<PAGE>
 
                       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 [FEE REQUIRED]

                 For the quarterly period ended March 31, 1998

                                      OR

         / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

     For the Transition period from __________________ to _________________

                         Commission file Number 0-13849



                            RAMSAY HEALTH CARE, INC.
             (Exact name of registrant as specified in its charter)


       DELAWARE                                             63-0857352
(STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)   

 

COLUMBUS CENTER
ONE ALHAMBRA PLAZA SUITE 750
CORAL GABLES, FLORIDA                                         33134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                   (ZIP CODE)


       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 569-6993

     Indicate by a 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 ___.
                                                -          


     The number of shares of the Registrant's Common Stock outstanding as of May
20, 1998, follows:


          Common Stock, par value $0.01 per share - 10,871,850 shares
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES

                                   FORM 10-Q


                                     INDEX


                                                                          PAGE
                                                                          ----

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.............................................   1

Consolidated balance sheets -- March 31, 1998 and June 30, 1997            
         (unaudited)......................................................   1

Consolidated statements of operations - three and nine months ended        
         March 31, 1998 and 1997 (unaudited)..............................   3

Consolidated statements of cash flows - nine months ended March 31,        
         1998 and 1997 (unaudited)........................................   4

Notes to consolidated financial statements - March 31, 1998...............   5

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations........................................  11
 


PART II.  OTHER INFORMATION

Item 5.  Other Information................................................  19

Item 6.  Exhibits and Current Reports on Form 8-K.........................  20

SIGNATURES................................................................  21

<PAGE>
 
                         PART I.  FINANCIAL INFORMATION

                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)



<TABLE>
<CAPTION>
                                                                             MARCH 31        JUNE 30
                                                                               1998           1997
                                                                          -------------  -------------
<S>                                                                       <C>            <C>
ASSETS
Current assets
  Cash and cash equivalents..............................................  $  4,751,000   $  1,723,000
  Patient accounts receivable, less allowances for doubtful accounts of      
   $4,521,000 and $4,386,000 at March 31, 1998 and June 30, 1997,                                            
   respectively..........................................................    24,109,000     25,802,000       
  Amounts due from third-party contractual agencies......................     5,552,000      5,653,000       
  Other receivables......................................................     2,894,000      3,139,000       
  Other current assets...................................................     1,979,000      1,699,000       
                                                                           ------------   ------------       
    Total current assets.................................................    39,285,000     38,016,000        
 
Other assets
  Cash held in trust.....................................................       830,000        827,000       
  Cost in excess of net asset value of purchased businesses..............     3,799,000     19,281,000       
  Other intangible assets................................................           ---      4,680,000       
  Unamortized preopening and loan costs..................................     3,440,000      1,837,000       
  Deferred income taxes..................................................           ---      9,411,000       
  Other noncurrent assets................................................       328,000      1,155,000       
                                                                           ------------   ------------       
    Total other assets...................................................     8,397,000     37,191,000        
 
Assets held for sale
  Cost in excess of net asset value of purchased businesses..............    15,209,000            ---       
  Other noncurrent assets................................................     1,188,000            ---       
  Property and equipment.................................................    46,577,000            ---       
  Less: Accumulated depreciation.........................................   (16,495,000)           ---       
  Less: Valuation allowance on property and equipment....................    (4,655,000)           ---       
                                                                           ------------   ------------       
    Total assets held for sale...........................................    41,824,000            ---        
 
Property and equipment
  Land...................................................................     3,687,000      5,025,000       
  Buildings and improvements.............................................    38,375,000     71,190,000       
  Equipment, furniture and fixtures......................................    12,539,000     22,294,000       
                                                                           ------------   ------------       
                                                                             54,601,000     98,509,000       
  Less: Accumulated depreciation.........................................   (19,020,000)   (32,527,000)       
                                                                           ------------   ------------       
                                                                             35,581,000     65,982,000       
                                                                           ------------   ------------        
 
                                                                           $125,087,000   $141,189,000
                                                                           ============   ============
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       1
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                   MARCH 31        JUNE 30  
                                                                                     1998           1997    
                                                                                -------------  -------------
<S>                                                                             <C>            <C>         
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                               
Current liabilities                                                                                                
  Accounts payable...........................................................    $  5,353,000   $  7,284,000       
  Accrued salaries and wages.................................................       6,331,000      6,282,000       
  Hospital and medical claims payable........................................       2,880,000      1,975,000       
  Other accrued liabilities..................................................       8,751,000      5,218,000       
  Amounts due to third-party contractual agencies............................       9,153,000      7,075,000       
  Current portion of long-term debt..........................................       1,752,000        222,000       
                                                                                 ------------   ------------       
     Total current liabilities...............................................      34,220,000     28,056,000       
                                                                                                                   
Noncurrent liabilities                                                                                             
  Other accrued liabilities..................................................      13,928,000      6,617,000       
  Long-term debt, less current portion.......................................      52,250,000     35,632,000       
  Short-term debt expected to be refinanced..................................             ---     11,622,000       
  Minority interests.........................................................         145,000         80,000       
                                                                                 ------------   ------------       
     Total noncurrent liabilities............................................      66,323,000     53,951,000       
                                                                                                                   
Commitments and contingencies                                                                                      
                                                                                                                   
Class B convertible redeemable preferred stock, Series 1997,                        
 $1 par value -- authorized 100,000 shares; issued 100,000                                                         
 shares (liquidation value of $2,500,000), net of issuance                                                         
 costs of $100,000 and including accrued dividends of $55,000................       2,455,000            ---
Class B redeemable preferred stock, Series 1997-A,                                  
 $1 par value--authorized 4,000 shares; issued 4,000 shares
 (liquidation value of $4,000,000) including accrued dividends
 of $181,000.................................................................       4,181,000            --- 
 
Stockholders' equity
  Class B convertible preferred stock, Series C, $1 par               
   value--authorized 152,321 shares; issued 142,486 shares
   (liquidation value of $7,244,000) including accrued dividends.............         324,000        504,000 
  Class B convertible preferred stock, Series 1996, $1 par          
   value--authorized 100,000 shares; issued 100,000 shares
   (liquidation value of $3,000,000) including accrued dividends.............       3,075,000      3,121,000 
  Common Stock, $.01 par value--authorized 30,000,000 shares;         
   issued 11,453,400 shares at March 31, 1998 and 11,150,640
   shares at June 30, 1997...................................................         115,000        112,000 
  Additional paid-in capital.................................................     108,923,000    106,332,000
  Retained earnings (deficit)................................................     (90,630,000)   (46,988,000)
  Treasury stock, 581,550 common shares at March 31, 1998       
   and June 30, 1997, at cost................................................      (3,899,000)    (3,899,000) 
                                                                                 ------------   ------------ 
     Total stockholders' equity..............................................      17,908,000     59,182,000
                                                                                 ------------   ------------
 
                                                                                 $125,087,000   $141,189,000
                                                                                 ============   ============
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       2
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                       QUARTER ENDED             NINE MONTHS ENDED
                                                          MARCH 31                    MARCH 31
                                               ----------------------------  --------------------------
                                                   1998            1997          1998          1997
                                               --------------  ------------  ------------  ------------
<S>                                              <C>           <C>           <C>           <C>
Revenues:
   Provider - based operations.................  $ 30,370,000   $31,732,000  $ 94,698,000   $98,137,000
   Managed care operations.....................     6,652,000           ---    19,859,000           ---
   Investment income and other.................        24,000        69,000       221,000       271,000
                                                 ------------   -----------  ------------   -----------
 
TOTAL REVENUES.................................    37,046,000    31,801,000   114,778,000    98,408,000
 
Expenses:
  Salaries, wages and benefits.................    21,358,000    16,473,000    60,962,000    49,736,000
  Managed care provider expenses...............     2,409,000           ---     7,805,000           ---
  Other operating expenses.....................    17,401,000    10,257,000    40,714,000    32,613,000
  Provision for doubtful accounts..............     2,840,000     1,183,000     5,033,000     3,332,000
  Depreciation and amortization................     1,648,000     1,376,000     4,929,000     3,969,000
  Interest and other financing charges.........     2,749,000     1,429,000     5,540,000     4,463,000
  Restructuring charges........................     3,927,000           ---     3,927,000           ---
  Asset impairment charges.....................    16,525,000           ---    16,525,000           ---
                                                 ------------   -----------  ------------   -----------
 
TOTAL EXPENSES.................................    68,857,000    30,718,000   145,435,000    94,113,000
 
INCOME (LOSS) BEFORE INCOME                       
TAXES AND EXTRAORDINARY       
ITEM...........................................   (31,811,000)    1,083,000   (30,657,000)    4,295,000
Income taxes...................................     9,411,000       411,000     9,411,000     1,632,000
                                                 ------------   -----------  ------------   -----------
 
INCOME (LOSS) BEFORE                              
EXTRAORDINARY ITEM.............................   (41,222,000)      672,000   (40,068,000)    2,663,000
Extraordinary item:                                       
  Loss from early extinguishment of debt.......           ---           ---    (3,574,000)          ---
                                                 ------------   -----------  ------------   -----------
 
NET INCOME (LOSS)..............................  $(41,222,000)  $   672,000  $(43,642,000)  $ 2,663,000
                                                 ============   ===========  ============   ===========
 
Income (loss) per common and dilutive
  common equivalent share: 
 
Basic:
  Before extraordinary item....................  $      (3.82)  $      0.07  $      (3.79)  $      0.29
  Extraordinary item...........................           ---           ---         (0.33)          ---
                                                 ------------   -----------  ------------   -----------
                                                 $      (3.82)  $      0.07  $      (4.12)  $      0.29
                                                 ============   ===========  ============   ===========
 
Diluted:
  Before extraordinary item....................  $      (3.82)  $      0.06  $      (3.79)  $      0.27
  Extraordinary item...........................           ---           ---         (0.33)          ---
                                                 ------------   -----------  ------------   -----------
                                                 $      (3.82)  $      0.06  $      (4.12)  $      0.27
                                                 ============   ===========  ============   ===========
 
Weighted average number of shares
 outstanding:
  Basic........................................    10,867,000     8,426,000    10,755,000     8,329,000
  Diluted......................................    10,867,000    10,514,000    10,755,000    10,012,000
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                        NINE MONTHS ENDED MARCH 31
                                                                       -----------------------------
                                                                           1998           1997
                                                                       ------------   -------------- 
<S>                                                                     <C>           <C>  
Cash flows from operating activities
Net income (loss)...................................................   $(43,642,000)  $  2,663,000
Adjustments to reconcile net income (loss) to net cash provided by
  operating activities:
  Depreciation and amortization, including loan costs...............      5,221,000      4,202,000
  Asset impairment charges..........................................     16,525,000            ---
  Restructuring charges.............................................      3,927,000            ---
  Loss from early extinguishment of debt............................      3,574,000            ---
  Provision for deferred income taxes...............................      9,411,000      1,272,000
  Provision for doubtful accounts...................................      5,033,000      3,332,000
  Management and director fees paid in common stock.................            ---        692,000
  Cash flows from (increase) decrease in operating assets: 
    Patient accounts receivable.....................................     (3,340,000)    (5,847,000)
    Amounts due from third-party contractual agencies...............        101,000      2,615,000
    Other current assets............................................       (344,000)      (783,000)
    Receivable from affiliated company..............................            ---        408,000
    Other noncurrent assets.........................................       (361,000)      (432,000)
  Cash flows from increase (decrease) in operating liabilities:
    Accounts payable................................................     (1,931,000)    (1,209,000)
    Accrued salaries, wages and other liabilities...................        282,000        408,000
    Hospital and medical claims payable.............................        905,000            ---
    Amounts due to third-party contractual agencies.................      2,078,000       (998,000)
    Other noncurrent liabilities....................................      4,511,000        323,000
                                                                       ------------   ------------
      Total adjustments.............................................     45,592,000      3,983,000
                                                                       ------------   ------------
        Net cash provided by operating activities...................      1,950,000     6,646,000
                                                                       ------------   ------------
Cash flows from investing activities
  Expenditures for property and equipment, net......................     (5,272,000)    (2,622,000)
  Preopening and other costs........................................        (78,000)      (401,000)
  Acquisition of business...........................................       (300,000)           ---
  Cash held in trust................................................         (3,000)       485,000
                                                                       ------------   ------------
    Net cash used in investing activities...........................     (5,653,000)    (2,538,000)
                                                                       ------------   ------------
Cash flows from financing activities
  Loan costs........................................................     (3,101,000)      (302,000)
  Proceeds from forward interest rate agreement.....................            ---      1,284,000
  Proceeds from issuance of debt....................................     57,625,000            ---
  Proceeds from exercise of options and stock purchases.............        158,000         40,000
  Distributions to minority interests...............................            ---       (900,000)
  Payments on debt..................................................    (50,849,000)   (10,872,000)
  Payments related to early extinguishment of debt..................     (2,229,000)           ---
  Cost of issuance of Series 1997 preferred stock...................       (100,000)           ---
  Proceeds from preferred stock issues..............................      5,284,000            ---
  Payment of preferred stock dividends..............................        (57,000)       (91,000)
                                                                       ------------   ------------
    Net cash provided by (used in) financing activities.............      6,731,000    (10,841,000)
                                                                       ------------   ------------
Net increase (decrease) in cash and cash equivalents................      3,028,000     (6,733,000)
Cash and cash equivalents at beginning of period....................      1,723,000      7,605,000
                                                                       ------------   ------------
Cash and cash equivalents at end of period..........................   $  4,751,000   $    872,000
                                                                       ============   ============
 
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
  Interest..........................................................   $  3,299,000   $  2,702,000
  Income taxes......................................................        566,000         79,000
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

                                MARCH 31, 1998

NOTE 1 -- GENERAL

     The accompanying unaudited 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 (including in connection with the Company's
change in strategic direction discussed in Note 2 below), 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 March 31, 1998 are not
necessarily indicative of the results that may be expected for the year.  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
June 30, 1997.

NOTE 2 -- CHANGE IN STRATEGIC DIRECTION AND ASSET SALES

     During the quarter ended March 31, 1998, the Company determined to change
its strategic direction from an organization which provides and manages a full
range of behavioral healthcare services to an organization engaged in providing
services for at-risk and adjudicated youth with special needs.  In connection
with its revised strategic initiative, the Company has identified for
divestiture certain of its inpatient facilities, its managed care operations and
other non-youth service businesses.  These assets are reflected in the
accompanying balance sheet as assets held for sale.  There can be no assurance
that the Company will be successful in selling these assets and, except as
discussed below, the Company cannot predict the net proceeds of these sales, if
any.

     On May 1, 1998, the Company signed a definitive agreement with an unrelated
third party to sell its managed care business for a cash purchase price of
$20,000,000, subject to certain future potential purchase price adjustments.  On
May 4, 1998, the Company sold its Three Rivers Hospital, which had been closed
since June 30, 1995, for $2,000,000.  Proceeds from the sale of Three Rivers
Hospital included a $500,000 cash payment at closing and a $1,500,000, 12%
promissory note, due and payable on May 1, 1999.  On May 15, 1998, the Company
signed a definitive agreement with an unrelated third party to sell its
Greenbrier Hospital for a cash purchase price of $1,600,000.  For the quarter
and nine months ended March 31, 1998, net income before taxes of the managed
care business totalled $854,000 and $2,000,000, respectively, and Greenbrier
Hospital incurred a net loss before taxes of $(122,000) and $(569,000),
respectively.  The sales of Greenbrier Hospital and the managed care business
are expected to close in June 1998 and have received the consent of the
Company's financial institution lenders, provided the sales take place on or
before June 15, 1998.  Proceeds from the sales of the above assets, costs of
sale and amounts placed in escrow, are expected to approximate $19,200,000 and
will be used to partially prepay the Senior Credit Facility.  In connection with
this prepayment, the Company expects to incur a loss on extinguishment of debt
of approximately $1,000,000, which will be recorded in the fourth quarter.

     Statement of Financial Accounting Standards (SFAS) No. 121 addresses the
accounting for the impairment of long-lived assets and long-lived assets to be
disposed of, certain identifiable intangible assets and goodwill relating to
those assets, and provides guidance for recognizing and measuring impairment
losses.  The statement requires that the carrying amount of impaired assets be
reduced to fair value.

                                       5
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES

     During the third quarter of fiscal 1998, in connection with the Company's
change in strategic direction, the Company decided to close or sell certain
operations, including the operations and assets discussed above, that were
identified as not compatible with the Company's future operating plans.
Accordingly, the carrying values of these facilities/operations were compared to
selling values or, if selling values were not available, to discounted future
cash flows, resulting in an aggregate non-cash asset impairment charge of $14.6
million.  The Company expects to complete these sales or closures during the
fourth quarter of fiscal 1998 and fiscal year 1999.

     During the third quarter of fiscal 1998, the Company recorded an impairment
loss of approximately $1.9 million related to other long-lived assets of a
facility which is not held for sale, given that the recorded asset value was
not considered fully recoverable based upon projected discounted future cash
flows.

NOTE 3 -- REFINANCING

     On September 30, 1997, the Company refinanced its then existing senior and
subordinated secured notes, its variable rate demand revenue bonds and its
demand note to a corporate affiliate of Paul J. Ramsay, the Company's Chairman
of the Board and a significant shareholder of the Company, with proceeds from a
credit facility consisting of term and revolving credit debt of $38,500,000 (the
"Senior Credit Facility") and the sale of $2,500,000 of Class B Preferred Stock,
Series 1997 (the "Series 1997 Preferred Stock") to a financial institution.  In
addition, on September 30, 1997, the Company issued a $17,500,000 subordinated
bridge facility, of which $15,000,000 was purchased by the financial institution
(the "Series A Bridge Notes") and $2,500,000 was purchased by a corporate
affiliate of Mr. Ramsay (the "Bridge Facility").

     Under the terms of the Senior Credit Facility, which is secured by
substantially all of the Company's real property, receivables and other assets,
the Company was provided (i) a $12,500,000 term loan, (ii) a $10,000,000 term
loan and (iii) a revolving credit facility (the "Revolver") for an amount up to
the lesser of $16,000,000 or the borrowing base of the Company's receivables
(defined as 70% of the Company's net patient accounts receivable, receivables
due from managed care customers and receivables due from customers whose
behavioral health operations are managed by the Company).  The borrowing base of
the Company's receivables may be further reduced by the financial institution
based on a material deterioration in the collectibility or value of the
Company's receivables or with respect to contingent or known material
liabilities (see Note 4).

     In addition, on September 30, 1997, the Company entered into an agreement
with a corporate affiliate of Mr. Ramsay pursuant to which the corporate
affiliate purchased 4,000 shares of non-convertible, non-voting Class B
Preferred Stock, Series 1997-A (the "Series 1997-A Preferred Stock"), $1.00 par
value, at $1,000 per share.  The shares are entitled to cumulative dividends at
a rate of 9% per annum ($360,000 per year) and to a liquidation preference of
$1,000 per share under certain circumstances.  The Series 1997-A Preferred Stock
shall be redeemed at a price of $1,000 per share and dividends on the Series C
Preferred Stock, Series 1996 Preferred Stock and Series 1997-A Preferred Stock
(all of which are held by corporate affiliates of Mr. Ramsay) shall be paid
provided (i) the Company's EBITDA (as defined in the Company's credit
documentation) for its fiscal year ending June 30, 1998 is equal to or greater
than $16,500,000, (ii) the Company has availability under the Revolver in excess
of $4,000,000, (iii) the financial institution syndicates a portion of the
Revolver and (iv) the Bridge Facility is refinanced or paid.  The Company does
not expect to meet these conditions for its fiscal year ending June 30, 1998.

     As mentioned above, in connection with the refinancing of the Company's
debt on September 30, 1997, the Company sold to the financial institution, which
effected the refinancing, $2,500,000 of Series 1997 Preferred Stock.  The Series
1997 Preferred Stock is (i) non-voting, (ii) senior to the Series C Preferred
Stock, the Series 1996 Preferred Stock and the Series 1997-A Preferred Stock in
liquidation and as to dividends, (iii) initially convertible, at the option of
the holder, into 394,945 shares of Common Stock, (iv) optionally redeemable by
the

                                       6
<PAGE>
 
                  RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES 

Company at a premium beginning in September 2000, and (v) mandatorily redeemable
at the earlier to occur of a change in control of the Company or September 2007.
Dividends on the Series 1997 Preferred Stock are payable quarterly at 9% per
annum, or $56,250 per quarter, unless the Company is unable to meet a fixed
charge ratio provided in the Senior Credit Facility, at which time dividends
accrue at 11% per annum.  The Company anticipates accruing such dividends
effective with the quarterly dividend payment payable July 1, 1998 (see Note 4).

NOTE 4 -- LONG-TERM DEBT

     The Company's long-term debt at March 31, 1998 is as follows:

<TABLE>
          <S>                               <C>        
          Variable rate Term Loan A,        
          due in quarterly installments                
           through 9/30/2002                $12,500,000            
          Variable rate Term Loan B,          
          due in quarterly installments                
           through 9/30/2004                  9,938,000          
          Revolver, due 9/30/2002            12,500,000
          Bridge Facility to financial       
           institution, due 9/30/2005        15,000,000           
          Bridge Facility to affiliate,       
          due 9/30/2005                       2,500,000          
          Junior Subordinated Note            
           Agreement to affiliate, due                 
           9/30/2006                          1,475,000          
          Other notes payable                    89,000
                                            -----------
                                             54,002,000
                                              1,752,000
                                            -----------
                                            $52,250,000
                                            =========== 
</TABLE>

     Interest on the term loans and the Revolver varies and, at the option of
the Company, equals (i) a function of the prime lending rate plus a margin
ranging from 1.25% to 1.75%, based on the Company's leverage ratio (as defined
in the credit agreement) or (ii) the LIBOR rate plus a margin ranging from 2.75%
to 3.25%, based on the Company's leverage ratio.  Effective May 20, 1998, the
Company may only elect LIBOR rate loans upon the written consent of the
financial institution lenders.

     The Bridge Facility bears interest at rates ranging from 11.0% to 12.5%
through September 1998, at which time the interest rate increases to 13%.  The
Bridge Facility also provides that the Company will incur a contingent payment
obligation (the "CPO") to the holders of the Series A Bridge Notes.  The CPO is
payable upon the earlier to occur of certain events (each, an "Event"),
including a change of control involving the Company, a public offering by the
Company of Common Stock, the repayment of the Series A Bridge Notes and
September 30, 2002.  On March 27, 1998, pursuant to a First Amendment to the
Bridge Facility (the "First Amendment"), the terms of the CPO were modified
which resulted in the Company agreeing to pay a $1.0 million nonrefundable fee
which has been accrued at March 31, 1998. If the Bridge Facility remains
outstanding as of October 1, 1998, the CPO will change to the greater of
$1,000,000 or 14% of the then existing aggregate market value of the Company's
Common Stock, calculated on a fully-diluted basis (as defined). In this event,
the first $1,000,000 shall be payable in cash and the balance, if any, shall be
payable in cash or Common Stock, at the option of the Company. 

                                       7
<PAGE>
 
                  RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES 

Amounts related to any future potential change related to the CPO and any
resulting payments were not recorded in the March 31, 1998 financial statements
given that they are not estimable at this time.

     The Senior Credit Facility and the Series A Bridge Notes prohibit the
payment of cash dividends to the common shareholders of the Company and require
that the Company meet certain financial covenants, including (i) the maintenance
of certain fixed charge, interest coverage and leverage ratios, (ii) the
maintenance of a minimum level of EBITDA and tangible net worth (as defined in
the credit agreement) and (iii) a limitation on capital expenditures.  The
Company is also required to meet an adjusted minimum fixed charge ratio
("Modified Fixed Charge Coverage Ratio"), which includes preferred dividends
payable in the calculation thereof, in order to pay dividends on the Series 1997
Preferred Stock.  As of March 31, 1998, the Company did not meet these financial
covenant requirements.  The financial institution lenders have agreed to waive
these requirements at March 31, 1998. In addition, the credit documentation
governing the Senior Credit Facility and the Series A Bridge Notes was amended
to provide for (i) a lower principal amount available under the Revolver from
the lesser of $16,000,000 or the borrowing base of the Company's receivables to
the lesser of $8,000,000 (increased by an amount equal to the Company's fiscal
1998 income tax liability, if any) or the borrowing base of the Company's
receivables, (ii) an agreement to secure the Series A Bridge Notes with second
liens on the Company's assets, (iii) monthly financial covenants, (iv) 
limitations on certain payments by the Company and (v) the payment to the
financial institution lenders of a fee, the substantial portion of which is
payable on September 30, 1998.

     On March 25, 1998, the Company entered into a Junior Subordinated Note
Purchase Agreement (the "Note"), with a corporate affiliate of Mr. Ramsay in an
aggregate principal amount of $5,000,000, plus accrued interest.  Proceeds from
any borrowings made under the Note are restricted, and may be used by the
Company solely to (i) acquire and renovate a youth services facility in Dothan,
Alabama, (ii) acquire and renovate a youth services facility in Palm Bay,
Florida and (iii) meet the working  capital needs of these facilities.  On March
31, 1998, the Company borrowed $1,475,000 under the Note to fund the purchase
price ($1,400,000) and sales commission ($75,000) of the facility in Palm Bay,
Florida.  On April 1, 1998, the Company borrowed an additional $1,916,000 under
the Note to fund the purchase price ($1,900,000) and closing costs ($16,000) of
the facility in Dothan, Alabama.

     The Note is unsecured and is subordinated and junior in right of payment to
the Senior Credit Facility and the Bridge Facility or to any refinancing
thereof.  Borrowings under the Note bear interest at a rate per annum equal to
50 basis points greater than the interest rate then in effect on the Bridge
Facility, provided that if the Bridge Facility is paid in full, the interest
rate is fixed at 12.5%.  Interest due under the Note will be accrued and added
to the unpaid principal balance until March 25, 1999 or repayment of the Series
A Bridge Notes, whichever occurs later.  Thereafter, interest is payable
quarterly in arrears provided there are no defaults under the Senior Credit
Facility.  Provided the Senior Credit Facility, the Bridge Facility and any
other future indebtedness senior to the Note are repaid in full, or in the event
any future lender consents, outstanding principal and accrued interest due under
the Note must be prepaid by the Company prior to its September 30, 2006 maturity
date with proceeds from any asset sales.

NOTE 5 -- LEASES

     In April 1995, the Company sold and leased back the land, buildings and
fixed equipment of two of its inpatient facilities.  The leases have a primary
term of 15 years (with three successive renewal options of 5 years each) and
currently require an aggregate annual minimum rental of approximately
$1,650,000, payable monthly.  Effective April 1 of each year, the lease payments
are subject to any upward adjustment (not to exceed 3%

                                       8
<PAGE>
 
                  RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES 

annually) in the consumer price index over the preceding twelve months.
Effective April 1995, the Company agreed to lease an 80-bed facility near Salt
Lake City, Utah for four years, with an option to renew for an additional three
years.  The lease requires annual base rental payments of $456,000, payable
monthly, and percentage rental payments equal to 2% of the net revenues of the
facility, payable quarterly.  The Company leases office space for various other
purposes over terms ranging from one to five years.  Annual rent expense related
to noncancellable operating leases totals approximately $4,000,000.

NOTE 6 -- INCOME TAXES

     Income taxes are accounted for in accordance with SFAS No. 109.  SFAS No.
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.  At March 31, 1998, net operating loss carryovers of
approximately $26,800,000 (of which approximately $14,300,000 expires from 2001
to 2002, $5,700,000 expires in 2010 and $6,800,000 expires from 2011 to 2012)
and alternative minimum tax credit carryovers of approximately $1,100,000 are
available to reduce future federal income taxes, subject to certain annual
limitations.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes.  Previously, the Company evaluated the
realizability of its deferred tax assets and the need for a valuation allowance
by considering the effects of implementing tax planning strategies that
contemplated the sales of certain appreciated property.  In connection with the
Company's change in strategic direction, announced on February 19, 1998, the
Company re-evaluated its tax planning strategies and determined that such
strategies will not be realized.  Consequently, the Company's net operating loss
carryforwards were no longer considered realizable, pursuant to the provisions
of SFAS No. 109, and a valuation allowance of $9,411,000 was recorded in the
quarter ended March 31, 1998.

NOTE 7 -- EARNINGS PER SHARE

     Basic and diluted net loss per share for the quarter and nine months ended
March 31, 1998 are calculated using the weighted average number of shares of
Common Stock outstanding during the respective periods.  Common Stock
equivalents are not included in the computation of diluted net loss per share as
their effect is antidilutive.  Basic net income per share for the quarter and
nine months ended March 31, 1997 is calculated using the weighted average number
of shares of Common Stock outstanding.  Diluted net income per share for the
quarter and nine months ended March 31, 1997 is calculated using the weighted
average number of shares of Common Stock outstanding and, if their effect is
dilutive, common stock equivalents outstanding.

     In February 1997, the FASB issued SFAS No. 128, Earnings per Share.  SFAS
No. 128, which applies to entities with publicly held common stock, simplifies
and replaces the standards for computing earnings per share previously required
in APB Opinion No. 15, Earnings per Share, and makes them comparable to
international earnings per share standards.  SFAS No. 128, which is effective
for financial statements issued for periods ending after December 15, 1997,
requires a restatement of prior year earnings (loss) per share calculations.
The adoption of the provisions of SFAS No. 128 did not have a material impact on
the calculation of earnings (loss) per share.

     The following table summarizes the amounts used in deriving the earnings
(loss) per share figures included in the accompanying financial statements:

                                       9
<PAGE>
 
                  RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES 

<TABLE>
<CAPTION>
                                                        QUARTER ENDED              NINE MONTHS ENDED
                                                          MARCH 31                     MARCH 31
                                                 --------------------------   --------------------------- 
                                                     1998           1997          1998           1997
                                                 ------------   -----------   ------------   ------------
<S>                                              <C>            <C>           <C>            <C>
BASIC:
 
Shares Outstanding:
 Weighted average common shares outstanding        10,866,576     8,425,953     10,755,482     8,329,001
                                                 ============   ===========   ============   ===========
 
Net Income (Loss):
 Net income (loss) before extraordinary 
  item, as reported                              $(41,222,000)  $   672,000   $(40,068,000)  $ 2,663,000
 Dividends, Class B convertible preferred             
  stock, Series C                                     (91,000)      (91,000)      (272,000)     (272,000)
 Dividends, Class B convertible preferred             
  stock, Series 1996                                  (38,000)          n/a       (113,000)          n/a
 Dividends, Class B convertible preferred             
  stock, Series 1997                                  (56,000)          n/a       (113,000)          n/a
 Dividends, Class B convertible preferred             
  stock, Series 1997-A                                (90,000)          n/a       (181,000)          n/a
                                                 ------------   -----------   ------------   ----------- 
    NET INCOME AVAILABLE TO                       
    COMMON SHAREHOLDERS-BEFORE
    EXTRAORDINARY ITEM                            (41,497,000)      581,000    (40,747,000)    2,391,000
    Extraordinary item                                    ---           ---     (3,574,000)          ---
                                                 ------------   -----------   ------------   -----------
    NET INCOME (LOSS)                            $(41,497,000)  $   581,000   $(44,321,000)  $ 2,391,000
                                                 ============   ===========   ============   ===========
 
Net Income (Loss) Per Share:
  Before extraordinary item                      $      (3.82)         0.07   $      (3.79)  $      0.29
  Extraordinary item                                      ---           ---          (0.33)          ---
                                                 ------------   -----------   ------------   -----------
  Net income (loss) per share                    $      (3.82)         0.07   $      (4.12)         0.29
                                                 ============   ===========   ============   ===========
DILUTED:
 
Shares Outstanding:
 Weighted average common shares outstanding        10,866,576     8,425,953     10,755,482     8,329,001
 Class B convertible preferred stock, Series C            ---     1,424,860            ---     1,424,860
 Dilutive effect of stock options and warrants            ---       662,739            ---       257,978
                                                 ------------   -----------   ------------   -----------
   TOTAL COMMON AND DILUTIVE                       
   COMMON EQUIVALENT SHARES                        10,866,576    10,513,552     10,755,482    10,011,839
                                                 ============   ===========   ============   ===========
 
Net Income (Loss):
  Net income (loss) before extraordinary item,  
   basic calculation                             $(41,497,000)  $   581,000   $(40,747,000)  $ 2,391,000
  Dividends, Class B convertible preferred                
   stock, Series C                                        ---        91,000            ---       272,000
                                                 ------------   -----------   ------------   -----------
    NET INCOME AVAILABLE TO        
    COMMON SHAREHOLDERS-BEFORE     
    EXTRAORDINARY ITEM                            (41,497,000)      672,000    (40,747,000)    2,663,000
    Extraordinary item                                    ---           ---     (3,574,000)          ---
                                                 ------------   -----------   ------------   -----------
   NET INCOME (LOSS)                             $(41,497,000)  $   672,000   $(44,321,000)  $ 2,663,000
                                                 ============   ===========   ============   ===========
 
Net Income (Loss) Per Share:
 Before extraordinary item                       $      (3.82)  $      0.06   $      (3.79)  $      0.27
 Extraordinary item                                       ---           ---          (0.33)          ---
                                                 ------------   -----------   ------------   -----------
 Net income (loss) per share                     $      (3.82)  $      0.06   $      (4.12)  $      0.27
                                                 ============   ===========   ============   ===========
</TABLE>

                                       10
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES

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

     On February 19, 1998, the Company announced a change in strategic direction
in order to focus on becoming a leader in the youth services industry.  The
Company's strategic plan is now focused on repositioning the Company for growth
in the at-risk youth services industry and strengthening the Company's financial
position.  The Company has engaged an investment banking firm to assist in the
execution of this growth strategy.  The firm will advise the Company in
connection with acquisitions and other strategic initiatives necessary to expand
the Company's existing youth services business.  In addition, the investment
banking firm will render advisory services in association with the divestiture
of the Company's non-youth services businesses, with proceeds to be used to
repay outstanding indebtedness.  See Item 1. Financial Statements, Notes 2 and
6.

     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.  Some of the most significant factors include (i) the
inability of the Company to effect its strategic plan, including the sale of
assets, (ii) accelerating changes occurring in the healthcare industry,
including competition from consolidating and integrated healthcare provider
systems and managers of healthcare, the imposition of more stringent admission
criteria by payors, increased payor pressures to limit lengths of stay,
limitations on reimbursement rates and limitations on annual and lifetime
patient health benefits, (iii) federal and state governmental budgetary
constraints which could have the effect of limiting the amount of funds
available to support governmental healthcare programs, including Medicare and
Medicaid, (iv) 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 and (v) the loss of major managed care customers or
the loss of a significant number of members from the Company's provider network.
There can be no assurance that any anticipated future results would be achieved.
As a result of the factors identified above and other factors, the Company's
actual results or financial or other condition could vary significantly from the
performance or financial or other condition set forth in any forward-looking
statements or information.

RESULTS OF OPERATIONS

QUARTER ENDED MARCH 31, 1998 COMPARED TO
QUARTER ENDED MARCH 31, 1997

     Revenues from provider-based operations in the quarter ended March 31, 1998
were $30.4 million, compared to $31.7 million in the comparable quarter of the
prior fiscal year.  Revenues from provider-based operations include revenues
related to the Company's youth services facilities (the "Retained Facilities")
as well as revenues associated with assets held for sale (the "Sale
Facilities").  Revenues of the Retained Facilities for the quarter ended March
31, 1998 totalled $12.8 million, which represents a 20% increase over the
comparable quarter of the prior year.  Of this total, revenues related to
adolescents in residential treatment settings totalled $6.1 million, or 47%, and
revenues in intensive inpatient and outpatient treatment settings totalled $6.0
million and $0.7 million, respectively.  For the comparable quarter of the prior
fiscal year, revenues related to adolescents in residential treatment settings
totalled $4.0 million, or 38% of total revenues of the Retained Facilities.
Residential treatment days for the Retained Facilities increased 58% between
quarters, from 17,879

                                       11
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


(or 59% of total treatment days of the Retained Facilities) in the March 1997
quarter to 28,200 (or 65% of total treatment days of the Retained Facilities) in
the March 1998 quarter.

     Revenues associated with the Sale Facilities totalled $19.7 million, of
which $2.0 million (approximately 10%) relates to adolescents in residential
treatment settings.  The remainder, or $17.7 million, includes primarily
revenues in intensive inpatient and outpatient treatment settings and medical
subacute services.  In the comparable quarter of the prior fiscal year, revenues
associated with the Sale Facilities totalled $20.7 million.

     In connection with the Company's change in strategic direction and the
proposed divestiture of certain of its facility operations, the Company recorded
a $2.1 million reserve in the quarter ended March 31, 1998 related to possible
future adjustments of its March 31, 1998 cost report estimates by
intermediaries.  Management believes adequate provision has been made for any
adjustments that may result from future intermediary reviews and audits.

     Revenues associated with the Company's managed care operations, which
commenced in June 1997, totalled $6.7 million in the quarter ended March 31,
1998 and approximated management's expectations.  As previously discussed, on
May 1, 1998, the Company entered into a definitive agreement to sell its managed
care operations to an unrelated third party for $20.0 million, subject to
certain future potential purchase price adjustments.  See Item 1. Financial
Statements, Note 2.

     Salaries, wages and benefits in the quarter ended March 31, 1998 totalled
$21.4 million, compared to $16.5 million in the comparable quarter of the prior
year.  This increase is primarily related to salaries, wages and benefits of the
Company's managed care operations ($1.9 million in the current year quarter),
and a $1.9 million increase attributable to an increase in patient census
between periods at the Retained Facilities and the Company's medical subacute
units.  Additionally, salaries, wages and benefits associated with the Company's
corporate office increased approximately $1.0 million between periods.


     Managed care provider expenses relate to the provider costs, including
medical professionals, inpatient facilities and outpatient centers, associated
with managing and providing the delivery of behavioral healthcare services on
behalf of the Company's managed care customers.  The Company provides for claims
incurred but not yet reported based on its past experience, adjusted for current
factors.  The overall ratio of managed care provider expenses to the related
revenues was consistent with management's expectations in the quarter ended
March 31, 1998.

     Other operating expenses increased from $10.3 million in the prior year
comparable quarter to $17.4 million in the quarter ended March 31, 1998. During
the current year quarter, the Company increased its reserve for professional and
general liability claims by approximately $1.5 million due primarily to the
settlement or pending settlement of three significant claims. In addition, the
Company (i) increased its reserves on other legal matters (including the matter
described in Part II-Other Information, "Item 5. Other Information"), (ii)
incurred $0.8 million of other operating expenses related to its managed care
operations acquired in June 1997 and (iii) due to increased census levels and an
increased corporate overhead structure, incurred increases in other operating
expenses of its provider-based operations and corporate office of approximately
$2.0 million.

     The provision for doubtful accounts increased from $1.2 million in the
prior year comparable quarter to $2.8 million in the current year quarter.
During the quarter ended March 31, 1998, one of the Sale Facilities recorded a
$1.0 million bad debt provision associated with accounts that are greater than
six months old and owed by certain state agencies with which this facility does
business.  The Company has engaged the services of local counsel to pursue this
matter.  However, given the age of these accounts and continued payment denials
by the

                                       12
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


payors, management determined that a $1.0 million reserve for uncollectibility
was necessary on these accounts at this time.  In addition, the Company
identified approximately $0.3 million of bad debts associated with accounts
receivable on facilities previously closed and $0.2 million of bad debts
associated with the Company's subacute facilities.

     Depreciation and amortization increased from $1.4 million in the comparable
prior year quarter to $1.6 million in the quarter ended March 31, 1998 primarily
due to the current period amortization of intangible assets recorded in
connection with the managed care acquisition in June 1997 and the acquisition of
Summa Healthcare Group, Inc. ("Summa") in October 1997.

     Interest and other financing charges increased from $1.4 million in the
prior year comparable quarter to $2.7 million in the current year quarter. On
March 27, 1998, pursuant to the First Amendment the Company incurred a $1.0
million nonrefundable fee which has been accrued at March 31, 1998. Additional
amounts which may be owed based on the Company's future aggregate market value
are not estimable at this time and, therefore, have not been recorded in the
accompanying financial statements. Excluding the impact of the amounts above,
interest and other financing charges increased approximately $0.3 million
between quarters as the impact of the increase in the Company's average
outstanding borrowings between quarters (as a result of its refinancing on
September 30, 1997) was greater than the decrease in the overall interest and
financing cost yield on its borrowings between quarters. See Item 1. Financial
Statements, Note 4.

     The Company recorded a provision for income taxes in the current year
quarter of $9.4 million, which represented a full valuation allowance on its
previously recorded deferred tax assets.  The realizability of these assets was
previously based on the implementation of tax planning strategies that
contemplated the sales of certain appreciated property.  In connection with the
Company's change in strategic direction in the quarter ended March 31, 1998, the
Company determined that its tax planning strategies will not be realized and a
full valuation allowance was considered necessary.  See Item 1. Financial
Statements, Note 6.

     In connection with the Company's change in strategic direction, and in
accordance with the accounting guidance available in Emerging Issues Task Force
("EITF") No. 94-3, the Company (i) initiated a restructuring of personnel at its
corporate headquarters, including the identification and communication of
severance arrangements with individual personnel, (ii) wrote off certain assets
located within its corporate headquarters which were considered to have no
future economic benefit and (iii) initiated the termination of certain
contractual commitments which require future payments.  These amounts, which in
the aggregate totalled $3.9 million, are reflected as restructuring charges in
the quarter ended March 31, 1998.

     On May 1, 1998, the Company signed a definitive agreement with an unrelated
third party to sell its managed behavioral care division for a cash purchase
price of $20,000,000, subject to certain future potential purchase price
adjustments.  On May 4, 1998, the Company sold its Three Rivers Hospital for
$2,000,000.  On May 15, 1998, the Company signed a definitive agreement with an
unrelated third party to sell its Greenbrier Hospital for a cash purchase price
of $1,600,000.  The sales of Greenbrier Hospital and the managed care division
are expected to close in June 1998.  See Item 1. Financial Statements, Note 2.

                                       13
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO
NINE MONTHS ENDED MARCH 31, 1997

     Revenues from provider-based operations in the nine months ended March 31,
1998 were $94.7 million, compared to $98.1 million in the comparable period of
the prior fiscal year.  Revenues from provider-based operations include revenues
related to the Retained Facilities as well as revenues associated with the Sale
Facilities.  Revenues of the Retained Facilities for the nine months ended March
31, 1998 totalled $36.6 million, which represents a 14% increase over the
comparable period of the prior year.  Of this total, revenues related to
adolescents in residential treatment settings totalled $16.8 million, or 46%,
and revenues in intensive inpatient and outpatient treatment settings totalled
$17.3 million and $2.5 million, respectively.  For the comparable period of the
prior fiscal year, revenues related to adolescents in residential treatment
settings totalled $11.5 million, or 36% of total revenues of the Retained
Facilities.  Residential treatment days for the Retained Facilities increased
52% between periods, from 50,408 (or 56% of total days of the Retained
Facilities) in the prior year nine-month period to 76,851 (or 65% of total days
of the Retained Facilities) in the current year nine-month period.

     Revenues associated with the Sale Facilities in the nine months ended March
31, 1998 totalled $60.1 million, of which $5.8 million (approximately 10%)
relates to adolescents in residential treatment settings.  The remainder, or
$54.3 million, includes primarily revenues in intensive inpatient and outpatient
settings and medical subacute services.  In the comparable period of the prior
fiscal year, revenues associated with the Sale Facilities totalled $61.9
million.

     In connection with the Company's change in strategic direction and the
proposed divestiture of certain of its facility operations, the Company recorded
a $2.1 million reserve in the quarter ended March 31, 1998 related to possible
future adjustments of its March 31, 1998 cost report estimates by
intermediaries.  Management believes adequate provision has been made for any
adjustments that may result from future intermediary reviews and audits.  In
addition, provider-based revenues in the prior year period include the impact of
a favorable cash judgment awarded the Company by the courts of the State of
Missouri.  In this matter, the courts ruled that the Company's Retained Facility
in Nevada, Missouri had received insufficient reimbursement from the Missouri
Department of Social Services for the provision of behavioral healthcare to
Medicaid patients from 1990 to 1996.  This judgment, net of related costs,
increased provider-based revenues in the nine months ended March 31, 1997 by
$2.9 million.

     Revenues associated with the Company's managed care operations, which
commenced in June 1997, totalled $19.9 million in the nine months ended March
31, 1998 and approximated management's expectations.  As previously discussed,
on May 1, 1998, the Company entered into a definitive agreement to sell its
managed care operations to an unrelated third party for $20.0 million, subject
to certain future potential purchase price adjustments.

     Salaries, wages and benefits in the nine months ended March 31, 1998
totalled $61.1 million, compared to $49.7 million in the comparable quarter of
the prior year.  This increase is primarily related to salaries, wages and
benefits of the Company's managed care operations ($6.5 million in the current
year period), and a $3.1 million increase attributable to an increase in patient
census between periods at the Company's medical subacute units.  Additionally,
salaries, wages and benefits associated with the Company's corporate office
increased approximately $1.6 million between periods.  Salaries, wages and
benefits at the Retained Facilities and Sale Facilities remained relatively
stable between periods.

     Managed care provider expenses for the nine months ended March 31, 1998
were $7.8 million, or 39% of revenues from managed care operations.  The overall
ratio of managed care provider expenses to the related revenues was consistent
with management's expectations in the nine months ended March 31, 1998.

                                       14
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


     Other operating expenses increased from $32.6 million in the prior year
comparable period to $40.7 million in the nine months ended March 31, 1998.
Other operating expenses related to the Company's provider-based operations
remained stable between periods, whereas other operating expenses related to the
Company's managed care operations acquired in June 1997 totalled $2.7 million in
the current year nine-month period.  During the third quarter, the Company
increased its reserve for professional and general liability claims by
approximately $1.5 million due primarily to the settlement or pending settlement
of three significant claims.  In addition, the Company increased its reserve on
other legal matters (including the matter described in Part II-Other
Information, "Item 5. Other Information") and incurred additional corporate
overhead costs of $1.0 million between periods.

     The provision for doubtful accounts increased from $3.3 million in the
prior year period to $5.0 million in the current year period.  During the
current year third quarter, one of the Company's Sale Facilities recorded a $1.0
million bad debt provision associated with accounts that are greater than six
months old and owed by certain state agencies with which this facility does
business.  The Company has engaged the services of local counsel to pursue this
matter.  However, given the age of these accounts and continued payment denials
by the payors, management determined that a $1.0 million reserve for
uncollectibility was necessary on these accounts at this time.  In addition, the
Company identified approximately $0.3 million of bad debts associated with
accounts receivable on facilities previously closed and $0.2 million of bad
debts associated with the Company's subacute facilities.

     Depreciation and amortization increased from $4.0 million in the comparable
prior year nine-month period to $4.9 million in the nine months ended March 31,
1998 primarily due to the current period amortization of intangible assets
recorded in connection with the managed care acquisition in June 1997 and the
acquisition of Summa in October 1997.

     Interest and other financing charges increased from $4.5 million in the
prior year comparable period to $5.5 million in the current year period. On
March 27, 1998, pursuant to the First Amendment the Company incurred a $1.0
million nonrefundable fee which has been accrued at March 31, 1998. Additional
amounts which may be owed based on the Company's future aggregate market value
are not estimable at this time and, therefore, have not been recorded in the
accompanying financial statements. Excluding the impact of the amounts above,
interest and other financing charges remained stable between periods as the
increase in the Company's average outstanding borrowings between periods (as a
result of its refinancing on September 30, 1997) was offset by a decrease in the
overall interest and financing cost yield on its borrowings between periods.

     The Company recorded a provision for income taxes in the current year nine-
month period of $9.4 million, which represented a full valuation allowance on
its previously recorded deferred tax assets.  The realizability of these assets
was previously based on the implementation of tax planning strategies that
contemplated the sales of certain appreciated property.  In connection with the
Company's change in strategic direction in the quarter ended March 31, 1998, the
Company determined that its tax planning strategies will not be realized and a
full valuation allowance was considered necessary.

     In connection with the Company's change in strategic direction, and in
accordance with the accounting guidance available in EITF No. 94-3, the Company
(i) initiated a restructuring of personnel at its corporate

                                       15
<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


headquarters, including the identification and communication of severance
arrangements with individual personnel, (ii) wrote off certain assets located
within its corporate headquarters which were considered to have no future
economic benefit and (iii) initiated the termination of certain contractual
commitments which require future payments.  These amounts, which in the
aggregate totalled $3.9 million, are reflected as restructuring charges in the
nine months ended March 31, 1998.

     On May 1, 1998, the Company signed a definitive agreement with an unrelated
third party to sell its managed behavioral care division for a cash purchase
price of $20,000,000, subject to certain future potential purchase price
adjustments.  On May 4, 1998, the Company sold its Three Rivers Hospital for
$2,000,000.  On May 15, 1998, the Company signed a definitive agreement with an
unrelated third party to sell its Greenbrier Hospital for a cash purchase price
of $1,600,000.  See Item 1. Financial Statements, Note 2.


FINANCIAL CONDITION

     The Company records amounts due to or from third-party contractual agencies
(Medicare, Medicaid and Blue Cross) based on its best estimate, using the
principles of cost reimbursement, of amounts to be ultimately received or paid
under current and prior years' cost reports filed (or to be filed) with the
appropriate intermediaries.  Ultimate settlements and other lump sum adjustments
due from and paid to these intermediaries occur at various times during the
fiscal year.  At March 31, 1998, amounts due from Medicare, Medicaid and Blue
Cross totalled approximately $3.4 million, $1.0 million and $1.2 million,
respectively.  Also, at March 31, 1998, amounts due to Medicare, Medicaid and
Blue Cross totalled approximately $7.9 million, $0.7 million and $0.6 million,
respectively.  Changes in these amounts since June 30, 1997 are the result of
fiscal intermediary lump sum adjustments, prior year cost report settlements and
current year estimated settlements recorded during the nine months ended March
31, 1998.

     In connection with the merger of Ramsay Managed Care, Inc. ("RMCI") in June
1997, the Company recorded cost in excess of net asset value of purchased
businesses of approximately $18.8 million and identifiable intangible assets of
approximately $4.7 million, which included the value of RMCI's established
clinical protocols and existing managed care contracts.  The cost in excess of
net asset value of purchased businesses recorded in connection with RMCI was
increased during the quarter ended March 31, 1998 based on changes (during the
one year period after the RMCI merger) to a litigation matter concerning RMCI.
This litigation concerns the sale of a former subsidiary of RMCI (prior to its
merger with the Company) in which the purchaser seeks damages of approximately
$5.8 million.  The Company believes this litigation may be settled for an amount
significantly less then the amount sought, and believes that adequate provision
has been made at March 31, 1998 for amounts which may be paid in connection with
this matter.

     In connection with the previously discussed sale of the Company's managed
care business, which is expected to close in June 1998 and which includes all
operating entities of RMCI, the Company recorded a full valuation allowance on
identifiable intangible assets recorded in connection with the RMCI merger and a
valuation allowance of approximately $5.8 million on cost in excess of net asset
value of purchased businesses recorded in connection with the RMCI merger.  The
remaining balance of cost in excess of net asset value of purchased businesses
is stated at fair value, based on the sale price per the May 1, 1998 definitive
agreement, and is classified as assets held for sale in the March 31, 1998
balance sheet.

     Based on the net sale proceeds derived (and expected to be derived) from
the sales of Greenbrier Hospital and Three Rivers Hospital, as well as the
Company's assessment that the recorded book value of long-lived assets
(associated with one of the Company's additional assets held for sale) is
greater than expected net sale proceeds,

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                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


the Company recorded a valuation allowance on assets held for sale of $4.9
million in the accompanying March 31, 1998 balance sheet.

     On October 9, 1997, the Company acquired Summa and recorded cost in excess
of net asset value of purchased businesses of approximately $3.4 million, which
included (i) cash consideration of $300,000, (ii) the issuance of Common Stock,
which had a market value on October 9, 1997 of $1.2 million and (iii) the
issuance of warrants, which had an estimated fair value on October 9, 1997 of
approximately $1.9 million (using a Black-Scholes pricing model).  The issuance
of Common Stock and warrants increased the Company's additional paid-in capital
by $3.1 million on the date of the acquisition.

     The Company determined that its previous tax planning strategies, which
strategies served as the basis for the recordation of its deferred tax assets,
would not be realized given the Company's change in strategic direction.
Accordingly, a full valuation allowance was recorded on its deferred tax assets
in the quarter ended March 31, 1998.  Also in connection with the Company's
change in strategic direction, the Company has identified certain of its
operations, including its managed care operations, for divestiture.  The
property and equipment, other noncurrent assets and cost in excess of net asset
value of purchased businesses associated with these operations has been
classified as assets held for sale in the accompanying March 31, 1998 balance
sheet.

     Other current accrued liabilities increased from $5.2 million at June 30,
1997 to $8.5 million at March 31, 1998 primarily as a result of restructuring
accruals recorded in connection with the Company's change in strategic direction
and the $1.0 million CPO assessed by the holders of the Series A Bridge Notes.
Other noncurrent accrued liabilities increased since June 30, 1997 primarily as
a result of the litigation mentioned above and the matter discussed in Part II -
Other Information "Item 5. Other Information", which matters management believes
will be protracted and will not result in cash payments (other than attorneys
fees, which have been classified as current liabilities) until after April 1,
1999.

     As mentioned previously, on September 30, 1997, the Company refinanced its
then existing credit facilities through borrowings totalling $50.0 million.
Consequently, the amounts which were due within one year at June 30, 1997 under
the Company's former credit facilities, totaling $11.6 million, were excluded
from current liabilities at June 30, 1997 since the refinancing resulted in this
amount being outstanding for an uninterrupted period extending beyond one year
from June 30, 1997.  In connection with this refinancing, the Company (i) issued
the Series 1997 Preferred Stock and the Series 1997-A Preferred Stock which,
based on the redemption features of these issues, are not reflected as
stockholders' equity in the accompanying balance sheet, (ii) wrote off
unamortized loan costs and letter of credit fees related to its former credit
facilities of approximately $1.3 million, (iii) incurred loan costs of
approximately $3.6 million and (iv) created a cash collateral account which was
used to redeem, by December 1, 1997, $12.3 million of principal (and related
accrued interest) due on the Company's previously outstanding variable rate
demand revenue bonds.

LIQUIDITY AND CAPITAL RESOURCES

     Under the terms of the Senior Credit Facility, the Company was provided (i)
a $12.5 million term loan, payable in 18 quarterly installments ranging from
approximately $0.4 million to $0.9 million, beginning July 1, 1998, (ii) a $10
million term loan, payable in 20 quarterly installments of $62,500, beginning
January 1, 1998, and eight quarterly installments of approximately $1.0 million,
beginning January 1, 2003, (iii) the Revolver and (iv) a $17.5 million Bridge
Facility, of which $15.0 million was purchased by the financial institution and
$2.5 million was purchased by a corporate affiliate of Mr. Ramsay.  At March 31,
1998 and May 15, 1998, drawings under the Revolver totalled $12.5 million and
$10.5 million, respectively.  Amounts drawn under the Revolver will be further
reduced by $5.0 million from proceeds from the expected sale of the managed care
business in June 1998.

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<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


     Given that the Bridge Facility was not refinanced prior to March 30, 1998,
the financial institution which holds the Series A Bridge Notes is entitled to a
$1.0 million CPO, payable in cash upon the occurrence of an Event (see Item I.
Financial Statements, Note 4).  Provided the Bridge Facility is not refinanced
before September 30, 1998, the CPO amount becomes the greater of $1.0 million or
14% of the then existing aggregate market value of the Company's Common Stock,
calculated on a fully-diluted basis (as defined).  The Company does not believe
that the CPO will have a material adverse effect on its liquidity, given its
ability to satisfy any amounts which may become due under the CPO greater than
$1.0 million through the issuance of additional shares of Common Stock.

     Also, on September 30, 1997, a corporate affiliate of Mr. Ramsay purchased
additional preferred shares in the Company upon closing and, under certain
limited circumstances related to the matter discussed in Part II. Other
Information, "Item 5. Other Information", agreed to purchase Common Stock at a
price of $5.17 per share (the 30-day average stock price prior to the closing).
The Company entered into an agreement with this corporate affiliate pursuant to
which the corporate affiliate purchased 4,000 shares of Series 1997-A Preferred
Stock at $1,000 per share.  The purchase price, which totalled $4.0 million, was
paid by (i) offset against approximately $0.6 million in dividends accrued
through September 30, 1997 on the Series C Preferred Stock and the Series 1996
Preferred Stock, (ii) offset against approximately $0.4 million in unpaid
accrued interest and commitment fees on the former demand note owed to a
corporate affiliate of Mr. Ramsay, (iii) $0.25 million in principal due on the
former demand note which was not refinanced with proceeds of the Bridge Facility
and (iv) approximately $2.8 million in cash.

     Proceeds of the refinancing were used as follows:  (i) principal repayments
of $27.5 million of 11.6% senior secured notes and $1.4 million of 15.6%
subordinated secured notes held by a group of insurance companies, (ii)
repayment of $3.4 million of bank debt created on September 2, 1997 upon the
redemption of one of the Company's variable rate demand revenue bonds, (iii)
repayment of approximately $0.9 million of accrued interest on the above
obligations, (iv) creation of a cash collateral account which was used to redeem
$12.3 million of principal due on outstanding variable rate revenue bonds and to
pay accrued interest thereon on their redemption dates of November 3, 1997 and
December 1, 1997, (v) repayment of $2.5 million of the $2.75 million loan to a
corporate affiliate of Mr. Ramsay, (vi) payment of a $2.2 million prepayment
penalty to the group of insurance companies holding the senior and subordinated
secured notes and (vii) transaction costs totaling approximately $2.8 million.

     As previously discussed, in May 1998 the Company signed definitive
agreements with respect to the sale of its managed care business and its
Greenbrier Hospital, both of which are expected to close in June 1998.  The
Company also sold its Three Rivers Hospital in May 1998.  Net proceeds from
these sales will be applied to the Senior Credit Facility, reducing the
Company's financial institution indebtedness by approximately $19.2 million to
approximately $29.0 million.  The Company expects to reduce its financial
institution indebtedness significantly through proceeds of all other assets
which are held for sale.  As a result, funds generated from the sale of assets
will not be available for operating purposes.  There can be no assurance that
the Company will be successful in selling these assets and, except as described
above, the Company cannot predict the net proceeds of these sales, if any.

     As of March 31, 1998, the Company did not meet the financial covenant
ratios required in its credit agreements.  The financial institution lenders
have agreed to waive these requirements at March 31, 1998. In addition, the
credit documentation governing the Senior Credit Facility and the Series A
Bridge Notes was amended to provide for (i) a lower principal amount available
under the Revolver from the lesser of $16.0 million or the borrowing base of the
Company's receivables to the lesser of $8.0 million (increased by an amount
equal to the Company's fiscal 1998 income tax liability, if any) or the
borrowing base of the Company's receivables, (ii) an agreement to secure the
Series A Bridge Notes with second liens on the Company's assets, (iii) monthly
financial covenants, (iv) limitations on certain payments by the Company



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<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


Company and (v) the payment to the financial institution lenders of a fee, the 
substantial portion of which is payable on September 30, 1998. 

     During the nine months ended March 31, 1998, net cash provided by the
operating activities of the Company decreased approximately $4.7 million. 
In the prior year, the Company received a favorable cash judgment from the State
of Missouri totalling $2.9 million (see "Nine Months Ended March 31, 1998 
Compared to Nine Months Ended March 31, 1997"). The remaining difference is 
related to decreases in operating performance at certain of the Sale Facilities 
and changes in working capital between periods.

     The Company's current primary cash requirements relate to its normal
operating expenses, debt service (including the previously mentioned $1.0
million CPO payment), lease payments on the Company's leased facilities, working
capital needs, routine capital improvements at its facilities and payments made
in connection with the Company's corporate restructuring.  Also, although not
anticipated within the next twelve months, certain of the Company's litigation
matters could require cash payments in the future.  See "Financial Condition"
above and Part II. - Other Information, "Item 5.  Other Information" below.

     The Company believes that its cash resources, including the current
availability of additional funds under the Revolver, the availability under the
Junior Subordinated Note Purchase Agreement to fund the working capital needs of
the facilities in Dothan, Alabama and Palm Bay, Florida and internally-generated
funds from future operations, will be sufficient to fund its current operations,
provided certain of the contingent matters discussed elsewhere herein do not
result in significant payments by the Company. In the event that the Company is
required to make such payments, or in the event the Company's financial
institution lenders further restrict availability under the Revolver, the
Company may be required to seek consents from its lenders to make such payments
or may be required to seek additional financing and/or a refinancing of its
existing indebtedness. There can be no assurance that the Company will be
successful in obtaining such consents or such alternative financing
arrangements.


PART II - OTHER INFORMATION

ITEM 5.  OTHER INFORMATION

     During fiscal year 1996, the State of Louisiana requested repayment of
disproportionate share payments received by two of the Company's Louisiana
facilities in fiscal years 1995 and 1994 totaling approximately $5.0 million.
The repayment requests related to a) alleged overpayments made to the Company's
former Three Rivers Hospital, which was closed on June 30, 1995, because the
State of Louisiana believed Three Rivers' actual annual inpatient volume was
less than its projection of annual inpatient volume made at the beginning of its
1994 cost reporting year and b) alleged improper teaching hospital payments made
to Three River Hospital and Bayou Oaks Hospital because the State believed these
facilities were not qualifying teaching hospitals at the time these payments
were made.  The Company believes that certain of the calculations which support
the State's calculation have not been considered.  Further, the Company believes
that, based on its understanding of the rules and regulations in place at the
time the teaching hospital payments were made, payments received as a result of
the teaching classification were appropriate.

     Over the last two years, the Company has had extensive discussions with
officials in the Louisiana Department of Health and Hospitals with respect to
these matters.  These discussions have included a possible settlement at an
amount considerably less than the State's initial requests.  The Company notes
that during the

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<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


course of its negotiations with the State, the State's demands have varied
significantly and that, during the third quarter, the State's demands increased.
Although the Company intends to vigorously contest any position by the State of
Louisiana which the Company considers adverse, the Company has been advised by
counsel that this matter is closer to litigation than the Company previously
believed and that the costs to litigate, as well as any settlement, could exceed
the amount which the Company previously reserved for on this matter.
Accordingly, the Company increased its reserve for this matter in the quarter
ended March 31, 1998.  Notwithstanding this increase, the Company believes that
the resolution of this matter will not have a material adverse effect on its
liquidity.


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 2.6     Agreement of Purchase and Sale dated as of March 18,
                          1998 by and between Ramsay Louisiana, Inc. and Health-
                          One Properties, LLC. Pursuant to Reg. S-K, Item
                          601(b)(2), the Company agrees to furnish a copy of the
                          Disclosure Schedules and attachments to such Agreement
                          to the Commission upon request

          Exhibit 2.7     Stock Purchase Agreement dated as of May 1, 1998 by
                          and among the Company, Ramsay Managed Care, Inc. and
                          Horizon Health Corporation. Pursuant to Reg. S-K, Item
                          601(b)(2), the Company agrees to furnish a copy of the
                          Disclosure Schedules and attachments to such Agreement
                          to the Commission upon request

          Exhibit 2.8     Asset Purchase Agreement dated as of May 15, 1998 by
                          and among Greenbrier Hospital, Inc., the Company and
                          Provider Options Holdings, L.L.C. Pursuant to Reg. S-
                          K, Item 601(b)(2), the Company agrees to furnish a
                          copy of the Disclosure Schedules and attachments to
                          such Agreement to the Commission upon request

          Exhibit 10.113  First Amendment to Credit Agreement dated as of March
                          27, 1998 by and among the Company, certain
                          subsidiaries of the Company on the signature pages
                          thereto, General Electric Capital Corporation, as
                          Administrative Agent and Lender, and The ING Capital
                          Senior Secured High Income Fund, L.P., as Lender

          Exhibit 10.114  First Amendment to Subordinated Note Purchase
                          Agreement dated as of March 27, 1998 by and among the
                          Company, General Electric Capital Corporation and Paul
                          Ramsay Holdings Pty. Limited

          Exhibit 10.115  Junior Subordinated Note Purchase Agreement dated as
                          of March 25, 1998 by and between the Company and Paul
                          Ramsay Holdings Pty. Limited

          Exhibit 27      Financial Data Schedule

     (b)  Current Reports on Form 8-K

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<PAGE>
 
                   RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES


          The Company did not file any Current Reports on Form 8-K during the
          quarter ended March 31, 1998.


                                   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 HEALTH CARE, INC.
                                         Registrant


                                          /s/ Carol C. Lang
                                         -------------------------
                                         Carol C. Lang
                                         Chief Financial Officer



Date: May 20, 1998

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