<PAGE>   1
                       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 JUNE 30, 2001

                                       OR

     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                 FOR THE TRANSITION PERIOD FROM ______ TO ______

                         COMMISSION FILE NUMBER 0-13849

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


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


               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
August 8, 2001, follows:

         Common Stock, par value $0.01 per share - 9,137,430 shares


<PAGE>   2


                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                                      INDEX

                                                                          PAGE
                                                                          ----

PART I.  FINANCIAL INFORMATION

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

Condensed Consolidated Balance Sheets - June 30, 2001 (unaudited) and
         December 31, 2000...............................................   1

Condensed Consolidated Statements of Operations - Quarter and Six Months
         ended June 30, 2001 (unaudited) and 2000........................   3

Condensed Consolidated Statements of Cash Flows - Six Months ended
         June 30, 2001 (unaudited) and 2000..............................   4

Notes to Condensed Consolidated Financial Statements - June 30, 2001
         (unaudited).....................................................   5

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.......................................   9

Item 3.  Quantitative and Qualitative Disclosures About Market Risk......  17


PART II. OTHER INFORMATION

Item 1.  Other Information...............................................  18

Item 2.  Exhibits and Current Reports on Form 8-K........................  19

SIGNATURES...............................................................  20


                                       i
<PAGE>   3




                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                        JUNE 30,       DECEMBER 31,
                                                                          2001             2000
                                                                       -----------      -----------
                                                                       (UNAUDITED)

<S>                                                                    <C>              <C>
ASSETS

Current assets
   Cash and cash equivalents ....................................      $ 1,691,000      $ 1,539,000
   Accounts receivable, less allowances for doubtful accounts of
     $2,908,000 and $2,807,000 at June 30, 2001 and December 31,
     2000, respectively .........................................       24,664,000       22,970,000
   Amounts due from third-party contractual agencies ............        1,784,000        1,164,000
   Other current assets .........................................        2,496,000        2,323,000
                                                                       -----------      -----------
     Total current assets .......................................       30,635,000       27,996,000


Other assets
   Cash held in trust ...........................................        1,011,000        1,041,000
   Cost in excess of net asset value of purchased businesses, net        2,290,000        2,548,000
   Unamortized loan costs, net ..................................        1,267,000        1,415,000
   Note receivable ..............................................        1,800,000               --
   Net assets held for sale .....................................               --        2,129,000
                                                                       -----------      -----------
     Total other assets .........................................        6,368,000        7,133,000


Property and equipment
   Land .........................................................        4,666,000        4,666,000
   Buildings and improvements ...................................       37,172,000       36,351,000
   Equipment, furniture and fixtures ............................       12,116,000       11,698,000
                                                                       -----------      -----------
                                                                        53,954,000       52,715,000

   Less accumulated depreciation ................................       19,349,000       18,246,000
                                                                       -----------      -----------
                                                                        34,605,000       34,469,000
                                                                       -----------      -----------
                                                                       $71,608,000      $69,598,000
                                                                       ===========      ===========
</TABLE>


            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



                                       1
<PAGE>   4


                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                      JUNE 30,         DECEMBER 31,
                                                                       2001                2000
                                                                   -------------       -------------
                                                                   (UNAUDITED)

<S>                                                                <C>                 <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Accounts payable .........................................      $   5,937,000       $   7,606,000
   Accrued and other liabilities ............................          7,300,000           5,627,000
   Amounts due to third-party contractual agencies ..........          2,582,000           3,632,000
   Current portion of long-term debt ........................          3,052,000           2,803,000
                                                                   -------------       -------------
     Total current liabilities ..............................         18,871,000          19,668,000

Noncurrent liabilities
   Other accrued liabilities ................................          4,911,000           4,389,000
   Long-term debt, less current portion .....................         25,797,000          24,708,000
                                                                   -------------       -------------
     Total liabilities ......................................         49,579,000          48,765,000
                                                                   -------------       -------------

Commitments and contingencies

Stockholders' equity
   Common stock $.01 par value--authorized 30,000,000 shares;
     issued 9,137,430 shares at June 30, 2001 and 9,121,180
     shares at December 31, 2000 ............................             91,000              91,000
   Additional paid-in capital ...............................        127,040,000         127,024,000
   Accumulated deficit ......................................       (101,203,000)       (102,383,000)
   Treasury stock--193,850 common shares at June 30, 2001 and
     December 31, 2000, at cost .............................         (3,899,000)         (3,899,000)
                                                                   -------------       -------------
           Total stockholders' equity .......................         22,029,000          20,833,000
                                                                   -------------       -------------
                                                                   $  71,608,000       $  69,598,000
                                                                   =============       =============
</TABLE>



            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



                                       2
<PAGE>   5

                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                              QUARTER ENDED JUNE 30,          SIX MONTHS ENDED JUNE 30,
                                                           ----------------------------      --------------------------
                                                                2001             2000            2001             2000
                                                           -----------      -----------      -----------      -----------

<S>                                                        <C>              <C>              <C>              <C>
REVENUES ............................................      $33,840,000      $25,257,000      $65,629,000      $48,714,000

Operating Expenses:
   Salaries, wages and benefits .....................       20,736,000       15,646,000       40,563,000       30,333,000
   Other operating expenses .........................        9,638,000        7,035,000       18,630,000       13,966,000
   Provision for doubtful accounts ..................        1,087,000          884,000        1,919,000        1,465,000
   Depreciation and amortization ....................          592,000          558,000        1,185,000        1,148,000
                                                           -----------      -----------      -----------      -----------
TOTAL OPERATING EXPENSES ............................       32,053,000       24,123,000       62,297,000       46,912,000
                                                           -----------      -----------      -----------      -----------
Income from operations ..............................        1,787,000        1,134,000        3,332,000        1,802,000

Non-operating expenses:
   Interest and other financing charges, net ........          866,000          529,000        1,851,000          995,000
   Loss on sale of assets ...........................               --          456,000               --          456,000
                                                           -----------      -----------      -----------      -----------
     Total non-operating expenses, net ..............          866,000          985,000        1,851,000        1,451,000

INCOME BEFORE INCOME TAXES ..........................          921,000          149,000        1,481,000          351,000

Provision for income taxes ..........................          125,000           42,000          301,000           84,000
                                                           -----------      -----------      -----------      -----------

NET INCOME ..........................................      $   796,000      $   107,000      $ 1,180,000      $   267,000
                                                           ===========      ===========      ===========      ===========

Income attributable to common stockholders ..........      $   796,000      $   107,000      $ 1,180,000      $   267,000
                                                           ===========      ===========      ===========      ===========
Income per common share:
   Basic ............................................      $       .09      $       .01      $       .13      $       .03
                                                           ===========      ===========      ===========      ===========
   Diluted ..........................................      $       .08      $       .01      $       .13      $       .03
                                                           ===========      ===========      ===========      ===========

Weighted average number of common shares outstanding:
   Basic ............................................        8,944,000        8,912,000        8,936,000        8,904,000
                                                           ===========      ===========      ===========      ===========
   Diluted ..........................................       10,037,000        9,012,000        9,379,000        9,082,000
                                                           ===========      ===========      ===========      ===========

</TABLE>


            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



                                       3
<PAGE>   6


                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                     SIX MONTHS ENDED JUNE 30,
                                                                  -------------------------------
                                                                      2001               2000
                                                                  ------------       ------------

<S>                                                               <C>                <C>
Cash flows from operating activities:
   Net income ..............................................      $  1,180,000       $    267,000
   Adjustments to reconcile net income to net cash used in
     operating activities:
     Depreciation ..........................................         1,112,000            916,000
     Amortization, including loan costs ....................           371,000            385,000
     Provision for doubtful accounts .......................         1,919,000          1,465,000
     Loss on sale of assets ................................                --            456,000
     Change in operating assets and liabilities:
       Accounts receivable .................................        (3,559,000)        (5,731,000)
       Other current assets ................................          (847,000)           943,000
       Accounts payable ....................................        (1,654,000)        (2,133,000)
       Accrued and other liabilities .......................         2,195,000         (1,683,000)
       Amounts due to third-party contractual agencies .....        (1,050,000)           729,000
                                                                  ------------       ------------
         Total adjustments .................................        (1,513,000)        (4,653,000)
                                                                  ------------       ------------
           Net cash used in operating activities ...........          (333,000)        (4,386,000)
                                                                  ------------       ------------
Cash flows from investing activities:
   Proceeds from the sale of assets ........................           472,000            100,000
   Increase in net assets held for sale ....................                --            (93,000)
   Expenditures for property and equipment .................        (1,228,000)        (1,090,000)
   Acquisitions ............................................                --           (149,000)
   Cash held in trust ......................................            30,000            (18,000)
                                                                  ------------       ------------
           Net cash used in investing activities ...........          (726,000)        (1,250,000)
                                                                  ------------       ------------
Cash flows from financing activities:
   Loan costs ..............................................           (25,000)          (626,000)
   Proceeds from issuance of debt and warrants .............         2,569,000         10,149,000
   Payments on debt ........................................        (1,347,000)        (3,779,000)
   Net proceeds from exercise of options and stock purchases            14,000             24,000
   Registration costs ......................................                --            (17,000)
                                                                  ------------       ------------
           Net cash provided by financing activities .......         1,211,000          5,751,000
                                                                  ------------       ------------
Net increase in cash and cash equivalents ..................           152,000            115,000
Cash and cash equivalents at beginning of period ...........         1,539,000            622,000
                                                                  ------------       ------------
Cash and cash equivalents at end of period .................      $  1,691,000       $    737,000
                                                                  ============       ============

Cash paid during the period for:
   Interest ................................................      $  1,564,000       $    724,000
                                                                  ============       ============
   Income taxes ............................................      $    223,000       $  1,050,000
                                                                  ============       ============

</TABLE>

            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



                                       4
<PAGE>   7


                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                  JUNE 30, 2001


NOTE 1.  BASIS OF PRESENTATION

         The Company is a provider and manager of mental health, substance abuse
and behavioral health programs and services in residential and non-residential
settings in the states and the commonwealth of Puerto Rico. The Company offers
its programs and services in Alabama, Florida, Hawaii, Missouri, Michigan,
Nevada, North Carolina, South Carolina, Texas, Utah and the Commonwealth of
Puerto Rico.

         The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the interim information are,
unless otherwise discussed in this report, of a normal recurring nature and have
been included. The Company's business is seasonal in nature and subject to
general economic conditions and other factors. Accordingly, operating results
for the quarter and six months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year. The balance sheet
at December 31, 2000 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.

         On August 4, 2000, the Company acquired the operating assets of Charter
Behavioral Health System of Manatee Palms, L.P. ("Manatee Palms") from Charter
Behavioral Health Systems, LLC and the corresponding real estate from Crescent
Real Estate Funding VII, L.P. for a cash purchase price of $7,700,000. The
acquisition was accounted for under the purchase method of accounting. In
connection with the acquisition, the Company recorded cost in excess of net
asset value of purchased businesses of $1,892,000. This amount is being
amortized on a straight-line basis over a term of 20 years. The operations of
Manatee Palms have been included in the Company's consolidated statement of
operations effective August 4, 2000. The Company's Senior Credit Facility was
amended on August 4, 2000 to provide for the approval of this acquisition.

         On May 15, 2001, the Company sold its facility in Palm Bay, Florida for
$2,300,000. Proceeds from the sale included a $500,000 cash payment at closing
and a $1,800,000, 8% promissory note, due and payable on June 30, 2003. The note
is secured by the facility.


NOTE 2.  LONG-TERM DEBT

         The Company's long-term debt is as follows:
<TABLE>
<CAPTION>

                                                                                  JUNE 30,          DECEMBER 31,
                                                                                    2001                2000
                                                                               ----------------    ----------------
<S>                                                                                    <C>                  <C>
                   Variable rate Term Loan, due October 30, 2003.......           $ 9,407,000          $10,597,000
                   Revolver, due October 30, 2003......................             8,132,000            5,586,000
                   Acquisition Loan, due October 30, 2003..............             2,006,000            2,162,000
                   Subordinated Note (net of discount of $364,000), due
                      January 24, 2007.................................             4,636,000            4,579,000
                   Subordinated Note (net of discount of $382,000), due
                      January 24, 2007.................................             4,618,000            4,560,000
                   Other ..............................................                50,000               27,000
                                                                               ----------------    ----------------
                                                                                   28,849,000           27,511,000
                   Less current portion................................             3,052,000            2,803,000
                                                                               ----------------    ----------------
                                                                                  $25,797,000          $24,708,000
                                                                               ================    ================
</TABLE>



                                       5
<PAGE>   8

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

         The Company's senior credit facility (the "Senior Credit Facility") was
amended on August 4, 2000 to provide for the acquisition of Manatee Palms. The
amended Senior Credit Facility consists of (i) a term loan (the "Term Loan")
payable in monthly installments ranging from $83,000 to $302,000 with a final
installment of $2,100,000 due on October 30, 2003, (ii) a revolving credit
facility (the "Revolver") for an amount up to the lesser of $12,000,000 or the
borrowing base of the Company's receivables (as defined in the agreement) and
(iii) an acquisition loan commitment of up to $6,000,000 (the "Acquisition
Loan").

         The Company's amended Senior Credit Facility also provided for a
$1,250,000 bridge loan advance under the Acquisition Loan. The bridge loan
advance is payable on the occurrence of certain events (as defined in the
agreement).

         In connection with the aforementioned bridge loan advance, a corporate
affiliate of Paul J. Ramsay, Chairman of the Board of the Company, entered into
a Junior Subordinated Note Purchase Agreement with the Senior Credit Facility
lender to participate in the Senior Credit Facility in an amount equal to the
bridge loan advance.

         The Company failed to maintain the required senior debt fixed charged
coverage and leverage ratios as of December 31, 2000. The Company's senior
lender agreed to waive these requirements as of December 31, 2000. Effective
March 31, 2001, the Company's Senior Credit Facility was amended (the "Seventh
Amendment"). Under the Seventh Amendment, certain coverage and leverage ratios
required to be met by the Company were revised. As of June 30, 2001, the Company
is in compliance with all senior debt covenants under the Seventh Amendment.

         On April 14, 2001, the Company's subordinated debt agreement was
amended (the "Second Amendment"). Under the Second Amendment, certain coverage
and leverage ratios required to be met by the Company were revised retroactive
to March 31, 2001. As of June 30, 2001, the Company is in compliance with all
subordinated debt covenants.

NOTE 3.  EARNINGS PER SHARE

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

<TABLE>
<CAPTION>

                                                          QUARTER ENDED JUNE 30,         SIX MONTHS ENDED JUNE 30,
                                                       ------------------------------  ------------------------------
                                                           2001            2000            2001            2000
                                                       --------------  --------------  --------------  --------------
                                                                 (unaudited)                     (unaudited)
<S>                                                         <C>             <C>           <C>               <C>
Numerator:
     Numerator for basic earnings per share -
       income attributable to common stockholders           $796,000        $107,000      $1,180,000        $267,000
   Effect of dilutive securities.................                 --              --              --              --
                                                       --------------  --------------  --------------  --------------
                                                                  --              --              --              --
                                                       --------------  --------------  --------------  --------------
     Numerator for diluted earnings per share -
       income attributable to common stockholders
       after assumed conversions.................           $796,000        $107,000      $1,180,000        $267,000
                                                       ==============  ==============  ==============  ==============

Denominator:
   Denominator for basic earnings per share -
     weighted-average shares.....................          8,944,000       8,912,000       8,936,000       8,904,000

   Effect of dilutive securities:
     Employee stock options and warrants.........          1,093,000         100,000         443,000         178,000
                                                       --------------  --------------  --------------  --------------
   Dilutive potential common shares..............          1,093,000         100,000         443,000         178,000
                                                       --------------  --------------  --------------  --------------
     Denominator for diluted earnings per share -
       adjusted weighted-average shares and
       assumed conversions.......................         10,037,000       9,012,000       9,379,000       9,082,000
                                                       ==============  ==============  ==============  ==============
Basic earnings per share.........................               $.09            $.01            $.13            $.03
                                                       ==============  ==============  ==============  ==============
Diluted earnings per share.......................               $.08            $.01            $.13            $.03
                                                       ==============  ==============  ==============  ==============
</TABLE>

                                       6
<PAGE>   9


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


         For both the quarter and the six months ended June 30, 2001, options
and warrants totalling 792,947 and 1,792,947, respectively, were excluded from
the above computation because their effect would be antidilutive.

         For both the quarter and the six months ended June 30, 2000, 2,441,013
options and warrants were excluded from the above computation because their
effect would be antidilutive.

NOTE 4.  SEGMENT INFORMATION

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

OWNED OPERATIONS

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

         The residential setting provides a safe, secure and highly structured
environment for the evaluation and development of long-term intensive treatment
services. The programs focus on a cognitive behavioral model with family, group
and individual counseling, social and life skills development, and educational
and recreational programs. The primary focus of these services is to reshape
antisocial behaviors by stressing responsibility and achievement of performance
and treatment goals.

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

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

MANAGEMENT CONTRACT OPERATIONS

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

                                       7
<PAGE>   10
         RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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

                                                           QUARTER ENDED                 SIX MONTHS ENDED
                                                              JUNE 30,                       JUNE 30,
                                                    -----------------------------  -----------------------------
                                                        2001           2000            2001           2000
                                                    -------------  --------------  -------------- --------------

<S>                                                  <C>            <C>             <C>            <C>
SEGMENT REVENUE
   Owned operations...........................       $26,886,000    $20,406,000     $52,268,000    $40,559,000
   Management contracts.......................         6,954,000      4,851,000      13,361,000      8,155,000
                                                    -------------  --------------  -------------- --------------
Total consolidated revenues...................       $33,840,000    $25,257,000     $65,629,000    $48,714,000
                                                    =============  ==============  ============== ==============

SEGMENT DEPRECIATION AND AMORTIZATION
  Owned operations............................          $524,000        $422,000     $1,056,000       $877,000
  Management contracts........................            27,000          14,000         51,000         28,000
                                                    -------------  --------------  -------------- --------------
                                                         551,000         436,000      1,107,000        905,000

Reconciling items
   Corporate depreciation and amortization....            41,000         122,000         78,000        243,000
                                                    -------------  --------------  -------------- --------------
Total consolidated depreciation and
  amortization................................          $592,000        $558,000     $1,185,000     $1,148,000
                                                    =============  ==============  ============== ==============

SEGMENT PROFIT
  Owned operations............................        $2,773,000      $1,929,000     $5,331,000     $3,980,000
  Management contracts........................           548,000         639,000      1,137,000        822,000
                                                    -------------  --------------  -------------- --------------
                                                       3,321,000       2,568,000      6,468,000      4,802,000

Reconciling items

   Corporate expenses.........................        (1,534,000)     (1,434,000)    (3,136,000)    (3,000,000)
   Loss on sale of assets.....................                --        (456,000)           ---       (456,000)
   Interest and other financing charges.......          (866,000)       (529,000)    (1,851,000)      (995,000)
                                                    -------------  --------------  -------------- --------------
Total consolidated income before income taxes           $921,000        $149,000     $1,481,000       $351,000
                                                    =============  ==============  ============== ==============

SEGMENT CAPITAL EXPENSES
  Owned operations............................          $515,000        $695,000       $968,000     $1,105,000
  Management contracts........................            45,000          79,000        130,000        205,000
                                                    -------------  --------------  -------------- --------------
                                                         560,000         774,000      1,098,000      1,310,000

Reconciling items
   Corporate assets...........................           102,000           1,000        130,000         22,000
                                                    -------------  --------------  -------------- --------------
Total consolidated capital expenditures.......          $662,000        $775,000     $1,228,000     $1,332,000
                                                    =============  ==============  ============== ==============

SEGMENT ASSETS
  Owned operations............................       $60,815,000     $49,265,000
  Management contracts........................         7,251,000       6,524,000
                                                    -------------  --------------
Total segment assets..........................        68,066,000      55,789,000

Reconciling Items
   Corporate assets...........................         3,542,000       4,394,000
                                                    -------------  --------------
Total consolidated assets.....................       $71,608,000     $60,183,000
                                                    =============  ==============

</TABLE>

                                       8
<PAGE>   11

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


NOTE 5.  ACCOUNTS RECEIVABLE

         The Company has experienced delays in the collection of receivables
from its contracts in Puerto Rico. As of June 30, 2001, the Company had
approximately $4.7 million in outstanding receivables due from the Commonwealth
of Puerto Rico, of which $1.4 million was over 120 days past due. As of the date
of this filing, the Company had collected approximately $1.3 million of the
outstanding receivable balance and had established reserves of $0.8 million
against the remaining balance. The Company and its advisors are in active
discussions with the Government of Puerto Rico with respect to the payment of
the outstanding receivables. The Company believes that it has fully performed
its obligations under the Puerto Rico contracts and is entitled to receive
payment of these receivables in full. Although the Company has been advised by
its legal counsel that the net receivables due on the Puerto Rico contracts are
collectable, there can be no assurances that future transactions or events will
not result in the need for additional reserves for these accounts receivable. If
the Company were to record additional reserves, it would adversely affect
earnings in the period in which the reserves are recorded.

NOTE 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." These Statements make
significant changes to the accounting for business combinations, goodwill, and
intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations with limited exceptions for combinations
initiated prior to July 1, 2001. In addition, it further clarifies the criteria
for recognition of intangible assets separately from goodwill. This statement is
effective for business combinations completed after June 30, 2001.

         SFAS No, 142 requires that upon adoption, amortization of goodwill will
cease and instead, the carrying value of goodwill will be evaluated for
impairment on an annual basis. Identifiable intangible assets will continue to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". The Company will adopt the provision of
SFAS No. 142 effective January 1, 2002.

         The Company is required to adopt the provisions of SFAS 141 and SFAS
142 on January 1, 2002, with the exception of the immediate requirement to use
the purchase method of accounting for all future business combinations completed
after June 30, 2001. Early adoption and retroactive application of these
Standards are not permitted. However, any goodwill and any intangible asset
determined to have an indefinite useful life that is acquired in a business
combination completed after June 30, 2001 will not be amortized. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized until December 31, 2001. The Company is
currently evaluating the impact that these standards will have on its financial
statements.

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

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

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

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

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

         IN CONNECTION WITH THE "SAFE-HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY NOTES THAT THIS QUARTERLY
REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS ABOUT THE COMPANY. THE
COMPANY IS HEREBY SETTING FORTH CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT
FACTORS THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE SET FORTH IN ANY FORWARD-LOOKING STATEMENTS OR INFORMATION MADE BY OR ON
BEHALF OF OR CONCERNING THE COMPANY. SOME OF THE MOST SIGNIFICANT FACTORS
INCLUDE (I) ACCELERATING CHANGES OCCURRING IN THE AT-RISK YOUTH INDUSTRY,
INCLUDING COMPETITION FROM CONSOLIDATING AND INTEGRATED PROVIDER SYSTEMS AND
LIMITATIONS ON REIMBURSEMENT RATES, (II) FEDERAL AND STATE GOVERNMENTAL
BUDGETARY CONSTRAINTS WHICH COULD HAVE THE EFFECT OF LIMITING THE AMOUNT OF



                                       9
<PAGE>   12
                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


FUNDS AVAILABLE TO SUPPORT GOVERNMENTAL PROGRAMS, (III) STATUTORY, REGULATORY
AND ADMINISTRATIVE CHANGES OR INTERPRETATIONS OF EXISTING STATUTORY AND
REGULATORY PROVISIONS AFFECTING THE CONDUCT OF THE COMPANY'S BUSINESS AND
AFFECTING CURRENT AND PRIOR REIMBURSEMENT FOR THE COMPANY'S SERVICES AND (IV)
THE COMPANY'S INABILITY TO SUCCESSFULLY IMPLEMENT ITS NEW STRATEGIC DIRECTION OF
PROVIDING TREATMENT AND EDUCATION PROGRAMS FOR AT-RISK AND TROUBLED YOUTH, AND
(V) UNCERTAINTIES REGARDING ISSUES IN THE PUERTO RICO MARKET SERVICED BY THE
COMPANY. THERE CAN BE NO ASSURANCE THAT ANY ANTICIPATED FUTURE RESULTS WILL BE
ACHIEVED. AS A RESULT OF THE FACTORS IDENTIFIED ABOVE AND INCLUDING ANY OTHER
FACTORS, THE COMPANY'S ACTUAL RESULTS OR FINANCIAL OR OTHER CONDITION COULD VARY
SIGNIFICANTLY FROM THE PERFORMANCE OR EXPECTATION SET FORTH IN ANY
FORWARD-LOOKING STATEMENTS OR INFORMATION.

                              RESULTS OF OPERATIONS

QUARTER ENDED JUNE 30, 2001 COMPARED TO QUARTER ENDED JUNE 30, 2000

OWNED OPERATIONS SEGMENT

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


<TABLE>
<CAPTION>

                                                          QUARTER ENDED JUNE 30,
                                               ---------------------------------------------------
                                                         2001                      2000
                                               ------------------------- -------------------------
<S>                                               <C>            <C>        <C>            <C>
Revenues..................................        $26,886        100.0%     $20,406        100.0%

Expenses:
   Salaries, wages and benefits...........         15,516         57.7%      12,071         59.1%
   Other operating expenses...............          7,371         27.4%       5,428         26.6%
   Provision for doubtful accounts........            702          2.6%         556          2.7%
   Depreciation and amortization..........            524          2.0%         422          2.1%
                                               ------------ ------------ ------------ ------------
     Total operating expenses.............         24,113         89.7%      18,477         90.5%
                                               ------------ ------------ ------------ ------------
Income from operations....................        $ 2,773         10.3%     $ 1,929          9.5%
                                               ============ ============ ============ ============
</TABLE>

REVENUES

         Revenues increased from $20.4 million in the quarter ended June 30,
2000 to $26.9 million in the quarter ended June 30, 2001. The increase of $6.5
million in revenues from 2000 to 2001 is primarily a result of (i) an increase
in revenues of $2.8 million from the acquisition of the Manatee Palms facilities
and (ii) an increase of $3.7 million in the Company's other facilities primarily
due to a total increase in census of 11.6% between periods (from 68,000 days
during the quarter ended June 30, 2000 to 75,900 days during the quarter ended
June 30, 2001).

SALARIES, WAGES AND BENEFITS

         Salaries, wages and benefits were $12.1 million, or 59.1% of revenues
for the quarter ended June 30, 2000, compared to $15.5 million, or 57.7% of
revenues for the quarter ended June 30, 2001. The decrease as a percentage of
revenues is primarily due to the outsourcing of certain services at the
Company's Michigan facility and the previously discussed 11.6% total increase in
census between periods.

OTHER OPERATING EXPENSES

         Other operating expenses were $5.4 million or 26.6% of revenues for the
quarter ended June 30, 2000, compared to $7.4 million, or 27.4% of revenues for
the quarter ended June 30, 2001. The increase as a percentage of revenues is
primarily due to the aforementioned outsourcing of certain services at the
Company's Michigan facility.

PROVISION FOR DOUBTFUL ACCOUNTS

         The provision for doubtful accounts were $0.6 million or 2.7% of
revenues for the quarter ended June 30, 2000, compared to $0.7 million, or 2.6%
of revenues for the quarter ended June 30, 2001. Provision for doubtful accounts


                                       10
<PAGE>   13

                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


during the quarter ended June 30, 2001 did not fluctuate significantly as a
percentage of revenue when compared to the same period in the prior year.

DEPRECIATION AND AMORTIZATION

         Depreciation and amortization was $0.4 million or 2.1% of revenues for
the quarter ended June 30, 2000, compared to $0.5 million, or 2.0% of revenues
for the quarter ended June 30, 2001. Depreciation and amortization during the
quarter ended June 30, 2001 did not fluctuate significantly as a percentage of
revenue when compared to the same period in the prior year.

MANAGEMENT CONTRACT SEGMENT

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

<TABLE>
<CAPTION>

                                                           QUARTER ENDED JUNE 30,
                                               ---------------------------------------------------
                                                         2001                      2000
                                               ------------------------- -------------------------
<S>                                                <C>           <C>         <C>           <C>
Revenues..................................         $6,954        100.0%      $4,851        100.0%

Expenses:
   Salaries, wages and benefits...........          4,499         64.7%       2,920         60.2%
   Other operating expenses...............          1,495         21.5%         950         19.6%
   Provision for doubtful accounts........            385          5.5%         328          6.7%
   Depreciation and amortization..........             27          0.4%          14          0.3%
                                               ------------ ------------ ------------ ------------
     Total operating expenses.............          6,406         92.1%       4,212         86.8%
                                               ------------ ------------ ------------ ------------
Income from operations....................         $  548          7.9%      $  639         13.2%
                                               ============ ============ ============ ============
</TABLE>

REVENUES

         Revenues increased from $4.9 million in the quarter ended June 30, 2000
to $6.9 million in the quarter ended June 30, 2001. The increase of $2.0 million
in revenues from 2000 to 2001 is primarily a result of an increase in revenues
of $1.0 million from the acquisition of a management contract in Florida in
August 2000 and the effect of new programs awarded to the Company in Florida and
Puerto Rico.

SALARIES, WAGES AND BENEFITS

         Salaries, wages and benefits increased from $2.9 million or 60.2% of
revenue in the quarter ended June 30, 2000 to $4.5 million or 64.7% of revenue
in the quarter ended June 30, 2001. The increase as a percentage of revenues is
primarily due to more intensive staffing for new services provided by the
Company at its Florida contracts.

OTHER OPERATING EXPENSES

         Other operating expenses increased from $1.0 million or 19.6% of
revenue in the quarter ended June 30, 2000 to $1.5 million or 21.5% of
management contract revenue in the quarter ended June 30, 2001. The increase as
a percentage of revenues is primarily due to an increase in operating expenses
for new services provided by the Company at its Florida contracts.


PROVISION FOR DOUBTFUL ACCOUNTS

         The provision for doubtful accounts increased from $0.3 million or 6.7%
of revenue in the quarter ended June 30, 2000 to $0.4 million or 5.5% of revenue
in the quarter ended June 30, 2001. The provision for doubtful accounts recorded
by the Company during the quarter ended June 30, 2000 and 2001 are primarily
related to the Company's management contract operations in Puerto Rico. The



                                       11
<PAGE>   14
                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


increase in the provision from $.3 million in 2000 to $0.4 million in 2001 is
attributable to the delays in receivable collections from the Company's
management contracts in Puerto Rico.

DEPRECIATION AND AMORTIZATION

         Depreciation and amortization increased from 0.3% of revenue in the
quarter ended June 30, 2000 to 0.4% of revenue in the quarter ended June 30,
2001. Depreciation and amortization did not fluctuate significantly as a
percentage of revenue.

CORPORATE AND OTHER

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

<TABLE>
<CAPTION>

                                                           QUARTER ENDED JUNE 30,
                                               ---------------------------------------------------
                                                         2001                      2000
                                               ------------------------- -------------------------
<S>                                               <C>            <C>        <C>            <C>
Revenues:
   Owned operations.......................        $26,886                   $20,406
   Management contracts...................          6,954                     4,851
                                               ------------              ------------
     Total revenues.......................        $33,840        100.0%     $25,257        100.0%

Expenses:
   Salaries, wages and benefits...........            721          2.1%         655          2.6%
   Other operating expenses...............            772          2.3%         657          2.6%
   Depreciation and amortization..........             41          0.1%         122          0.5%
   Investment and other financing charges.            866          2.6%         529          2.1%
   Provision for income taxes.............            125          0.4%          42          0.2%
   Loss on sale of assets.................             --                       456          1.8%

</TABLE>


SALARIES, WAGES AND BENEFITS

         Corporate office salaries, wages and benefits were $0.7 million or 2.6%
of total consolidated revenues for the quarter ended June 30, 2000, compared to
$0.7 million or 2.1% of total consolidated revenues for the same period in 2001.
The decrease as a percentage of total consolidated revenues is primarily due to
the increase in total consolidated revenues of $8.6 million during the quarter.

OTHER OPERATING EXPENSES

         Corporate office other operating expenses were $0.7 million or 2.6% of
total consolidated revenues for the quarter ended June 30, 2000, compared to
$0.8 million or 2.3% of total consolidated revenues for the same period in 2001.
The decrease as a percentage of total consolidated revenues is primarily due to
the increase in total consolidated revenues of $8.6 million during the quarter.

DEPRECIATION AND AMORTIZATION

         Corporate office depreciation and amortization was $0.1 million or 0.5%
of total consolidated revenues for the quarter ended June 30, 2000, compared to
$0.04 million or 0.1% of total consolidated revenues for the same period in
2001. The decrease is due to the Company's completion of the amortization of
certain projects during the fiscal year ended December 31, 2000.

INTEREST AND OTHER FINANCING CHARGES

         Interest and other financing charges increased from $0.5 million or
2.1% of total consolidated revenues for the quarter ended June 30, 2000 to $0.9
million or 2.6% of total consolidated revenues for the quarter ended June 30,
2001. The increase in interest and other financing charges is primarily
attributable to an increase in the Company's average outstanding borrowings
between quarters.



                                       12
<PAGE>   15
                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


PROVISION FOR INCOME TAXES

         For both periods presented, the provision for income taxes was recorded
at an effective tax rate significantly less than the statutory tax rate due to
the Company's significant net operating loss carryovers.

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

OWNED OPERATIONS SEGMENT

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

<TABLE>
<CAPTION>

                                                           SIX MONTHS ENDED JUNE 30,
                                               ---------------------------------------------------
                                                         2001                      2000
                                               ------------------------- -------------------------
<S>                                               <C>            <C>        <C>            <C>
Revenues..................................        $52,268        100.0%     $40,559        100.0%

Expenses:
   Salaries, wages and benefits...........         30,274         57.9%      23,882         58.9%
   Other operating expenses...............         14,192         27.2%      10,751         26.5%
   Provision for doubtful accounts........          1,415          2.7%       1,069          2.6%
   Depreciation and amortization..........          1,056          2.0%         877          2.2%
                                               ------------ ------------ ------------ ------------
     Total operating expenses.............         46,937         89.8%      36,579         90.2%
                                               ------------ ------------ ------------ ------------
Income from operations....................        $ 5,331         10.2%     $ 3,980          9.8%
                                               ============ ============ ============ ============
</TABLE>

REVENUES

         Revenues increased from $40.6 million in the six months ended June 30,
2000 to $52.3 million in the six months ended June 30, 2001. The increase of
$11.7 million in revenues from 2000 to 2001 is primarily a result of (i) an
increase in revenues of $5.6 million from the acquisition of the Manatee Palms
facilities and (ii) an increase of $6.1 million in the Company's other
facilities primarily due to a total increase in census of 9.9% between periods
(from approximately 134,000 days during the quarter ended June 30, 2000 to
approximately 147,000 days during the quarter ended June 30, 2001).

SALARIES, WAGES AND BENEFITS

         Salaries, wages and benefits were $23.9 million, or 58.9% of revenues
for the six months ended June 30, 2000, compared to $30.3 million, or 57.9% of
revenues for the six months ended June 30, 2001. The decrease as a percentage of
revenues is primarily due to the outsourcing of certain services at the
Company's Michigan facility and the previously discussed 9.9% total increase in
census between periods.

OTHER OPERATING EXPENSES

         Other operating expenses were $10.8 million or 26.5% of revenues for
the six months ended June 30, 2000, compared to $14.2 million, or 27.2% of
revenues for the six months ended June 30, 2001. The increase as a percentage of
revenues is primarily due to the aforementioned outsourcing of certain services
at the Company's Michigan facility.

PROVISION FOR DOUBTFUL ACCOUNTS

         The provision for doubtful accounts was $1.1 million or 2.6% of
revenues for the six months ended June 30, 2000, compared to $1.4 million, or
2.7% of revenues for the six months ended June 30, 2001. Provision for doubtful
accounts during the six months ended June 30, 2001 did not fluctuate
significantly as a percentage of revenue when compared to the same period in the
prior year.



                                       13
<PAGE>   16
                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


DEPRECIATION AND AMORTIZATION

         Depreciation and amortization was $0.9 million or 2.2% of revenues for
the six months ended June 30, 2000, compared to $1.1 million, or 2.0% of
revenues for the six months ended June 30, 2001. Depreciation and amortization
during the six months ended June 30, 2001 did not fluctuate significantly as a
percentage of revenue when compared to the same period in the prior year.

MANAGEMENT CONTRACT SEGMENT

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

<TABLE>
<CAPTION>

                                                           SIX MONTHS ENDED JUNE 30,
                                               ---------------------------------------------------
                                                         2001                      2000
                                               ------------------------- -------------------------
<S>                                               <C>            <C>         <C>           <C>
Revenues..................................        $13,361        100.0%      $8,155        100.0%

Expenses:
   Salaries, wages and benefits...........          8,787         65.8%       5,142         63.1%
   Other operating expenses...............          2,882         21.6%       1,767         21.6%
   Provision for doubtful accounts........            504          3.7%         396          4.9%
   Depreciation and amortization..........             51          0.4%          28          0.3%
                                               ------------ ------------ ------------ ------------
     Total operating expenses.............         12,224         91.5%       7,333         89.9%
                                               ------------ ------------ ------------ ------------
Income from operations....................        $ 1,137          8.5%      $  822         10.1%
                                               ============ ============ ============ ============
</TABLE>

REVENUES

         Revenues increased from $8.2 million in the six months ended June 30,
2000 to $13.4 million in the six months ended June 30, 2001. The increase of
$5.2 million in revenues from 2000 to 2001 is primarily a result of an increase
in revenues of $1.9 million from the acquisition of a management contract in
Florida in August 2000 and the effect of new programs awarded to the Company in
Florida and Puerto Rico.

SALARIES, WAGES AND BENEFITS

         Salaries, wages and benefits increased from $5.1 million or 63.1% of
revenue in the six months ended June 30, 2000 to $8.8 million or 65.8% of
revenue in the six months ended June 30, 2001. The increase as a percentage of
revenues is primarily due to more intensive staffing for new services provided
by the Company at its Florida contracts.

OTHER OPERATING EXPENSES

         Other operating expenses increased from $1.8 million or 21.6% of
revenue in the six months ended June 30, 2000 to $2.9 million or 21.6% of
revenue in the six months ended June 30, 2001. Other operating expenses during
the six months ended June 30, 2001 did not fluctuate as a percentage of revenue
when compared to the same period in the prior year.

PROVISION FOR DOUBTFUL ACCOUNTS

         The provision for doubtful accounts increased from $0.4 million or 4.9%
of revenue in the six months ended June 30, 2000 to $0.5 million or 3.7% of
revenue in the six months ended June 30, 2001. The provision for doubtful
accounts recorded by the Company during the six months ended June 30, 2000 and
2001 are primarily related to the Company's management contract operations in
Puerto Rico. The increase in the provision from $0.4 million in 2000 to $0.5
million in 2001 is attributable to the delays in receivable collections from the
Company's management contracts in Puerto Rico.



                                       14
<PAGE>   17
                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


DEPRECIATION AND AMORTIZATION

         Depreciation and amortization increased from 0.3% of revenue in the six
months ended June 30, 2000 to 0.4% of management contract revenue in the six
months ended June 30, 2001. Depreciation and amortization did not fluctuate
significantly as a percentage of revenues.

CORPORATE AND OTHER

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


<TABLE>
<CAPTION>

                                                           SIX MONTHS ENDED JUNE 30,
                                               ---------------------------------------------------
                                                         2001                      2000
                                               ------------------------- -------------------------
<S>                                               <C>            <C>        <C>            <C>
Revenues:
   Owned operations.......................        $52,268                   $40,559
   Management contracts...................         13,361                     8,155
                                               ------------              ------------
     Total revenues.......................        $65,629        100.0%     $48,714        100.0%

Expenses:
   Salaries, wages and benefits...........          1,502          2.3%       1,309          2.7%
   Other operating expenses...............          1,556          2.4%       1,448          3.0%
   Depreciation and amortization..........             78          0.1%         243          0.5%
   Interest and other financing charges...          1,851          2.8%         995          2.0%
   Provision for income taxes.............            301          0.5%          84          0.2%
   Loss on sale of assets.................             --                       456          0.9%
</TABLE>

SALARIES, WAGES AND BENEFITS

         Corporate office salaries, wages and benefits were $1.3 million or 2.7%
of total consolidated revenues for the six months ended June 30, 2000, compared
to $1.5 million or 2.3% of total consolidated revenues for the same period in
2001. The decrease as a percentage of total consolidated revenues is primarily
due to the increase in total consolidated revenues of $16.9 million during the
six months ended June 30, 2001.

OTHER OPERATING EXPENSES

         Corporate office other operating expenses were $1.4 million or 3.0% of
total consolidated revenues for the six months ended June 30, 2000, compared to
$1.6 million or 2.4% of total consolidated revenues for the same period in 2001.
The decrease as a percentage of total consolidated revenues is primarily due to
the increase in total consolidated revenues of $16.9 million during the six
months ended June 30, 2001.

DEPRECIATION AND AMORTIZATION

         Corporate office depreciation and amortization was $0.2 million or 0.5%
of total consolidated revenues for the six months ended June 30, 2000, compared
to $0.08 million or 0.1% of total consolidated revenues for the same period in
2001. The decrease is due to the Company's completion of the amortization of
certain projects during the fiscal year ended December 31, 2000.

INTEREST AND OTHER FINANCING CHARGES

         Interest and other financing charges increased from $1.0 million or
2.0% of total consolidated revenues for the six months ended June 30, 2000 to
$1.9 million or 2.8% of total consolidated revenues for the six months ended
June 30, 2001. The increase in interest and other financing charges is primarily
attributable to an increase in the Company's average outstanding borrowings
between periods.

                                       15
<PAGE>   18

                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


PROVISION FOR INCOME TAXES

         For both periods presented, the provision for income taxes was recorded
at an effective tax rate significantly less than the statutory tax rate due to
the Company's significant net operating loss carryovers.

                         LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 2001 and December 31, 2000, the Company had $11.8 million
and $8.3 million, respectively, in working capital and $1.7 million and $1.5
million, respectively, in cash and cash equivalents. The Company's principal
sources of liquidity as of June 30, 2001 and December 31, 2000 consisted
primarily of the aforementioned cash and cash equivalents and accounts
receivable of $24.7 million and $23.0 million, respectively.

         Net cash used in operating activities was $0.3 million for the six
months ended June 30, 2001. During the six months ended June 30, 2001, cash used
in operating activities was impacted by a $4.4 million increase in accounts
receivable and other assets and a $1.7 million decrease in accounts payable.

         Cash used in investing activities was $0.7 million for the six months
ended June 30, 2001. Investing activities are primarily attributable to $1.2
million used in capital expenditures, offset by approximately $0.5 million in
proceeds from the sale of certain assets.

         Net cash provided by financing activities was $1.2 million for the six
months ended June 30, 2001. Financing activities consisted primarily of proceeds
from the Company's revolving credit facility which were used to finance capital
expenditures and make required term loan payments under the Company's senior
credit facility.

         The Company has experienced delays in the collection of receivables
from its contracts in Puerto Rico. As of June 30, 2001, the Company had
approximately $4.7 million in outstanding receivables due from the Commonwealth
of Puerto Rico, of which $1.4 million was over 120 days past due. As of the date
of this filing, the Company had collected approximately $1.3 million of the
outstanding receivable balance and had established reserves of $0.8 million
against the remaining balance. The Company and its advisors are in active
discussions with the Government of Puerto Rico with respect to the payment of
the outstanding receivables. The Company believes that it has fully performed
its obligations under the Puerto Rico contracts and is entitled to receive
payment of these receivables in full. Although the Company has been advised by
its legal counsel that the net receivables due on the Puerto Rico contracts are
collectable, there can be no assurances that future transactions or events will
not result in the need for additional reserves for these accounts receivable. If
the Company were to record additional reserves, it would adversely affect
earnings in the period in which the reserves are recorded.

         Management of the Company believes that it can meet its current cash
requirements and future identifiable needs with internally generated funds from
operations and availability in its Senior Credit Facility. If the Company is
unable to collect the Puerto Rico receivables, the Company may need to obtain
liquidity through other sources of debt or equity. Although the Company believes
that it has the ability to raise such additional liquidity, there can be no
assurances that the Company will be able to raise debt or equity capital through
other sources, or if obtained, that it will be on terms acceptable to the
Company. The incurring or assumption by the Company of additional indebtedness
could result in the issuance of additional equity and/or debt which could have a
dilutive effect on current shareholders and a significant effect on the
Company's operations.

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                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                           PART II - OTHER INFORMATION

ITEM 1.  OTHER INFORMATION

         The Company is party to certain claims, suits and complaints, whether
arising from the acts or omissions of its employees, providers or others, which
arise in the ordinary course of business. The Company has established reserves
at June 30, 2001 for the estimated amounts which might be recovered from the
Company as a result of all outstanding legal proceedings. In the opinion of
management, the ultimate resolution of these pending legal proceedings is not
expected to have a material adverse effect on the Company's financial position,
results of operations or liquidity.

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                  RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2.  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 11        Computation of Net Income Per Share

                  Exhibit 99.18     Press Release dated July 25, 2001

         (b)      Current Reports on Form 8-K

                  The Company did not file any Current Reports on Form 8-K
                  during the quarter ended June 30, 2001.



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                                   SIGNATURES

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

                                       RAMSAY YOUTH SERVICES, INC.
                                       Registrant



                                       /s/ MARCIO C. CABRERA
                                       -----------------------------------
                                       Marcio C. Cabrera
                                       Executive V.P. and
                                       Chief Financial Officer



Date:  August 8, 2001



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