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the Company and we have:



| |                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) evaluated the effectiveness of the Companys disclosure controls and
procedures as of a date within 90 days prior to the filing date of the date of
this quarterly report (the Evaluation Date); and



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The Companys Chief Executive Officer and I have disclosed, based on our
most recent evaluation, to the Companys auditors and to the audit committee of
the Companys board of directors:



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Companys ability to record, process,
summarize and report financial data and have identified for the Companys
auditors any material weaknesses in internal controls; and



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Companys internal controls; and

6.     The Companys Chief Executive Officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                        |  |                          
|----------------------- |  | -------------------------
|Date: November 13, 2002 |  |                          
|                        |  | By: /s/ Marcio C. Cabrera
|                        |  |                          
|                        |  | Chief Financial Officer  

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