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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

|    |  |                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|[X] |  | Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended June 30, 2003 or

|      |  |                                                                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|[   ] |  | Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
_______ to _______

Commission file number 0-20488

PSYCHIATRIC SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)


|                                                                         |  |                                                
|------------------------------------------------------------------------ |  | -----------------------------------------------
|DELAWARE
(State or Other Jurisdiction of Incorporation or
 Organization) |  | 23-2491707
(I.R.S. Employer Identification No.)

|                                                                                                              
|--------------------------------------------------------------------------------------------------------------
|113 Seaboard Lane, Suite C-100
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)

|                                                                   
|-------------------------------------------------------------------
|(615) 312-5700
(Registrants Telephone Number, Including Area Code)

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

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

As of August 11, 2003, 8,606,709 shares of the registrants common stock
were outstanding.





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TABLE OF CONTENTS



|                                      |                                                                                               |                                                                  |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION        
|                                      | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                      |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                                      |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME                     
|                                      |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                                      |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|                                      | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                      | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                          
|                                      | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION          
|                                      | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                      | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                      | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                           
|EX-31.1 CEO SECTION 302 CERTIFICATION
|EX-31.2 PFO SECTION 302 CERTIFICATION
|EX-32.1 SECTION 906 CERTIFICATIONS   



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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.

TABLE OF CONTENTS

|                                                                                                                  |  |  |    | 
|----------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I. FINANCIAL INFORMATION                                                                                     |  |  |    | 
|Item 1. Financial Statements                                                                                      |  |  |    | 
|Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and
December 31, 2002                       |  |  | 1  | 
|Condensed Consolidated Statements of Income for the three and six months ended
June 30, 2003 and 2002 (Unaudited) |  |  | 2  | 
|Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2003 and 2002 (Unaudited)       |  |  | 3  | 
|Notes to Condensed Consolidated Financial Statements (Unaudited)                                                  |  |  | 4  | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations                     |  |  | 16 | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                                |  |  | 25 | 
|Item 4. Controls and Procedures                                                                                   |  |  | 25 | 
|PART II. OTHER INFORMATION                                                                                        |  |  |    | 
|Item 1. Legal Proceedings                                                                                         |  |  | 26 | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                       |  |  | 26 | 
|Item 6. Exhibits and Reports on Form 8-K                                                                          |  |  | 26 | 





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PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




PSYCHIATRIC SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |   |  | 
|------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | ------ | ----------- | - | ------------ | ------ | - |  | 
|                                                                                                                          |                                                                                                                                                      |   |         |        | June 30,    |   | December 31,
|                                                                                                                          |                                                                                                                                                      |   |         |        | 2003        |   | 2002        
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |             
|                                                                                                                          |                                                                                                                                                      |   |         |        | (Unaudited) |   |              |        |  
|ASSETS                                                                                                                    |                                                                                                                                                      |   |         |        |             |   |              |       
|Current assets:                                                                                                           |                                                                                                                                                      |   |         |        |             |   |              |       
|                                                                                                                          | Cash                                                                                                                                                 |   | $       | 9,912  |             |   | $            | 2,392  |  
|                                                                                                                          | Accounts receivable, less allowance for doubtful accounts of
$9,558 (unaudited) and $5,284, respectively                                             |   |         | 58,129 |             |   |              | 19,473 |  
|                                                                                                                          | Prepaids and other                                                                                                                                   |   |         | 8,699  |             |   |              | 2,219  |  
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |  
|Total current assets                                                                                                      |                                                                                                                                                      |   | 76,740  |        |             |   | 24,084       |       
|Property and equipment, net of accumulated depreciation                                                                   |                                                                                                                                                      |   | 134,165 |        |             |   | 33,547       |       
|Cost in excess of net assets acquired, net                                                                                |                                                                                                                                                      |   | 51,119  |        |             |   | 28,822       |       
|Contracts, net                                                                                                            |                                                                                                                                                      |   | 3,322   |        |             |   | 607          |       
|Other assets                                                                                                              |                                                                                                                                                      |   | 17,190  |        |             |   | 3,078        |       
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |  
|Total assets                                                                                                              |                                                                                                                                                      | $ | 282,536 |        |             | $ | 90,138       |       
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                      |                                                                                                                                                      |   |         |        |             |   |              |       
|Current liabilities:                                                                                                      |                                                                                                                                                      |   |         |        |             |   |              |       
|                                                                                                                          | Accounts payable                                                                                                                                     |   | $       | 14,100 |             |   | $            | 3,338  |  
|                                                                                                                          | Salaries and benefits payable                                                                                                                        |   |         | 11,386 |             |   |              | 4,825  |  
|                                                                                                                          | Other accrued liabilities                                                                                                                            |   |         | 16,758 |             |   |              | 6,482  |  
|                                                                                                                          | Revolving line of credit                                                                                                                             |   |         |       |             |   |              | 5,383  |  
|                                                                                                                          | Current portion of long-term debt                                                                                                                    |   |         | 761    |             |   |              | 1,687  |  
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |  
|Total current liabilities                                                                                                 |                                                                                                                                                      |   | 43,005  |        |             |   | 21,715       |       
|Long-term debt, less current portion                                                                                      |                                                                                                                                                      |   | 172,507 |        |             |   | 36,752       |       
|Deferred tax liability                                                                                                    |                                                                                                                                                      |   | 1,969   |        |             |   | 258          |       
|Other liabilities                                                                                                         |                                                                                                                                                      |   | 2,460   |        |             |   | 864          |       
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |  
|Total liabilities                                                                                                         |                                                                                                                                                      |   | 219,941 |        |             |   | 59,589       |       
|Series A convertible preferred stock, $0.01 par value, 6,000 shares
authorized; 4,545 shares outstanding at June 30, 2003 |                                                                                                                                                      |   | 25,020  |        |             |   |             |       
|Redeemable common stock                                                                                                   |                                                                                                                                                      |   | 3,609   |        |             |   |             |       
|Stockholders equity:                                                                                                     |                                                                                                                                                      |   |         |        |             |   |              |       
|                                                                                                                          | Common stock, $0.01 par value, 48,000 shares authorized;
8,649 and 7,739 issued and outstanding at June 30, 2003
and December 31, 2002, respectively |   |         | 83     |             |   |              | 77     |  
|                                                                                                                          | Additional paid-in capital                                                                                                                           |   |         | 38,946 |             |   |              | 35,008 |  
|                                                                                                                          | Notes receivable from stockholders                                                                                                                   |   |         | (804   | )           |   |              | (259   | )
|                                                                                                                          | Accumulated deficit                                                                                                                                  |   |         | (4,259 | )           |   |              | (4,277 | )
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |  
|Total stockholders equity                                                                                                |                                                                                                                                                      |   | 33,966  |        |             |   | 30,549       |       
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |  
|Total liabilities and stockholders equity                                                                                |                                                                                                                                                      | $ | 282,536 |        |             | $ | 90,138       |       
|                                                                                                                          |                                                                                                                                                      |   |         |        |             |   |              |        |  

See notes to condensed consolidated financial statements

1



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PSYCHIATRIC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except for per share amounts)

|                                                   |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |       | 
|-------------------------------------------------- | ----------------------------------------- | - | --------------------------- | ----- | ------------------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                   |                                           |   | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                                   |                                           |   |                             |       |                          
|                                                   |                                           |   | 2003                        |       | 2002                      |   | 2003   |       | 2002
|                                                   |                                           |   |                             |       |                           |   |        |       |     
|Revenue                                            |                                           | $ | 57,438                      |       |                           | $ | 22,617 |       |      | $ | 94,532 |       |  | $ | 45,803 |      
|Salaries, wages and employee benefits              |                                           |   | 28,736                      |       |                           |   | 13,524 |       |      |   | 46,522 |       |  |   | 27,494 |      
|Professional fees                                  |                                           |   | 6,876                       |       |                           |   | 3,279  |       |      |   | 11,328 |       |  |   | 6,387  |      
|Supplies                                           |                                           |   | 2,993                       |       |                           |   | 1,133  |       |      |   | 4,683  |       |  |   | 2,232  |      
|Rentals and leases                                 |                                           |   | 534                         |       |                           |   | 187    |       |      |   | 782    |       |  |   | 377    |      
|Other operating expenses                           |                                           |   | 9,965                       |       |                           |   | 1,682  |       |      |   | 17,124 |       |  |   | 3,256  |      
|Provision for bad debts                            |                                           |   | 1,336                       |       |                           |   | 420    |       |      |   | 2,657  |       |  |   | 1,135  |      
|Depreciation and amortization                      |                                           |   | 1,068                       |       |                           |   | 412    |       |      |   | 1,735  |       |  |   | 797    |      
|Interest expense, net                              |                                           |   | 2,386                       |       |                           |   | 1,123  |       |      |   | 3,797  |       |  |   | 2,492  |      
|Loss on refinancing long-term debt                 |                                           |   | 4,586                       |       |                           |   |       |       |      |   | 4,586  |       |  |   |       |      
|Change in valuation of put warrants                |                                           |   |                            |       |                           |   |       |       |      |   | 960    |       |  |   |       |      
|Change in reserve on stockholder notes             |                                           |   | (84                         | )     |                           |   |       |       |      |   | (545   | )     |  |   |       |      
|                                                   |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|                                                   |                                           |   | 58,396                      |       |                           |   | 21,760 |       |      |   | 93,629 |       |  |   | 44,170 |      
|Income before income taxes                         |                                           |   | (958                        | )     |                           |   | 857    |       |      |   | 903    |       |  |   | 1,633  |      
|                                                   | (Benefit from) provision for income taxes |   |                             | (364  | )                         |   |        |      |      |   |        | 708   |  |   |        | 21    | 
|                                                   |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|Net (loss) income                                  |                                           | $ | (594                        | )     |                           | $ | 857    |       |      | $ | 195    |       |  | $ | 1,612  |      
|Accrued preferred stock dividends                  |                                           |   | 177                         |       |                           |   |       |       |      |   | 177    |       |  |   |       |      
|                                                   |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|Net (loss) income available to common stockholders |                                           | $ | (771                        | )     |                           | $ | 857    |       |      | $ | 18     |       |  | $ | 1,612  |      
|                                                   |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|Earnings per common share:                         |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|                                                   | Basic                                     |   | $                           | (0.09 | )                         |   | $      | 0.17  |      |   | $      | 0.00  |  |   | $      | 0.32  | 
|                                                   |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|                                                   | Diluted                                   |   | $                           | (0.09 | )                         |   | $      | 0.16  |      |   | $      | 0.00  |  |   | $      | 0.30  | 
|                                                   |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|Shares used in computing per share amounts:        |                                           |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|                                                   | Basic                                     |   |                             | 8,154 |                           |   |        | 4,993 |      |   |        | 7,947 |  |   |        | 4,992 | 
|                                                   | Diluted                                   |   |                             | 8,154 |                           |   |        | 5,834 |      |   |        | 8,420 |  |   |        | 5,832 | 

See notes to condensed consolidated financial statements

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PSYCHIATRIC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

|                                                                                  |                                                  |                           |         |                           |         |      |        |       |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------- | ------- | ------------------------- | ------- | ---- | ------ | ----- | ------ | -
|                                                                                  |                                                  |                           |         | Six Months Ended June 30,
|                                                                                  |                                                  |                           |         | 2003                      |         | 2002
|                                                                                  |                                                  |                           |         |                           |         |     
|Operating Activities                                                              |                                                  |                           |         |                           |         |      |        |      
|Net income                                                                        |                                                  | $                         | 195     |                           |         | $    | 1,612  |      
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                  |                           |         |                           |         |      |        |      
|                                                                                  | Depreciation and amortization                    |                           |         | 1,735                     |         |      |        | 797   |       
|                                                                                  | Provision for doubtful accounts                  |                           |         | 2,657                     |         |      |        | 1,135 |       
|                                                                                  | Accretion of detachable warrants                 |                           |         | 149                       |         |      |        | 520   |       
|                                                                                  | Non-cash stock compensation expense              |                           |         | 9                         |         |      |        | 109   |       
|                                                                                  | Amortization of loan costs                       |                           |         | 328                       |         |      |        | 108   |       
|                                                                                  | Loss
on refinancing long-term debt               |                           |         | 4,586                     |         |      |        |      |       
|                                                                                  | Change in deferred tax liability                 |                           |         | 500                       |         |      |        |      |       
|                                                                                  | Change in valuation of put warrants              |                           |         | 960                       |         |      |        |      |       
|                                                                                  | Change in reserve on stockholder notes           |                           |         | (545                      | )       |      |        |      |       
|                                                                                  | Long-term interest accrued                       |                           |         | 124                       |         |      |        | 162   |       
|                                                                                  | Changes in operating assets and liabilities:     |                           |         |                           |         |      |        |       |       
|                                                                                  |                                                  | Accounts receivable       |         |                           | (10,299 | )    |        |       | (1,874 | )
|                                                                                  |                                                  | Prepaids and other assets |         |                           | 730     |      |        |       | (115   | )
|                                                                                  |                                                  | Accounts payable          |         |                           | 1,511   |      |        |       | 919    |  
|                                                                                  |                                                  | Accrued liabilities       |         |                           | 1,516   |      |        |       | (631   | )
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|Net cash provided by operating activities                                         |                                                  |                           | 4,156   |                           |         |      | 2,742  |      
|Investing Activities:                                                             |                                                  |                           |         |                           |         |      |        |      
|Cash paid for acquisitions, net of cash acquired                                  |                                                  |                           | (93,874 | )                         |         |      |       |      
|Capital purchases of property and equipment                                       |                                                  |                           | (1,196  | )                         |         |      | (458   | )    
|Change in net assets of discontinued operations                                   |                                                  |                           |        |                           |         |      | 31     |      
|Other assets                                                                      |                                                  |                           | 24      |                           |         |      | (56    | )    
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|Net cash used in investing activities                                             |                                                  |                           | (95,046 | )                         |         |      | (483   | )    
|Financing Activities:                                                             |                                                  |                           |         |                           |         |      |        |      
|Net principal borrowings (payments) on long-term debt,                            |                                                  |                           | 77,888  |                           |         |      | (1,463 | )    
|Payment of loan and issuance costs                                                |                                                  |                           | (4,481  | )                         |         |      | (372   | )    
|Proceeds from issuance of series A convertible preferred stock                    |                                                  |                           | 25,000  |                           |         |      |       |      
|Proceeds from issuance of common stock                                            |                                                  |                           | 3       |                           |         |      | 4      |      
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|Net cash provided by (used in) financing activities                               |                                                  |                           | 98,410  |                           |         |      | (1,831 | )    
|Net increase in cash                                                              |                                                  |                           | 7,520   |                           |         |      | 428    |      
|Cash at beginning of the period                                                   |                                                  |                           | 2,392   |                           |         |      | 1,262  |      
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|Cash at end of the period                                                         |                                                  | $                         | 9,912   |                           |         | $    | 1,690  |      
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|Significant Non-cash Transactions:                                                |                                                  |                           |         |                           |         |      |        |      
|Issuance of detachable stock warrants as consideration for Bridge Loan            |                                                  | $                         |        |                           |         | $    | 299    |      
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|Issuance of common stock upon conversion of convertible debt                      |                                                  | $                         | 4,588   |                           |         | $    |       |      
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|Issuance of common stock upon exercise of warrants                                |                                                  | $                         | 2,979   |                           |         | $    |       |      
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|Effect of Acquisitions:                                                           |                                                  |                           |         |                           |         |      |        |      
|                                                                                  | Assets acquired, net of cash acquired            |                           | $       | 176,202                   |         |      | $      |      |       
|                                                                                  | Liabilities assumed                              |                           |         | (27,032                   | )       |      |        |      |       
|                                                                                  | Long-term debt issued                            |                           |         | (55,296                   | )       |      |        |      |       
|                                                                                  |                                                  |                           |         |                           |         |      |        |      
|                                                                                  | Cash paid for acquisitions, net of cash acquired |                           | $       | 93,874                    |         |      | $      |      |       
|                                                                                  |                                                  |                           |         |                           |         |      |        |      

See notes to condensed consolidated financial statements

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003



|1. |  | Recent Developments
|-- |  | -------------------

Acquisitions

On June 30, 2003, we consummated the acquisition of Ramsay Youth Services, Inc.
(Ramsay), a public company that traded on the Nasdaq SmallCap Market under
the symbol RYOU, for approximately $85.0 million, consisting of $56.0 million
in cash, or $5.00 per share, $26.0 million in net assumed debt that was repaid
in connection with the acquisition and $3.0 million in fees and expenses. We
financed the acquisition of Ramsay with proceeds from the issuance of $150
million in senior subordinated notes and an
issuance of $12.5 million of our series A convertible preferred stock. The 11
owned or leased inpatient behavioral health care facilities we acquired from
Ramsay, which have an aggregate of 1,250 beds, are located primarily in the
Southeastern region of the United States with locations also in Michigan,
Missouri and Utah. In the acquisition, we also assumed 10 contracts to manage
behavioral health care facilities for government agencies in Florida, Georgia
and Puerto Rico.

In April 2003, we consummated the acquisition of six inpatient behavioral
health care facilities from The Brown Schools, Inc. for $63.0 million in cash.
The six facilities, which have an aggregate of 879 licensed beds, are located
in Austin, San Antonio and San Marcos, Texas; Charlottesville, Virginia;
Colorado Springs, Colorado; and Tulsa, Oklahoma. The Brown Schools facilities
(The Brown Schools) offer a full continuum of care for troubled adolescents
and adults. We financed the acquisition of The Brown Schools with proceeds from
the issuance of $12.5 million of our series A convertible preferred stock and
an increase in funding under our senior credit facility.

The Brown Schools and Ramsay are both leading providers of behavioral health
care treatment programs focused primarily on children and adolescents. The
Brown Schools and Ramsay operate acute behavioral hospitals and residential
treatment centers (RTCs) through a network of owned, leased or state-owned
facilities. Both businesses have a national presence and referral base, have
strong relationships with payors and have demonstrated favorable operating and
financial results. Our business has historically provided acute behavioral
health care services to adults. The acquisitions of The Brown Schools and
Ramsay broaden our core behavioral health care business.

Financing

On June 30, 2003, we issued $150 million in senior subordinated notes, which
are fully and unconditionally guaranteed on a senior subordinated basis by
substantially all of our existing operating subsidiaries. Proceeds from the
issuance of the senior subordinated notes and the issuance of $12.5 million in
series A convertible preferred stock were used to finance the acquisition of
Ramsay and pay down substantially all of our long-term debt. Interest on the
senior subordinated notes accrues at the rate of 10.625% per annum and is
payable semi-annually in arrears on June 15 and December 15, commencing on
December 15, 2003. The senior subordinated notes will mature on June 15, 2013.

On April 1, 2003, concurrent with the acquisition of The Brown Schools, we
received $12.5 million from the private placement of 2,272,727 shares of our
series A convertible preferred stock with affiliates of Oak Investment Partners
and Salix Ventures and with Brown Brothers Harriman & Co.s The 1818 Mezzanine
Fund II, L.P. (The 1818 Fund). These investors purchased an additional
2,272,727 shares of our series A convertible preferred stock for $12.5 million
on June 19, 2003. The proceeds were used to acquire The Brown Schools and
Ramsay. The investors are previous investors in the Company, with Oak
Investment Partners and Salix Ventures (or related entities) being among our
co-founders. Representatives of Oak Investment Partners, Salix Ventures and Brown Brothers Harriman &
Co. currently serve on our Board of Directors.
Each share of series A convertible preferred stock is convertible into one
share of our common stock. The impact of the series A convertible preferred
stock on diluted earnings per share is calculated using the if-converted
method.

In connection with the closing of the sale of our senior subordinated notes,
our senior credit facility with our senior lender, CapitalSource
Finance LLC (CapSource) was amended and restated to increase our senior
secured revolver to $50.0 million from $28.0 million and refinance $36.0
million in term loans with proceeds from the sale of the senior subordinated
notes. The term loans remain outstanding with a balance of $17.0 million. Our
amended and restated senior secured credit facility currently consists of
approximately $17.0 million of term loans and a $50.0 million revolving working
capital line of credit. Our credit facility is secured by substantially all of our assets and
the stock of our existing operating subsidiaries. The term loans accrue
interest at the Citibank, N.A. prime rate plus 4.5% subject to a floor of 8.75%
and are due in November 2003. The revolving line of credit accrues interest at
the Citibank, N.A. prime rate plus 2% subject to a floor of 6.25% and is due in
June 2006. At June 30, 2003, the effective interest rate under the revolving
line of credit was 6.59%. Until the maturity date, we may borrow, repay and
re-borrow an amount not to exceed the lesser of $50.0 million or the borrowing
base (as defined in the amended and restated credit facility). As of June 30,
2003, we had $50.0 million available under the revolving line of credit under
our amended and restated credit facility. Under the revolving line of credit,
all of our collections, except for Medicare and Medicaid payments, are
deposited into lockbox accounts controlled by CapSource. The funds deposited in
the lockboxes are returned to us on a daily basis. Prior to amending and
restating the senior credit facility, funds deposited in the lockboxes were
applied to outstanding borrowings on a daily basis. As a result, the
outstanding

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

borrowings under the revolving line of credit are classified as short-term as
of December 31, 2002 and all periods prior to June 30, 2003. We must pay on a
monthly basis an unused fee in the amount of 0.5% per annum on the unused
portion of our amended and restated credit facility. Such fees were
approximately $28,000 for the six months ended June 30, 2003.

Our amended and restated credit facility contains customary covenants which
include: (1) a specified monthly patient census for any owned, operated or
leased facilities; (2) a limitation on capital expenditures, sales of assets,
mergers, changes of ownership, new principal lines of business, indebtedness,
dividends and redemptions; and (3) various financial covenants. In addition,
the amended and restated credit facility provides CapSource with a right of
first refusal to provide additional debt financing to us. As of June 30, 2003,
we were in compliance with all debt covenant requirements. If we violate one or
more of these covenants, amounts outstanding under the amended and restated
credit facility could become immediately payable and additional borrowings
could be restricted. As of June 30, 2003, no balance was outstanding under the
revolver portion of our amended and restated senior credit facility.

On April 1, 2003, our senior credit facility was expanded to approximately
$81.0 million with the increase of our revolving credit facility to $28.0
million from $17.5 million and a new $36.0 million term loan. We borrowed
approximately $52.2 million during April 2003, including the $36.0 million term
loan and $16.2 million under the revolving line of credit, to partially fund
our acquisition of The Brown Schools. The revolving line of credit and new
$36.0 million term loan were repaid on June 30, 2003 with proceeds from the
issuance of our senior subordinated notes.

Other

On May 16, 2003, The 1818 Fund exercised its stock purchase warrant to purchase
372,412 shares of our common stock. Deducting the exercise price of $0.01 per
share based on the closing price of our common stock on May 15, 2003, The 1818
Fund received 372,039 shares of our common stock from the exercise of the
warrant. In addition, The 1818 Fund provided us with a written consent to waive
its ability to require that we repurchase the warrants for cash effective April
1, 2003. Thus, we are no longer required to record non-cash expense for
increases in the fair market value of our common stock. In certain
circumstances, The 1818 Fund has the right to require that we repurchase the
372,039 shares of our common stock that The 1818 Fund received upon the
exercise of the stock purchase warrant.

In connection with our acquisition of
Sunrise Behavioral Health, Ltd. in May
2000, we issued subordinated convertible notes in the amount of $3.6 million.
The principal amount of these convertible notes and the interest thereon was
converted into 537,908 shares of our common stock in April and May 2003, based
on a conversion price of $8.53 per share.



|2. |  | Basis of Presentation
|-- |  | ---------------------

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States for audited financial statements. The
condensed consolidated balance sheet at December 31, 2002 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position of
Psychiatric Solutions, Inc. (Psychiatric Solutions or the Company) have
been included. The majority of our expenses are cost of
revenue items. Operating results for the six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the full year.
For further information, refer to the financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 filed on March 27, 2003.



|3. |  | Earnings Per Share
|-- |  | ------------------

Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share, requires dual presentation of basic and diluted earnings per share by
entities with complex capital structures. Basic earnings per share include no
dilution and are computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of the entity. We have calculated
our earnings per share in accordance with SFAS No. 128 for all periods
presented.

The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

|                                          |                                                                     |       |       |                             |   |                           |      |      |  |       |      |    |  |       |       |       |  | 
|----------------------------------------- | ------------------------------------------------------------------- | ----- | ----- | --------------------------- | - | ------------------------- | ---- | ---- |  | ----- | ---- | -- |  | ----- | ----- | ----- |  | 
|                                          |                                                                     |       |       | Three months ended June 30, |   | Six months ended June 30,
|                                          |                                                                     |       |       |                             |   |                          
|                                          |                                                                     |       |       | 2003                        |   | 2002                      |      | 2003 |  | 2002 
|                                          |                                                                     |       |       |                             |   |                           |      |      |  |      
|Numerator:                                |                                                                     |       |       |                             |   |                           |      |      |  |       |      |    |  |       |       |      
|                                          | Net
(loss) income available to common stockholders                  |       | $     | (771                        | ) |                           | $    | 857  |  |       | $    | 18 |  |       | $     | 1,612 | 
|                                          | Add: Interest on convertible notes                                  |      |       |                             |   | 81                        |      |      |  |      |      |    |  | 162  
|                                          |                                                                     |       |       |                             |   |                           |      |      |  |       |      |    |  |       |       |      
|                                          | (Loss) earnings used in computing diluted earnings per common share | $     | (771  | )                           |   |                           | 938  |      |  |       | 18   |    |  | $     | 1,774
|Denominator:                              |                                                                     |       |       |                             |   |                           |      |      |  |       |      |    |  |       |       |      
|                                          | Weighted average shares outstanding for basic earnings per share    | 8,154 |       |                             |   | 4,993                     |      |      |  | 7,947 |      |    |  | 4,992 |      
|                                          | Effects of dilutive stock options and warrants outstanding          |      |       |                             |   | 419                       |      |      |  | 473   |      |    |  | 418   |      
|                                          | Effect of dilutive convertible debt outstanding                     |      |       |                             |   | 422                       |      |      |  |      |      |    |  | 422   |      
|                                          |                                                                     |       |       |                             |   |                           |      |      |  |       |      |    |  |       |       |       | 
|                                          | Shares used in computing diluted earnings per common share          | 8,154 |       |                             |   | 5,834                     |      |      |  | 8,420 |      |    |  | 5,832 |      
|                                          |                                                                     |       |       |                             |   |                           |      |      |  |       |      |    |  |       |       |       | 
|(Loss) earnings per common share, basic   |                                                                     | $     | (0.09 | )                           |   | $                         | 0.17 |      |  | $     | 0.00 |    |  | $     | 0.32  |      
|                                          |                                                                     |       |       |                             |   |                           |      |      |  |       |      |    |  |       |       |       | 
|(Loss) earnings per common share, diluted |                                                                     | $     | (0.09 | )                           |   | $                         | 0.16 |      |  | $     | 0.00 |    |  | $     | 0.30  |      
|                                          |                                                                     |       |       |                             |   |                           |      |      |  |       |      |    |  |       |       |       | 

The computation of diluted earnings per share for the three months ended June
30, 2003 does not include accrued dividends on series A convertible preferred
stock of $177,000, interest on convertible notes of $43,000, approximately
475,000 shares representing potentially dilutive increments of stock options
and warrants outstanding, approximately 225,000 shares representing the
weighted average of convertible debt outstanding during the period and
approximately 2,572,000 shares representing the weighted average of series A
convertible preferred stock outstanding during the period as the effects would
have been antidilutive. The computation of diluted earnings per share for the
six months ended June 30, 2003 does not include accrued dividends on series A
convertible preferred stock of $177,000, interest on convertible notes of
$124,000, approximately 323,000 shares representing the weighted average of
convertible debt outstanding during the period and approximately 1,286,000
shares representing the weighted average of series A convertible preferred
stock outstanding during the period as the effects would have been
antidilutive.



|4. |  | Stock-Based Compensation
|-- |  | ------------------------

We account for our stock option plans using the intrinsic value method in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Pursuant to APB Opinion No. 25, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. We do not plan to adopt the
fair-value method of accounting for stock options at the current time.

Pro forma information regarding interim net income and earnings per share is
required by SFAS No. 148, and has been determined as if we had accounted for
our employee stock options under the fair value method. The fair value of
options was estimated using the Black-Scholes option pricing model.

Option valuation models require the input of highly subjective assumptions.
Because the our employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of our employee stock options.

For purposes of pro forma disclosure, the estimated fair value of the options
at grant date is amortized to expense over the options vesting period. The pro
forma information follows (in thousands, except per share amounts):

|                                                      |  |                                     |       |                                   |  |      |      |      |  |   |       |   |  |   |       | 
|----------------------------------------------------- |  | ----------------------------------- | ----- | --------------------------------- |  | ---- | ---- | ---- |  | - | ----- | - |  | - | ----- | 
|                                                      |  | For the three months ended June 30, |       | For the six months ended June 30,
|                                                      |  |                                     |       |                                  
|                                                      |  | 2003                                |       | 2002                              |  | 2003 |      | 2002
|                                                      |  |                                     |       |                                   |  |      |      |     
|Net income available to common stockholders           |  | $                                   | (771  | )                                 |  | $    | 857  |      |  |   | 18    |   |  | $ | 1,612 | 
|Pro forma compensation expense from stock options     |  |                                     | 37    |                                   |  |      | 5    |      |  | $ | 62    |   |  |   | 72    | 
|                                                      |  |                                     |       |                                   |  |      |      |      |  |   |       |   |  |   |       | 
|Pro forma net income available to common stockholders |  | $                                   | (808  | )                                 |  | $    | 852  |      |  | $ | (44   | ) |  | $ | 1,540 | 
|                                                      |  |                                     |       |                                   |  |      |      |      |  |   |       |   |  |   |       | 
|Basic pro forma earnings per share                    |  | $                                   | (0.10 | )                                 |  | $    | 0.17 |      |  | $ | (0.01 | ) |  | $ | 0.31  | 
|                                                      |  |                                     |       |                                   |  |      |      |      |  |   |       |   |  |   |       | 
|Diluted pro forma earnings per share                  |  | $                                   | (0.10 | )                                 |  | $    | 0.16 |      |  | $ | (0.01 | ) |  | $ | 0.29  | 
|                                                      |  |                                     |       |                                   |  |      |      |      |  |   |       |   |  |   |       | 



|5. |  | Mergers and Acquisitions
|-- |  | ------------------------

Acquiring free-standing psychiatric facilities is a key part of our business
strategy. Because we have grown through mergers and acquisitions accounted for
as purchases, it is difficult to make meaningful comparisons between our
financial statements for the fiscal periods presented.

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

On June 30, 2003, we consummated the acquisition of Ramsay, a public company
that traded on the Nasdaq SmallCap Market under the symbol RYOU, for
approximately $85.0 million, consisting of $56.0 million in cash, or $5.00 per
share, $26.0 million in net assumed debt that was repaid in connection with the
acquisition and $3.0 million in fees and expenses. We financed the acquisition
of Ramsay with proceeds from the issuance of $150 million in senior subordinated notes and an
issuance of $12.5 million of our series A convertible preferred stock. The 11
owned or leased inpatient behavioral health care facilities we acquired from
Ramsay, which have an aggregate of 1,250 beds, are located primarily in the
Southeastern region of the United States with locations also in Michigan,
Missouri and Utah. In the acquisition, we also assumed 10 contracts to manage
behavioral health care facilities for government agencies in Florida, Georgia
and Puerto Rico.

In April 2003, we consummated the acquisition of six inpatient behavioral
health care facilities from The Brown Schools, Inc. for $63.0 million in cash.
The six facilities, which have an aggregate of 879 licensed beds, are located
in Austin, San Antonio and San Marcos, Texas; Charlottesville, Virginia;
Colorado Springs, Colorado; and Tulsa, Oklahoma. The Brown Schools offer a full
continuum of care for troubled adolescents and adults. We financed the
acquisition of The Brown Schools with proceeds from the issuance of $12.5
million of our series A convertible preferred stock and an increase in funding
under our senior credit facility.

The purchase price allocations for The
Brown Schools and Ramsay are preliminary as of June 30, 2003.

The Brown Schools and Ramsay are both leading providers of behavioral health
care treatment programs focused primarily on children and adolescents. The
Brown Schools and Ramsay operate acute behavioral hospitals and residential
treatment centers (RTCs) through a network of owned, leased or state-owned
facilities. Both businesses have a national presence and referral base, have
strong relationships with payors and have demonstrated favorable operating and
financial results. Our business has historically provided acute behavioral
health care services to adults. The acquisitions of The Brown Schools and
Ramsay broaden our core behavioral health care business.

The following represents the unaudited pro forma results of consolidated
operations as if the acquisitions of The Brown Schools and Ramsay had occurred
at the beginning of the immediate preceding period, after giving effect to
certain adjustments, including the depreciation and amortization of the assets
acquired based upon their fair values and changes in interest expense resulting
from changes in consolidated debt (in thousands, except per share data):

|                          |  |                             |        |                           |  |      |        |      |  |   |         |   |  |   |         | 
|------------------------- |  | --------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | 
|                          |  | Three months ended June 30, |        | Six months ended June 30,
|                          |  | 2003                        |        | 2002                      |  | 2003 |        | 2002
|                          |  |                             |        |                           |  |      |        |     
|Revenue                   |  | $                           | 97,716 |                           |  | $    | 58,687 |      |  | $ | 189,593 |   |  | $ | 136,977 | 
|Net (loss) income         |  | $                           | (1,605 | )                         |  | $    | 3,370  |      |  | $ | (1,531  | ) |  | $ | 9,538   | 
|Earnings per share, basic |  | $                           | (0.20  | )                         |  | $    | 0.68   |      |  | $ | (0.19   | ) |  | $ | 1.91    | 

The pro forma information given does not purport to be indicative of what our
results of operations would have been if the acquisitions had in fact occurred
at the beginning of the periods presented, and is not intended to be a
projection of the impact on future results or trends.

On July 1, 2002, we acquired all of the capital stock of Aeries Healthcare
Corporation and its wholly owned subsidiary, Aeries Healthcare of Illinois,
Inc., for $16.1 million, prior to certain adjustments. Aeries Healthcare of
Illinois, Inc. owned the assets and operations of Riveredge Hospital located
near Chicago, Illinois. The acquisition was financed in part through an
amendment to our senior credit facility.

On August 5, 2002, PMR Acquisition Corporation, a newly formed, wholly-owned
subsidiary of PMR Corporation (PMR), merged with and into Psychiatric
Solutions, Inc., whose name, subsequent to the merger, was changed to
Psychiatric Solutions Hospitals, Inc. (PSH). The surviving corporation in
the merger was PSH, which became a wholly-owned subsidiary of PMR, a publicly
traded company. In connection with the merger, PMR changed its name to
Psychiatric Solutions, Inc. and, effective August 6, 2002, the shares of
Psychiatric Solutions, Inc., formerly known as PMR Corporation, were approved
for listing on the Nasdaq National Market under the ticker symbol PSYS.
Because the former PSH stockholders own a majority of the surviving
corporations outstanding common stock, the acquisition was a reverse
acquisition and PSH was the acquiring company for accounting purposes.

During the three months ended
March 31, 2003, we finalized the
valuation of identifiable intangible assets acquired in the merger with PMR. As
a result, we reclassified approximately $3.7 million, which was the
value of contracts acquired in the PMR merger, from cost in excess of net
assets acquired to contracts.

6.     Debt

On June 30, 2003, we issued $150 million in senior subordinated notes, which
are fully and unconditionally guaranteed on a senior subordinated basis by
substantially all of our existing operating subsidiaries. Proceeds from the
issuance of the senior subordinated

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

notes and the issuance of $12.5 million inseries A convertible preferred stock were used to finance the acquisition of
Ramsay and pay down substantially all of our long-term debt. Interest on the
senior subordinated notes accrues at the rate of 10.625% per annum and is
payable semi-annually in arrears on June 15 and December 15, commencing on
December 15, 2003. The senior subordinated notes will mature on June 15, 2013.

In connection with the closing of the
sale of our senior subordinated notes on June 30, 2003,
our senior credit facility with our senior lender, CapSource, was
amended and restated to increase our senior secured revolver to $50.0 million
from $28.0 million and refinance $36.0 million in term loans with proceeds from
the sale of the senior subordinated notes. The term loans remain outstanding
with a balance of $17.0 million. Our amended and restated senior secured credit
facility currently consists of approximately $17.0 million of term loans and a
$50.0 million revolving working capital line of credit. Our
credit facility is secured by
substantially all of our assets and the stock of our existing operating
subsidiaries. The term loans accrue interest at the Citibank, N.A. prime rate
plus 4.5% subject to a floor of 8.75% and are due in November 2003. The
revolving line of credit accrues interest at the Citibank, N.A. prime rate plus
2% subject to a floor of 6.25% and is due in June 2006. At June 30, 2003, the
effective interest rate under the revolving line of credit was 6.59%. Until
the maturity date, we may borrow, repay and re-borrow an amount not to exceed
the lesser of $50.0 million or the borrowing base (as defined in the amended
and restated credit facility). As of June 30, 2003, we had $50.0 million
available under the revolving line of credit under our amended and restated
credit facility. Under the revolving line of credit, all of our collections,
except for Medicare and Medicaid payments, are deposited into lockbox accounts
controlled by CapSource. The funds deposited in the lockboxes are returned to
us on a daily basis. Prior to amending and restating the senior
credit facility, funds deposited in the lockboxes were applied to outstanding borrowings on a
daily basis. As a result, the outstanding borrowings under the revolving line
of credit are classified as short-term as of December 31, 2002 and all periods
prior to June 30, 2003. We must pay on a monthly basis an unused fee in the
amount of 0.5% per annum on the unused portion of our amended and restated
credit facility. Such fees were approximately $28,000 for the six months ended
June 30, 2003.

Our amended and restated credit facility contains customary covenants which
include: (1) a specified monthly patient census for any owned, operated or
leased facilities; (2) a limitation on capital expenditures, sales of assets,
mergers, changes of ownership, new principal lines of business, indebtedness,
dividends and redemptions; and (3) various financial covenants. In addition,
the amended and restated credit facility provides CapSource with a right of
first refusal to provide additional debt financing to us. As of June 30, 2003,
we were in compliance with all debt covenant requirements. If we violate one or
more of these covenants, amounts outstanding under the amended and restated
credit facility could become immediately payable and additional borrowings
could be restricted. As of June 30, 2003, no balance was outstanding under the
revolver portion of our amended and restated senior credit facility.

On April 1, 2003, our senior credit facility was expanded to approximately
$81.0 million with the increase of our revolving credit facility to $28.0
million from $17.5 million and a new $36.0 million term loan. We borrowed
approximately $52.2 million during April 2003, including the $36.0 million term
loan and $16.2 million under the revolving line of credit, to partially fund
our acquisition of The Brown Schools. The revolving line of credit and new
$36.0 million term loan were repaid on June 30, 2003 with proceeds from the
issuance of our senior subordinated notes.

On November 25, 2002, we entered into a mortgage loan agreement, insured by the
U.S. Department of Housing and Urban Development (HUD), to borrow $4,928,000,
secured by real estate located at Holly Hill Hospital in Raleigh, NC. Interest
accrues on the HUD loan at 5.95% and principal and interest are payable in 420
monthly installments through December 2037. We used proceeds from the loan to
replace $4,385,000 of our senior term loan with CapSource, pay certain
refinancing costs, and fund required escrow amounts for future improvements to
the property.

In connection with the acquisition of Sunrise Behavioral Health, Ltd. in May
2000, we issued subordinated convertible notes in the amount of $3.6 million.
The principal amount of these convertible notes and the interest thereon
were converted into 537,908 shares of our common stock in April and May 2003, based
on a conversion price of $8.53 per share.

We also issued two promissory notes totaling $4.5 million in connection with
our acquisitions of three facilities in 2001. At June 30, 2003, one note with a
current principal balance of $1.0 million remained outstanding. This note
accrues interest at 9% per annum and is due June 30, 2005. Among other
customary covenants, the notes contains cross default covenants triggered by a
default of any other indebtedness of at least $1.0 million. We were in
compliance with these covenants as of June 30, 2003.

On June 28, 2002, we entered into a securities purchase
agreement with The 1818 Fund to issue up to $20 million of senior subordinated
notes with detachable nominal warrants. At closing on June 28, 2002, a total of
$10 million of the senior subordinated notes were issued. On June 30, 2003, we
repaid principal of $10 million, accrued interest and a prepayment penalty of
3% to The 1818 Fund with proceeds from our issuance of senior subordinated
notes, and we no longer have the ability to borrow under the
securities purchase agreement with The 1818 Fund.

In connection with the issuance of the
senior subordinated notes to The 1818
Fund, we issued detachable stock purchase warrants for the purchase of 372,412
shares of our common stock at an exercise price of $.01 per share. Also, we
provided The 1818 Fund with

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

the ability to require us to repurchase their
warrants or the common stock acquired upon exercise of the warrants at fair
market value for cash. As discussed in Note 1, The 1818 Fund exercised its
stock purchase warrant and received 372,039 shares of our common stock on May
16, 2003. Because The 1818 Fund had the ability to require us to repurchase the
warrants for cash, the warrants constituted a derivative that required changes
in value of the warrants to be recorded as an increase or decrease to our
earnings. In connection with the exercise of the warrants, The 1818 Fund
provided us with a written consent to waive its ability to require that we
repurchase the warrants for cash effective April 1, 2003. As such, we are no
longer required to record non-cash expense for increases in the fair market
value of our common stock.



|7. |  | Mezzanine Equity and
Stockholders Equity
|-- |  | -----------------------------------------

As discussed in Note 1, we issued 4,545,454 shares of our series A convertible
preferred stock during the quarter ended June 30, 2003. Each share of series A
convertible preferred stock is convertible into one share of our common stock.
Holders of the series A convertible preferred stock are entitled to receive
pay-in-kind dividends, compounded quarterly, equal to 5% per share of the
original share price through March 31, 2005. Thereafter, pay-in-kind dividends
will compound quarterly at 7% per share of the original share price. Because
we may be required to redeem the series A convertible preferred stock upon
certain change of control events that may not be within our control, the series
A convertible preferred stock has been classified outside of our permanent
stockholders equity.

As discussed in Notes 1 and 6, we issued 372,039 shares of our common stock to
The 1818 Fund upon the exercise of The 1818 Funds stock purchase warrant.
Because The 1818 Fund maintains the right to demand redemption of these shares,
we have classified the shares outside of our permanent stockholders equity.
Furthermore, the redemption feature of this issuance of common stock to The
1818 Fund requires that we record the value of those shares at their redemption
amount, with any changes in redemption amount reflected as a component of
stockholders equity.

As a part of the merger with PMR, we became the holder of promissory notes with
certain stockholders of PMR. Because a certain provision of the stockholder
notes allows the stockholders to repay those notes with our common stock at the
higher of a stated price or market value of the stock, the notes have been
classified in our stockholders equity. As the stated price was higher than the
market value at December 31, 2002, we recorded a reserve on the promissory
notes equal to the difference between the stated price and market value. Due
to the increase in the market price of our common stock during the six months
ended June 30, 2003, we released $545,000 of the reserve on the stockholder
notes. At June 30, 2003, we do not maintain a reserve balance on our
stockholder notes because the market value exceeds the stated price. We may
have to establish reserves in the future should the market value decrease below
the stated price.



|8. |  | Income Taxes
|-- |  | ------------

During prior years, we generated net operating loss (NOL) carryforwards for
federal and state income tax purposes. As a result of the NOL carryforwards, we
have not recorded a provision for income tax for the period ended
June 30,
2002. During the fourth quarter of 2002, we released our valuation allowance
and recorded a corresponding income tax benefit for the twelve months ended
December 31, 2002. The provision recorded for the six months ended June 30,
2003 reflects an effective tax rate of approximately 78% due to the
non-deductible charge related to the valuation of the put warrants discussed in
Note 6.



|9. |  | Disclosures About Reportable Segments
|-- |  | -------------------------------------

In accordance with the criteria of SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information,we determined that, as of June 30, 2003,
we operate two reportable segments: (1) Psychiatric Unit Management, and (2)
Freestanding Psychiatric Facilities. The Psychiatric Unit Management division
provides psychiatric management and development services to behavioral health
units in hospitals and clinics. As of June 30, 2003, our
Psychiatric Unit Management division managed 47 behavioral health units
in hospitals and clinics in 14 states. The Freestanding Psychiatric Facilities
division includes owned, leased or managed psychiatric facilities. As
of June 30, 2003, our Freestanding Psychiatric Facilities
division owned or leased 22 free-standing psychiatric facilities in
12 states and managed 10 psychiatric facilities for government
agencies. Activities classified as Other in the
following schedule relate primarily to unallocated home office items. Our third
quarter report on Form 10-Q will present the impact of the Ramsay acquisition
on our reportable segments, as Ramsay had no effect on current results of
operations for the three and six months ended June 30, 2003. At June 30, 2003,
the assets of Ramsays 11 owned or leased psychiatric facilities
and 10 managed psychiatric
facilities were included in our Freestanding Psychiatric Facilities segment.

The following is a financial summary by business segment for the periods
indicated. Adjusted EBITDA is defined as net (loss) income before interest
expense (net of interest income), income taxes, depreciation, amortization,
stock compensation and other items included in the caption labeled Other
expenses. While you should not consider adjusted EBITDA in isolation or as a
substitute for net income, operating cash flows or other cash flow statement
data determined in accordance with accounting principles generally accepted in
the United States, we understand that adjusted EBITDA is a commonly used as an
analytical indicator within the health care industry and also serves as a
measure of leverage capacity and debt service ability. In addition, we use
adjusted EBITDA as the measure of operating profitability of our segments and
their components. Adjusted EBITDA, as presented, may not be comparable to
similarly titled measures of other companies (in thousands):

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

|                                 |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |       |  
|-------------------------------- | -------------------------------------- | - | ------------ | - | ----------- | - | --------- | - | ------------ | - | ------- | ----- | - | - | ------- | ----- | -
|                                 |                                        |   | Freestanding |   | Psychiatric |   |           |   |              |   |         |       |  
|                                 |                                        |   | Psychiatric  |   | Unit        |   | Corporate |   |              |   |        
|                                 |                                        |   | Facilities   |   | Management  |   | and Other |   | Consolidated
|                                 |                                        |   |              |   |             |   |           |   |             
|Three months ended June 30, 2003 |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|Revenue                          |                                        | $ | 44,972       |   |             | $ | 12,466    |   |              | $ |        |       |   | $ | 57,438  |      
|Adjusted EBITDA                  |                                        | $ | 6,466        |   |             | $ | 2,119     |   |              | $ | (1,582  | )     |   | $ | 7,003   |      
|Interest expense                 |                                        |   | 1,364        |   |             |   | 22        |   |              |   | 1,000   |       |   |   | 2,386   |      
|Benefit from income taxes        |                                        |   |             |   |             |   |          |   |              |   | (364    | )     |   |   | (364    | )    
|Depreciation and amortization    |                                        |   | 788          |   |             |   | 265       |   |              |   | 15      |       |   |   | 1,068   |      
|Inter-segment expenses           |                                        |   | 1,906        |   |             |   | 122       |   |              |   | (2,028  | )     |   |   |        |      
|Stock compensation expense       |                                        |   |             |   |             |   |          |   |              |   | 5       |       |   |   | 5       |      
|Other expenses:                  |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|                                 | Loss on refinance of long-term debt    |   |              |  |             |   |           |  |              |   |         | 4,586 |   |   |         | 4,586 |  
|                                 | Change in reserve on stockholder notes |   |              |  |             |   |           |  |              |   |         | (84   | ) |   |         | (84   | )
|                                 |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|                                 | Total other expenses                   |   |              |  |             |   |           |  |              |   |         | 4,502 |   |   |         | 4,502 |  
|                                 |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|Net income (loss)                |                                        | $ | 2,408        |   |             | $ | 1,710     |   |              | $ | (4,712  | )     |   | $ | (594    | )    
|                                 |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|Segment assets                   |                                        | $ | 146,065      |   |             | $ | 34,390    |   |              | $ | 102,081 |       |   | $ | 282,536 |      

|                                 |  |              |        |             |  |           |        |              |  |   |       |   |  |   |        | 
|-------------------------------- |  | ------------ | ------ | ----------- |  | --------- | ------ | ------------ |  | - | ----- | - |  | - | ------ | 
|                                 |  | Freestanding |        | Psychiatric |  |           |        |              |  |   |       |  
|                                 |  | Psychiatric  |        | Unit        |  | Corporate |        |              |  |  
|                                 |  | Facilities   |        | Management  |  | and Other |        | Consolidated
|                                 |  |              |        |             |  |           |        |             
|Three months ended June 30, 2002 |  |              |        |             |  |           |        |              |  |   |       |   |  |   |        | 
|Revenue                          |  | $            | 16,757 |             |  | $         | 5,860  |              |  | $ |      |   |  | $ | 22,617 | 
|Adjusted EBITDA                  |  | $            | 1,590  |             |  | $         | 1,446  |              |  | $ | (644  | ) |  | $ | 2,392  | 
|Interest expense                 |  |              | 662    |             |  |           | 81     |              |  |   | 380   |   |  |   | 1,123  | 
|Depreciation and amortization    |  |              | 279    |             |  |           | 92     |              |  |   | 41    |   |  |   | 412    | 
|Inter-segment expenses           |  |              | 586    |             |  |           | 127    |              |  |   | (713  | ) |  |   |       | 
|                                 |  |              |        |             |  |           |        |              |  |   |       |   |  |   |        | 
|Net income (loss)                |  | $            | 63     |             |  | $         | 1,146  |              |  | $ | (352  | ) |  | $ | 857    | 
|                                 |  |              |        |             |  |           |        |              |  |   |       |   |  |   |        | 
|Segment assets                   |  | $            | 32,504 |             |  | $         | 20,060 |              |  | $ | 2,961 |   |  | $ | 55,525 | 

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

|                               |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |       |  
|------------------------------ | -------------------------------------- | - | ------------ | - | ----------- | - | --------- | - | ------------ | - | ------- | ----- | - | - | ------- | ----- | -
|                               |                                        |   | Freestanding |   | Psychiatric |   |           |   |              |   |         |       |  
|                               |                                        |   | Psychiatric  |   | Unit        |   | Corporate |   |              |   |        
|                               |                                        |   | Facilities   |   | Management  |   | and Other |   | Consolidated
|                               |                                        |   |              |   |             |   |           |   |             
|Six months ended June 30, 2003 |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|Revenue                        |                                        | $ | 71,050       |   |             | $ | 23,482    |   |              | $ |        |       |   | $ | 94,532  |      
|Adjusted EBITDA                |                                        | $ | 10,546       |   |             | $ | 3,958     |   |              | $ | (3,059  | )     |   | $ | 11,445  |      
|Interest expense               |                                        |   | 2,270        |   |             |   | 103       |   |              |   | 1,424   |       |   |   | 3,797   |      
|Provision for income taxes     |                                        |   |             |   |             |   |          |   |              |   | 708     |       |   |   | 708     |      
|Depreciation and amortization  |                                        |   | 1,173        |   |             |   | 530       |   |              |   | 32      |       |   |   | 1,735   |      
|Inter-segment expenses         |                                        |   | 2,846        |   |             |   | 796       |   |              |   | (3,642  | )     |   |   |        |      
|Stock compensation expense     |                                        |   |             |   |             |   |          |   |              |   | 9       |       |   |   | 9       |      
|Other expenses:                |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|                               | Loss on refinance of long-term debt    |   |              |  |             |   |           |  |              |   |         | 4,586 |   |   |         | 4,586 |  
|                               | Change in valuation of put warrants    |   |              |  |             |   |           |  |              |   |         | 960   |   |   |         | 960   |  
|                               | Change in reserve on stockholder notes |   |              |  |             |   |           |  |              |   |         | (545  | ) |   |         | (545  | )
|                               |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|                               | Total other expenses                   |   |              |  |             |   |           |  |              |   |         | 5,001 |   |   |         | 5,001 |  
|                               |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|Net income (loss)              |                                        | $ | 4,257        |   |             | $ | 2,529     |   |              | $ | (6,591  | )     |   | $ | 195     |      
|                               |                                        |   |              |   |             |   |           |   |              |   |         |       |   |   |         |      
|Segment assets                 |                                        | $ | 146,065      |   |             | $ | 34,390    |   |              | $ | 102,081 |       |   | $ | 282,536 |      

|                               |  |              |        |             |  |           |        |              |  |   |        |   |  |   |        | 
|------------------------------ |  | ------------ | ------ | ----------- |  | --------- | ------ | ------------ |  | - | ------ | - |  | - | ------ | 
|                               |  | Freestanding |        | Psychiatric |  |           |        |              |  |   |        |  
|                               |  | Psychiatric  |        | Unit        |  | Corporate |        |              |  |  
|                               |  | Facilities   |        | Management  |  | and Other |        | Consolidated
|                               |  |              |        |             |  |           |        |             
|Six months ended June 30, 2002
|Revenue                        |  | $            | 33,601 |             |  | $         | 12,202 |              |  | $ |       |   |  | $ | 45,803 | 
|Adjusted EBITDA                |  | $            | 3,251  |             |  | $         | 3,126  |              |  | $ | (1,346 | ) |  | $ | 5,031  | 
|Interest expense               |  |              | 1,307  |             |  |           | 162    |              |  |   | 1,023  |   |  |   | 2,492  | 
|Provision for income taxes     |  |              |       |             |  |           |       |              |  |   | 21     |   |  |   | 21     | 
|Depreciation and amortization  |  |              | 551    |             |  |           | 174    |              |  |   | 72     |   |  |   | 797    | 
|Inter-segment expenses         |  |              | 1,204  |             |  |           | 301    |              |  |   | (1,505 | ) |  |   |       | 
|Stock compensation expense     |  |              |       |             |  |           |       |              |  |   | 109    |   |  |   | 109    | 
|                               |  |              |        |             |  |           |        |              |  |   |        |   |  |   |        | 
|Net income (loss)              |  | $            | 189    |             |  | $         | 2,489  |              |  | $ | (1,066 | ) |  | $ | 1,612  | 
|                               |  |              |        |             |  |           |        |              |  |   |        |   |  |   |        | 
|Segment assets                 |  | $            | 32,504 |             |  | $         | 20,060 |              |  | $ | 2,961  |   |  | $ | 55,525 | 



|10. |  | Recent Pronouncements
|--- |  | ---------------------

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51(FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. We do not expect this new interpretation to have
a material effect on its future results of operations or financial position.



|11. |  | Financial Information for the Company and Its Subsidiaries
|--- |  | ----------------------------------------------------------

We conduct substantially all of our business through our subsidiaries.
Presented below is condensed consolidated financial information for us and our
subsidiaries as of June 30, 2003, and for the three and six months then ended.
The information segregates
the parent company (Psychiatric Solutions, Inc.), the combined wholly owned
Subsidiary Guarantors, the combined Non-Guarantors, and eliminations. All of
the subsidiary guarantees are both full and unconditional and joint and
several. No combining financial

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

information has been presented for prior
periods as there were no Non-Guarantor Subsidiaries prior to November 2002.

Psychiatric Solutions, Inc.
Condensed Consolidating Balance Sheet
As of June 30, 2003 (Unaudited)

|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |        | 
|------------------------------------------------------- | --------------------------------- | - | ------- | ----- | ---------- | - | ---------- | ------ | ----------- | - | ------------- | ----- | ------------ | - | -------- | - |  | - | ------- | ------ | 
|                                                        |                                   |   |         |       |            |   | Combined   |        | Combined    |   |               |       |              |   | Total   
|                                                        |                                   |   |         |       |            |   | Subsidiary |        | Non-        |   | Consolidating |       | Consolidated
|                                                        |                                   |   | Parent  |       | Guarantors |   | Guarantors |        | Adjustments |   | Amounts      
|                                                        |                                   |   |         |       |            |   |            |        |             |   |              
|Current Assets:                                         |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |       
|                                                        | Cash                              |   | $       |      |            |   | $          | 8,689  |             |   | $             | 1,223 |              |   | $        |  |  |   | $       | 9,912  | 
|                                                        | Accounts receivable, net          |   |         |      |            |   |            | 58,129 |             |   |               |      |              |   |          |  |  |   |         | 58,129 | 
|                                                        | Prepaids and other                |   |         |      |            |   |            | 8,684  |             |   |               | 15    |              |   |          |  |  |   |         | 8,699  | 
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |        | 
|Total current assets                                    |                                   |   |        |       |            |   | 75,502     |        |             |   | 1,238         |       |              |   |         |   |  |   | 76,740  |       
|Property and equipment, net of accumulated depreciation |                                   |   |        |       |            |   | 128,294    |        |             |   | 5,871         |       |              |   |         |   |  |   | 134,165 |       
|Cost in excess of net assets acquired                   |                                   |   |        |       |            |   | 51,119     |        |             |   |              |       |              |   |         |   |  |   | 51,119  |       
|Contracts, net                                          |                                   |   |        |       |            |   | 3,322      |        |             |   |              |       |              |   |         |   |  |   | 3,322   |       
|Investment in subsidiaries                              |                                   |   | 213,966 |       |            |   |           |        |             |   |              |       |              |   | (213,966 | ) |  |   |         |       
|Other assets                                            |                                   |   | 8,362   |       |            |   | 7,510      |        |             |   | 1,318         |       |              |   |         |   |  |   | 17,190  |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |        | 
|Total assets                                            |                                   | $ | 222,328 |       |            | $ | 265,747    |        |             | $ | 8,427         |       |              | $ | (213,966 | ) |  | $ | 282,536 |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |        | 
|Current Liabilities:                                    |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |       
|                                                        | Accounts payable                  |   | $       |      |            |   | $          | 14,100 |             |   | $             |      |              |   | $        |  |  |   | $       | 14,100 | 
|                                                        | Salaries and benefits payable     |   |         |      |            |   |            | 11,386 |             |   |               |      |              |   |          |  |  |   |         | 11,386 | 
|                                                        | Other accrued liabilities         |   |         | 1,599 |            |   |            | 14,595 |             |   |               | 564   |              |   |          |  |  |   |         | 16,758 | 
|                                                        | Revolving line of credit          |   |         |      |            |   |            |       |             |   |               |      |              |   |          |  |  |   |         |       | 
|                                                        | Current portion of long-term debt |   |         | 717   |            |   |            |       |             |   |               | 44    |              |   |          |  |  |   |         | 761    | 
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |        | 
|Total current liabilities                               |                                   |   | 2,316   |       |            |   | 40,081     |        |             |   | 608           |       |              |   |         |   |  |   | 43,005  |       
|Long-term debt, less current portion                    |                                   |   | 167,644 |       |            |   |           |        |             |   | 4,863         |       |              |   |         |   |  |   | 172,507 |       
|Deferred tax liability                                  |                                   |   |        |       |            |   | 1,969      |        |             |   |              |       |              |   |         |   |  |   | 1,969   |       
|Other liabilities                                       |                                   |   |        |       |            |   | 2,460      |        |             |   |              |       |              |   |         |   |  |   | 2,460   |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |        | 
|Total liabilities                                       |                                   |   | 169,960 |       |            |   | 44,510     |        |             |   | 5,471         |       |              |   |         |   |  |   | 219,941 |       
|Series A convertible preferred stock                    |                                   |   | 25,020  |       |            |   |           |        |             |   |              |       |              |   |         |   |  |   | 25,020  |       
|Redeemable common stock                                 |                                   |   | 3,609   |       |            |   |           |        |             |   |              |       |              |   |         |   |  |   | 3,609   |       
|Stockholders equity:                                   |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |       
|Total stockholders equity                              |                                   |   | 23,739  |       |            |   | 221,237    |        |             |   | 2,956         |       |              |   | (213,966 | ) |  |   | 33,966  |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |        | 
|Total liabilities and stockholders equity              |                                   | $ | 222,328 |       |            | $ | 265,747    |        |             | $ | 8,427         |       |              | $ | (213,966 | ) |  | $ | 282,536 |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |   |  |   |         |        | 

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2003 (Unaudited)

|                                            |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  
|------------------------------------------- |  | ------ | ------ | ---------- |  | ---------- | ------ | ----------- |  | ------------- | --- | ------------ |  | ----- | - |  |  | - | ------ | -
|                                            |  |        |        |            |  | Combined   |        | Combined    |  |               |     |              |  | Total
|                                            |  |        |        |            |  | Subsidiary |        | Non-        |  | Consolidating |     | Consolidated
|                                            |  | Parent |        | Guarantors |  | Guarantors |        | Adjustments |  | Amounts      
|                                            |  |        |        |            |  |            |        |             |  |              
|Revenue                                     |  | $      |       |            |  | $          | 56,893 |             |  | $             | 545 |              |  | $     |  |  |  | $ | 57,438 |  
|                                           
|Salaries, wages and employee benefits       |  |        |       |            |  |            | 28,736 |             |  |               |    |              |  |       |  |  |  |   | 28,736 |  
|Professional fees                           |  |        |       |            |  |            | 6,840  |             |  |               | 36  |              |  |       |  |  |  |   | 6,876  |  
|Supplies                                    |  |        |       |            |  |            | 2,993  |             |  |               |    |              |  |       |  |  |  |   | 2,993  |  
|Rentals and leases                          |  |        |       |            |  |            | 534    |             |  |               |    |              |  |       |  |  |  |   | 534    |  
|Other operating expenses                    |  |        | 504    |            |  |            | 9,201  |             |  |               | 260 |              |  |       |  |  |  |   | 9,965  |  
|Provision for bad debts                     |  |        |       |            |  |            | 1,336  |             |  |               |    |              |  |       |  |  |  |   | 1,336  |  
|Depreciation and amortization               |  |        |       |            |  |            | 952    |             |  |               | 116 |              |  |       |  |  |  |   | 1,068  |  
|Interest expense                            |  |        | 2,197  |            |  |            | 43     |             |  |               | 146 |              |  |       |  |  |  |   | 2,386  |  
|Loss on refinancing long-term debt          |  |        | 4,586  |            |  |            |       |             |  |               |    |              |  |       |  |  |  |   | 4,586  |  
|Change in reserve of stockholder notes      |  |        | (84    | )          |  |            |       |             |  |               |    |              |  |       |  |  |  |   | (84    | )
|                                            |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  
|                                            |  |        | 7,203  |            |  |            | 50,635 |             |  |               | 558 |              |  |       |  |  |  |   | 58,396 |  
|(Loss) income before income taxes           |  |        | (7,203 | )          |  |            | 6,258  |             |  |               | (13 | )            |  |       |  |  |  |   | (958   | )
|(Benefit from) provision for income taxes   |  |        | (2,737 | )          |  |            | 2,378  |             |  |               | (5  | )            |  |       |  |  |  |   | (364   | )
|                                            |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  
|Net (loss) income                           |  |        | (4,466 | )          |  |            | 3,880  |             |  |               | (8  | )            |  |       |  |  |  |   | (594   | )
|Accrued preferred stock dividends           |  |        | 177    |            |  |            |       |             |  |               |    |              |  |       |  |  |  |   | 177    |  
|                                            |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  
|Net income available to common shareholders |  | $      | (4,643 | )          |  | $          | 3,880  |             |  | $             | (8  | )            |  | $     |  |  |  | $ | (771   | )
|                                            |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2003 (Unaudited)

|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  
|-------------------------------------------------- |  | ------ | ------ | ---------- |  | ---------- | ------ | ----------- |  | ------------- | --- | ------------ |  | ----- | - |  |  | - | ------ | -
|                                                   |  |        |        |            |  | Combined   |        | Combined    |  |               |     |              |  | Total
|                                                   |  |        |        |            |  | Subsidiary |        | Non-        |  | Consolidating |     | Consolidated
|                                                   |  | Parent |        | Guarantors |  | Guarantors |        | Adjustments |  | Amounts      
|                                                   |  |        |        |            |  |            |        |             |  |              
|Revenue                                            |  | $      |       |            |  | $          | 93,587 |             |  | $             | 945 |              |  | $     |  |  |  | $ | 94,532 |  
|                                                  
|Salaries, wages and employee benefits              |  |        |       |            |  |            | 46,522 |             |  |               |    |              |  |       |  |  |  |   | 46,522 |  
|Professional fees                                  |  |        |       |            |  |            | 11,292 |             |  |               | 36  |              |  |       |  |  |  |   | 11,328 |  
|Supplies                                           |  |        |       |            |  |            | 4,683  |             |  |               |    |              |  |       |  |  |  |   | 4,683  |  
|Rentals and leases                                 |  |        |       |            |  |            | 782    |             |  |               |    |              |  |       |  |  |  |   | 782    |  
|Other operating expenses                           |  |        | 571    |            |  |            | 16,049 |             |  |               | 504 |              |  |       |  |  |  |   | 17,124 |  
|Provision for bad debts                            |  |        |       |            |  |            | 2,657  |             |  |               |    |              |  |       |  |  |  |   | 2,657  |  
|Depreciation and amortization                      |  |        |       |            |  |            | 1,560  |             |  |               | 175 |              |  |       |  |  |  |   | 1,735  |  
|Interest expense                                   |  |        | 3,453  |            |  |            | 124    |             |  |               | 220 |              |  |       |  |  |  |   | 3,797  |  
|Loss on refinancing of long-term debt              |  |        | 4,586  |            |  |            |       |             |  |               |    |              |  |       |  |  |  |   | 4,586  |  
|Change in valuation of put warrants                |  |        | 960    |            |  |            |       |             |  |               |    |              |  |       |  |  |  |   | 960    |  
|Change in reserve of stockholder notes             |  |        | (545   | )          |  |            |       |             |  |               |    |              |  |       |  |  |  |   | (545   | )
|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  
|                                                   |  |        | 9,025  |            |  |            | 83,669 |             |  |               | 935 |              |  |       |  |  |  |   | 93,629 |  
|(Loss) income before income taxes                  |  |        | (9,025 | )          |  |            | 9,918  |             |  |               | 10  |              |  |       |  |  |  |   | 903    |  
|(Benefit from) provision for income taxes          |  |        | (3,064 | )          |  |            | 3,768  |             |  |               | 4   |              |  |       |  |  |  |   | 708    |  
|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  
|Net (loss) income                                  |  |        | (5,961 | )          |  |            | 6,150  |             |  |               | 6   |              |  |       |  |  |  |   | 195    |  
|Accrued preferred stock dividends                  |  |        | 177    |            |  |            |       |             |  |               |    |              |  |       |  |  |  |   | 177    |  
|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  
|Net (loss) income available to common shareholders |  | $      | (6,138 | )          |  | $          | 6,150  |             |  | $             | 6   |              |  | $     |  |  |  | $ | 18     |  
|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |   |  |  |   |        |  

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2003 (Unaudited)

|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |       |         |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------ | ---------- | ------ | ---------- | ------- | ----------- | ----- | ------------- | ---- | ------------ | - | ----- | - | - | ------- | ----- | ------- | -
|                                                                                                   |                                                                             |                                           |         |        |        |            |        | Combined   |         | Combined    |       |               |      |              |   | Total
|                                                                                                   |                                                                             |                                           |         |        |        |            |        | Subsidiary |         | Non-        |       | Consolidating |      | Consolidated
|                                                                                                   |                                                                             |                                           |         | Parent |        | Guarantors |        | Guarantors |         | Adjustments |       | Amounts      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |       |              
|Operating Activities                                                                               |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      
|Net (loss) income                                                                                  |                                                                             | $                                         | (5,961  | )      |        | $          | 6,150  |            |         | $           | 6     |               |      | $            |  |       |   | $ | 195     |      
|Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      
|                                                                                                   | Depreciation and amortization                                               |                                           |         |       |        |            |        | 1,560      |         |             |       | 175           |      |              |   |      |   |   |         | 1,735 |        
|                                                                                                   | Provision for doubtful accounts                                             |                                           |         |       |        |            |        | 2,657      |         |             |       |              |      |              |   |      |   |   |         | 2,657 |        
|                                                                                                   | Accretion of detachable warrants                                            |                                           |         | 149    |        |            |        |           |         |             |       |              |      |              |   |      |   |   |         | 149   |        
|                                                                                                   | Non-cash stock compensation expense                                         |                                           |         |       |        |            |        | 9          |         |             |       |              |      |              |   |      |   |   |         | 9     |        
|                                                                                                   | Amortization of loan costs                                                  |                                           |         | 328    |        |            |        |           |         |             |       |              |      |              |   |      |   |   |         | 328   |        
|                                                                                                   | Loss
on refinancing long-term debt                                          |                                           |         | 4,586  |        |            |        |           |         |             |       |              |      |              |   |      |   |   |         | 4,586 |        
|                                                                                                   | Change in deferred tax liability                                            |                                           |         |       |        |            |        | 500        |         |             |       |              |      |              |   |      |   |   |         | 500   |        
|                                                                                                   | Change in valuation of put warrants                                         |                                           |         | 960    |        |            |        |           |         |             |       |              |      |              |   |      |   |   |         | 960   |        
|                                                                                                   | Change in reserve on stockholder notes                                      |                                           |         | (545   | )      |            |        |           |         |             |       |              |      |              |   |      |   |   |         | (545  | )      
|                                                                                                   | Long-term interest accrued                                                  |                                           |         |       |        |            |        | 124        |         |             |       |              |      |              |   |      |   |   |         | 124   |        
|                                                                                                   | Changes in operating assets and liabilities, net of
effect of acquisitions: |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |       |        
|                                                                                                   |                                                                             | Accounts receivable                       |         |        |       |            |        |            | (10,299 | )           |       |               |     |              |   |       |  |   |         |       | (10,299 | )
|                                                                                                   |                                                                             | Prepaids and other current assets         |         |        |       |            |        |            | 1,244   |             |       |               | (514 | )            |   |       |  |   |         |       | 730     |  
|                                                                                                   |                                                                             | Accounts payable                          |         |        |       |            |        |            | 1,511   |             |       |               |     |              |   |       |  |   |         |       | 1,511   |  
|                                                                                                   |                                                                             | Accrued liabilities and other liabilities |         |        | (4,074 | )          |        |            | 5,230   |             |       |               | 360  |              |   |       |  |   |         |       | 1,516   |  
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      
|Net cash (used in) provided by continuing operating activities                                     |                                                                             |                                           | (4,557  | )      |        |            | 8,686  |            |         |             | 27    |               |      |              |  |       |   |   | 4,156   |      
|Investing Activities:                                                                              |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      
|Cash paid for acquisitions, net of cash acquired                                                   |                                                                             |                                           | (93,874 | )      |        |            |       |            |         |             |      |               |      |              |  |       |   |   | (93,874 | )    
|Capital purchases of property and equipment                                                        |                                                                             |                                           |        |        |        |            | (1,196 | )          |         |             |      |               |      |              |  |       |   |   | (1,196  | )    
|Other assets                                                                                       |                                                                             |                                           |        |        |        |            | 24     |            |         |             |      |               |      |              |  |       |   |   | 24      |      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      
|Net used in investing activities                                                                   |                                                                             |                                           | (93,874 | )      |        |            | (1,172 | )          |         |             |      |               |      |              |  |       |   |   | (95,046 | )    
|Financing Activities:                                                                              |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      
|Net principal borrowings on long-term debt                                                         |                                                                             |                                           | 77,909  |        |        |            |       |            |         |             | (21   | )             |      |              |  |       |   |   | 77,888  |      
|Payment of loan and issuance costs                                                                 |                                                                             |                                           | (4,481  | )      |        |            |       |            |         |             |      |               |      |              |  |       |   |   | (4,481  | )    
|Proceeds from issuance of series A convertible preferred stock                                     |                                                                             |                                           | 25,000  |        |        |            |       |            |         |             |      |               |      |              |  |       |   |   | 25,000  |      
|Proceeds from issuance of common stock                                                             |                                                                             |                                           | 3       |        |        |            |       |            |         |             |      |               |      |              |  |       |   |   | 3       |      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      
|Net cash provided by (used in) financing activities                                                |                                                                             |                                           | 98,431  |        |        |            |       |            |         |             | (21   | )             |      |              |  |       |   |   | 98,410  |      
|Net increase in cash                                                                               |                                                                             |                                           |        |        |        |            | 7,514  |            |         |             | 6     |               |      |              |  |       |   |   | 7,520   |      
|Cash at beginning of year                                                                          |                                                                             |                                           |        |        |        |            | 1,175  |            |         |             | 1,217 |               |      |              |  |       |   |   | 2,392   |      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      
|Cash at end of year                                                                                |                                                                             | $                                         |        |        |        | $          | 8,689  |            |         | $           | 1,223 |               |      | $            |  |       |   | $ | 9,912   |      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |       |               |      |              |   |       |   |   |         |      



|12. |  | Subsequent Events
|--- |  | -----------------

On July 10, 2003, we received 48,067 shares of our common stock as payment for
approximately $466,000 of the promissory notes outstanding with certain
stockholders (see Note 7). These shares were subsequently cancelled and
returned to the authorized, unissued status.

On July 31, 2003, we purchased for
approximately $3.6 million the real property and improvements associated
with Macon Behavioral Health System, which we formerly leased from Ramsay
Hospital Properties, Inc. (RHP), located in Macon, Georgia pursuant to a put
right held by RHP that was triggered by our acquisition of Ramsay.

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

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements include statements regarding intent, belief or
current expectations of (Psychiatric Solutions, Inc. or the Company) and
its management. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that may cause the Companys
actual results to differ materially from the results discussed in the
forward-looking statements. Risks and uncertainties that might cause such
differences include, but are not limited to: (1) potential competition which
alters or impedes the Companys acquisition strategy by decreasing the
Companys ability to acquire additional facilities on favorable terms; (2) the
ability of the Company to improve the operations of acquired facilities; (3)
the ability to maintain favorable and continuing relationships with physicians
who use the Companys facilities; (4) the limited operating history of the
Company; (5) the ability to receive timely additional financing on terms
acceptable to the Company to fund the Companys acquisition strategy and
capital expenditure needs; (6) risks inherent to the healthcare industry,
including the impact of unforeseen changes in regulation, reimbursement rates
from federal and state healthcare programs or managed care companies and
exposure to claims and legal actions by patients and others; and (7) potential
difficulties in integrating the operations of Psychiatric Solutions, Inc. with
recently acquired operations. The forward-looking statements herein are
qualified in their entirety by the risk factors set forth in the Companys
filings with the Securities and Exchange Commission, including the factors
listed in its Form 8-K filed on June 9, 2003, under the caption Risk Factors.
A copy of such filings may be obtained from the Public Reference Room of the
SEC at 450 Fifth Street NW, Washington, D.C. at prescribed rates.

Overview

We are a leading provider of behavioral health care services in the United
States.

As of June 30, 2003, we owned or
leased 22 free-standing psychiatric facilities in 12 states and
managed 10 free-standing psychiatric facilities for government
agencies and managed 47 psychiatric units for third party acute
care hospitals in 14 states. We also have a contract to provide mental health
care management services to approximately 4,300 children and adults with
serious mental illness in the Nashville, Tennessee area. Our objective is to
provide high-quality, cost-effective psychiatric services in the communities we
serve. Through our managed and freestanding psychiatric facilities, we offer a
comprehensive array of behavioral health programs to critically ill children,
adolescents and adults.

We were incorporated in the State of Delaware in 1988. Our principal executive
offices are located at 113 Seaboard Lane, Suite C-100, Franklin, Tennessee
37067. Our telephone number is (615) 312-5700.

Recent Developments

Acquisitions of Ramsay and the Brown Schools.On June 30, 2003, we consummated
the acquisition of Ramsay Youth Services, Inc. (Ramsay), a public company
that traded on the Nasdaq SmallCap Market under the symbol RYOU, for
approximately $85.0 million, consisting of $56.0 million in cash, or $5.00 per
share, $26.0 million in net assumed debt that was repaid in connection with the
acquisition and $3.0 million in fees and expenses. We financed the acquisition
of Ramsay with proceeds from the issuance of $150 million in senior
subordinated notes and an issuance of $12.5
million of our series A convertible preferred stock. The 11 owned or leased
inpatient behavioral health care facilities we acquired from Ramsay, which have
an aggregate of 1,250 beds, are located primarily in the Southeastern region of
the United States with locations also in Michigan, Missouri and Utah. In the
acquisition, we also assumed 10 contracts to manage behavioral health care
facilities for government agencies in Florida, Georgia and Puerto Rico.

In April 2003, we consummated the acquisition of six inpatient behavioral
health care facilities from The Brown Schools, Inc. for $63.0 million in cash.
The six facilities, which have an aggregate of 879 licensed beds, are located
in Austin, San Antonio and San Marcos, Texas; Charlottesville, Virginia;
Colorado Springs, Colorado; and Tulsa, Oklahoma. The Brown Schools facilities
(The Brown Schools) offer a full continuum of care for troubled adolescents
and adults. We financed the acquisition of The Brown Schools with proceeds from
the issuance of $12.5 million of our series A convertible preferred stock and
an increase in funding under our senior credit facility.

The Brown Schools and Ramsay are both leading providers of behavioral health
care treatment programs focused primarily on children and adolescents. The
Brown Schools and Ramsay operate acute behavioral hospitals and residential
treatment centers (RTCs) through a network of owned, leased or state-owned
facilities. Both businesses have a national presence and referral base, have
strong relationships with payors and have demonstrated favorable operating and
financial results. Our business has historically

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provided acute behavioral health care services to adults. The acquisitions of
The Brown Schools and Ramsay broaden our core behavioral health care business.

Issuance of $150 Million Senior Subordinated Notes.On June 30, 2003, we issued
$150 million in senior subordinated notes, which are fully and unconditionally
guaranteed on a senior subordinated basis by substantially all of our existing
operating subsidiaries. Proceeds from the issuance of the senior subordinated
notes and the issuance of $12.5 million in series A convertible preferred stock
were used to finance the acquisition of Ramsay and pay down substantially all
of our long-term debt. Interest on the senior subordinated notes accrues at the
rate of 10.625% per annum and is payable semi-annually in arrears on June 15
and December 15, commencing on December 15, 2003. The senior subordinated
notes will mature on June 15, 2013.

$25 Million Private Placement of Series A Convertible Preferred Stock.On April
1, 2003, concurrent with the acquisition of The Brown Schools, we received
$12.5 million from the private placement of 2,272,727 shares of our series A
convertible preferred stock with affiliates of Oak Investment Partners and
Salix Ventures and with Brown Brothers Harriman & Co.s The 1818 Mezzanine Fund
II, L.P. (The 1818 Fund). These investors purchased an additional 2,272,727
shares of our series A convertible preferred stock for $12.5 million on June
19, 2003. The proceeds were used to acquire The Brown Schools and Ramsay. The
investors are previous investors in the Company, with Oak Investment Partners
and Salix Ventures (or related entities) being among our co-founders.
Representatives of Oak Investment Partners, Salix Ventures and Brown Brothers Harriman & Co. currently
serve on our Board of Directors. Each share
of series A convertible preferred stock is convertible into one share of our
common stock. The impact of the series A convertible preferred stock on diluted
earnings per share is calculated using the if-converted method.

Amended and Restated Senior Credit Facility.In connection with the closing of
the sale of our senior subordinated notes, our expanded senior credit facility
with our senior lender, CapitalSource Finance LLC
(CapSource), was amended and
restated to increase our senior secured revolver to $50.0 million from $28.0
million and refinance $36.0 million in term loans with proceeds from the sale
of the senior subordinated notes. The term loans remain outstanding with a
balance of $17.0 million. Our amended and restated senior secured credit
facility currently consists of approximately $17.0 million of term loans and a
$50.0 million revolving working capital line of credit. Our
credit facility is secured by
substantially all of our assets and the stock of our existing operating
subsidiaries. The term loans accrue interest at the Citibank, N.A. prime rate
plus 4.5% subject to a floor of 8.75% and are due in November 2003. The
revolving line of credit accrues interest at the Citibank, N.A. prime rate plus
2% subject to a floor of 6.25% and is due in June 2006. At June 30, 2003, the
effective interest rate under the revolving line of credit was 6.59%. Until
the maturity date, we may borrow, repay and re-borrow an amount not to exceed
the lesser of $50.0 million or the borrowing base (as defined in the amended
and restated credit facility). As of June 30, 2003, we had $50.0 million
available under the revolving line of credit under our amended and restated
credit facility. Under the revolving line of credit, all of our collections,
except for Medicare and Medicaid payments, are deposited into lockbox accounts
controlled by CapSource. The funds deposited in the lockboxes are returned to
us on a daily basis. Prior to amending and restating the senior
credit facility, funds deposited in the lockboxes were applied to outstanding borrowings on a
daily basis. As a result, the outstanding borrowings under the revolving line
of credit are classified as short-term as of December 31, 2002 and all periods
prior to June 30, 2003. We must pay on a monthly basis an unused fee in the
amount of 0.5% per annum on the unused portion of the amended and restated
credit facility. Such fees were approximately $28,000 for the six months ended
June 30, 2003.

Our amended and restated credit facility contains customary covenants which
include: (1) a specified monthly patient census for any owned, operated or
leased facilities; (2) a limitation on capital expenditures, sales of assets,
mergers, changes of ownership, new principal lines of business, indebtedness,
dividends and redemptions; and (3) various financial covenants. In addition,
the amended and restated credit facility provides CapSource with a right of
first refusal to provide additional debt financing to us. As of June 30, 2003,
we were in compliance with all debt covenant requirements. If we violate one or
more of these covenants, amounts outstanding under the amended and restated
credit facility could become immediately payable and additional borrowings
could be restricted. As of June 30, 2003, no balance was outstanding under the
revolver portion of our amended and restated senior credit facility.

Expansion of Senior Credit Facility.On April 1, 2003, our senior credit
facility was expanded to approximately $81.0 million with the increase of our
revolving credit facility to $28.0 million from $17.5 million and a new $36.0
million term loan. We borrowed approximately $52.2 million during April 2003,
including the $36.0 million term loan and $16.2 million under the revolving
line of credit, to partially fund our acquisition of The Brown Schools. The
revolving line of credit and new $36.0 million term loan were repaid on June
30, 2003 with proceeds from the issuance of our senior subordinated notes.

1818 Fund Exercise of Stock Purchase Warrant.On May 16, 2003, The 1818 Fund
exercised its stock purchase warrant to purchase 372,412 shares of our common
stock. Deducting the exercise price of $0.01 per share based on the closing
price of our common stock on May 15, 2003, The 1818 Fund received 372,039
shares of our common stock from the exercise of the warrant. In addition, The
1818 Fund provided us with a written consent to waive its ability to require
that we repurchase the warrants for cash effective April 1, 2003. Thus, we are
no longer required to record non-cash expense for increases in the fair market
value of our common stock. In certain circumstances, The 1818 Fund has the
right to require that we repurchase the 372,039 shares of our common stock that
The 1818 Fund received upon the exercise of the stock purchase warrant.

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Conversion of Subordinated Convertible Notes.In connection with our
acquisition of Sunrise Behavioral Health, Ltd. in May 2000, we issued
subordinated convertible notes in the amount of $3.6 million. The principal
amount of these convertible notes and the interest thereon was converted into
537,908 shares of our common stock in April and May 2003, based on a conversion
price of $8.53 per share.

Impact of Mergers and Acquisitions

Acquiring free-standing psychiatric facilities is a key part of our business
strategy. Because we have grown through mergers and acquisitions accounted for
as purchases, it is difficult to make meaningful comparisons between our
financial statements for the fiscal periods presented.

On June 30, 2003, we consummated the acquisition of Ramsay, a public company
that traded on the Nasdaq SmallCap Market under the symbol RYOU, for
approximately $85.0 million, consisting of $56.0 million in cash, or $5.00 per
share, $26.0 million in net assumed debt that was repaid in connection with the
acquisition and $3.0 million in fees and expenses. We financed the acquisition
of Ramsay with proceeds from the issuance of $150 million in senior
subordinated notes and an issuance of $12.5 million of our
series A convertible preferred
stock. The 11 owned or leased inpatient behavioral health care facilities we
acquired from Ramsay, which have an aggregate of 1,250 beds, are located
primarily in the Southeastern region of the United States with locations also
in Michigan, Missouri and Utah. In the acquisition, we also assumed 10
contracts to manage behavioral health care facilities for government agencies
in Florida, Georgia and Puerto Rico.

In April 2003, we consummated the acquisition of six inpatient behavioral
health care facilities from The Brown Schools, Inc. for $63.0 million in cash.
The six facilities, which have an aggregate of 879 licensed beds, are located
in Austin, San Antonio and San Marcos, Texas; Charlottesville, Virginia;
Colorado Springs, Colorado; and Tulsa, Oklahoma. The Brown Schools offer a full
continuum of care for troubled adolescents and adults. We financed the
acquisition of The Brown Schools with proceeds from the issuance of $12.5
million of our series A convertible preferred stock and an increase in funding
under our credit facility.

The Brown Schools and Ramsay are both leading providers of behavioral health
care treatment programs focused primarily on children and adolescents. The
Brown Schools and Ramsay operate acute behavioral hospitals and residential
treatment centers (RTCs) through a network of owned, leased or state-owned
facilities. Both businesses have a national presence and referral base, have
strong relationships with payors and have demonstrated favorable operating and
financial results. Our business has historically provided acute behavioral
health care services to adults. The acquisitions of The Brown Schools and
Ramsay broaden our core behavioral health care business.

On July 1, 2002, we acquired all of the capital stock of Aeries Healthcare
Corporation and its wholly owned subsidiary, Aeries Healthcare of Illinois,
Inc., for $16.1 million, prior to certain adjustments. Aeries Healthcare of
Illinois, Inc. owned the assets and operations of Riveredge Hospital located
near Chicago, Illinois. The acquisition was financed in part through an
amendment to our senior credit facility.

On August 5, 2002, PMR Acquisition Corporation, a newly formed, wholly-owned
subsidiary of PMR Corporation (PMR), merged with and into Psychiatric
Solutions, Inc., whose name, subsequent to the merger, was changed to
Psychiatric Solutions Hospitals, Inc. (PSH). The surviving corporation in
the merger was PSH, which became a wholly-owned subsidiary of PMR, a publicly
traded company. In connection with the merger, PMR changed its name to
Psychiatric Solutions, Inc. and, effective August 6, 2002, the shares of
Psychiatric Solutions, Inc., formerly known as PMR Corporation, were approved
for listing on the Nasdaq National Market under the ticker symbol PSYS.
Because the former PSH stockholders own a majority of the surviving
corporations outstanding common stock, the acquisition was a reverse
acquisition and PSH was the acquiring company for accounting purposes. For
more information relating to the merger, see Note 1 to Notes to Consolidated
Financial Statement in our Annual Report on Form 10-K for the year
ended December 31, 2002.

Sources of Revenue

Patient Service Revenue.Patient service revenue is generated by our inpatient
facilities as a result of services provided to patients at our facilities.
Patient service revenue is reported on the accrual basis in the period in which
services are rendered, at established rates, regardless of whether collection
in full is expected. Patient service revenue includes amounts estimated by
management to be reimbursable by Medicare and Medicaid under provisions of cost
or prospective reimbursement formulas in effect. Settlements under
cost reimbursement agreements are estimated and recorded in the
period in which the related services are rendered and are adjusted in
future periods as final settlements are determined. There were no
material adjustments under such agreements during the three and six
months ended June 30, 2003. Amounts received are generally
less than the established billing rates of the facilities and the differences
are reported as deductions from patient service revenue at the time the service
is rendered. For the three and six months ended June 30, 2003, patient service
revenue comprised approximately 78% and 75% of total revenue, respectively.

Management Fee Revenue.Management fee revenue is earned by our psychiatric
unit management division. The psychiatric unit management division receives
contractually determined management fees and director fees from hospitals and
clinics for providing psychiatric management and development
services. Revenues for fixed rate contracts are recognized in the
period in which services are provided based on the terms of the
contract. Revenues for variable rate contracts are recognized in the
period in which services are provided to the patient. For the
three and six months ended June 30, 2003, management fee revenue comprised
approximately 22% and 25% of total revenue, respectively.

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Results of Operations

The following table sets forth, for the periods indicated, our operating
results (unaudited, dollars in thousands):

|                                          |  |                             |        |                           |  |        |       |      |  |        |        |   |  |        |       |   |  |   |        |   |  |  |       |   |  |   |        |  |  |  |       |  
|----------------------------------------- |  | --------------------------- | ------ | ------------------------- |  | ------ | ----- | ---- |  | ------ | ------ | - |  | ------ | ----- | - |  | - | ------ | - |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|                                          |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                          |  |                             |        |                          
|                                          |  | 2003                        |        | 2002                      |  | 2003   |       | 2002
|                                          |  |                             |        |                           |  |        |       |     
|                                          |  | Amount                      |        | %                         |  | Amount |       | %    |  | Amount |        | % |  | Amount |       | %
|                                          |  |                             |        |                           |  |        |       |      |  |        |        |   |  |        |       |  
|Revenue                                   |  | $                           | 57,438 |                           |  |        | 100.0 | %    |  | $      | 22,617 |   |  |        | 100.0 | % |  | $ | 94,532 |   |  |  | 100.0 | % |  | $ | 45,803 |  |  |  | 100.0 | %
|Salaries, wages, and employee benefits    |  |                             | 28,736 |                           |  |        | 50.0  | %    |  |        | 13,524 |   |  |        | 59.8  | % |  |   | 46,522 |   |  |  | 49.2  | % |  |   | 27,494 |  |  |  | 60.0  | %
|Professional fees                         |  |                             | 6,876  |                           |  |        | 12.0  | %    |  |        | 3,279  |   |  |        | 14.5  | % |  |   | 11,328 |   |  |  | 12.0  | % |  |   | 6,387  |  |  |  | 14.0  | %
|Supplies                                  |  |                             | 2,993  |                           |  |        | 5.2   | %    |  |        | 1,133  |   |  |        | 5.0   | % |  |   | 4,683  |   |  |  | 5.0   | % |  |   | 2,232  |  |  |  | 4.9   | %
|Provision for bad debts                   |  |                             | 1,336  |                           |  |        | 2.3   | %    |  |        | 420    |   |  |        | 1.9   | % |  |   | 2,657  |   |  |  | 2.8   | % |  |   | 1,135  |  |  |  | 2.5   | %
|Other operating expenses                  |  |                             | 10,499 |                           |  |        | 18.3  | %    |  |        | 1,869  |   |  |        | 8.3   | % |  |   | 17,906 |   |  |  | 18.9  | % |  |   | 3,633  |  |  |  | 7.9   | %
|Depreciation and amortization             |  |                             | 1,068  |                           |  |        | 1.9   | %    |  |        | 412    |   |  |        | 1.8   | % |  |   | 1,735  |   |  |  | 1.8   | % |  |   | 797    |  |  |  | 1.7   | %
|Interest expense, net                     |  |                             | 2,386  |                           |  |        | 4.1   | %    |  |        | 1,123  |   |  |        | 4.9   | % |  |   | 3,797  |   |  |  | 4.0   | % |  |   | 2,492  |  |  |  | 5.5   | %
|Other expenses:                           |  |                             |        |                           |  |        |       |      |  |        |        |   |  |        |       |   |  |   |        |   |  |  |       |   |  |   |        |  |  |  |       |  
|Loss on refinancing long-term debt        |  |                             | 4,586  |                           |  |        | 8.0   | %    |  |        |       |   |  |        | 0.0   | % |  |   | 4,586  |   |  |  | 4.9   | % |  |   |       |  |  |  | 0.0   | %
|Change in valuation of put warrants       |  |                             |       |                           |  |        | 0.0   | %    |  |        |       |   |  |        | 0.0   | % |  |   | 960    |   |  |  | 1.0   | % |  |   |       |  |  |  | 0.0   | %
|Change in reserve on stockholder notes    |  |                             | (84    | )                         |  |        | -0.1  | %    |  |        |       |   |  |        | 0.0   | % |  |   | (545   | ) |  |  | -0.6  | % |  |   |       |  |  |  | 0.0   | %
|                                          |  |                             |        |                           |  |        |       |      |  |        |        |   |  |        |       |   |  |   |        |   |  |  |       |   |  |   |        |  |  |  |       |  
|(Loss) income before income taxes         |  |                             | (958   | )                         |  |        | -1.7  | %    |  |        | 857    |   |  |        | 3.8   | % |  |   | 903    |   |  |  | 1.0   | % |  |   | 1,633  |  |  |  | 3.5   | %
|(Benefit from) provision for income taxes |  |                             | (364   | )                         |  |        | -0.7  | %    |  |        |       |   |  |        | 0.0   | % |  |   | 708    |   |  |  | 0.8   | % |  |   | 21     |  |  |  | 0.0   | %
|                                          |  |                             |        |                           |  |        |       |      |  |        |        |   |  |        |       |   |  |   |        |   |  |  |       |   |  |   |        |  |  |  |       |  
|Net (loss) income                         |  | $                           | (594   | )                         |  |        | -1.0  | %    |  | $      | 857    |   |  |        | 3.8   | % |  | $ | 195    |   |  |  | 0.2   | % |  | $ | 1,612  |  |  |  | 3.5   | %
|                                          |  |                             |        |                           |  |        |       |      |  |        |        |   |  |        |       |   |  |   |        |   |  |  |       |   |  |   |        |  |  |  |       |  



---

|Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
|-----------------------------------------------------------------------------

Revenue. Revenue from continuing operations was $57.4 million for the quarter
ended June 30, 2003, compared to $22.6 million for the quarter ended June 30,
2002, an increase of $34.8 million or 154.0%. Revenue from owned facilities
accounted for $45.0 million of the second quarter 2003 results compared to
$16.7 million of the second quarter 2002 results, an increase of $28.3 million
or 169.5%. The increase in revenues from owned facilities relates primarily to
revenues of $18.5 million in the quarter ended June 30,
2003 for The Brown
Schools acquired in April 2003 and $7.7 million in the quarter ended
June 30, 2003 at Riveredge Hospital, which was acquired July 1, 2002. The
remainder of the increase in revenues from owned facilities is attributable to
growth at the other four facilities as evidenced by same facility growth in
admissions and patient days of 4.4% and 6.8%, respectively. Revenue from unit
management contracts accounted for $12.4 million of the second quarter 2003
results compared to $5.9 million of the second quarter 2002 results, an
increase of $6.5 million or 110.2%. The increase in revenues from unit
management contracts relates to the additional unit management operations
acquired in the merger with PMR. See Impact of Mergers and Acquisitions under
this Item 2.

Salaries, wages, and employee benefits. Salaries, wages and employee benefits
expense was $28.7 million, or 50.0% of revenue for the quarter ended June 30,
2003, compared to $13.5 million, or 59.8% of revenue for the quarter ended June
30, 2002. Salaries, wages and employee benefits expense from owned facilities
was $24.7 million in the second quarter of 2003, or 55.1% of second quarter
2003 revenue from owned facilities, compared to $10.0 million in the second
quarter of 2002 or 59.9% of second quarter 2002 revenue from owned facilities.
This decrease in salaries, wages and employee benefits expense as a percentage
of revenue from owned facilities relates to efforts within our
owned facilities to maintain staffing levels on higher volumes. Salaries, wages and employee benefits expense from unit
management contracts was $3.2 million in the second quarter of 2003, or 25.6%
of second quarter 2003 revenue from unit management contracts, compared to $3.1
million in the second quarter of 2002, or 52.9% of second quarter 2002 revenue
from unit management contracts. This decrease in salaries, wages and employee
benefits expense as a percentage of revenue from unit management contracts
relates to our assumption from PMR of a contract to provide case management
services in and around Nashville, Tennessee. All costs to provide these
services are recorded in other operating expenses because the actual services
provided are subcontracted. Salaries, wages and employee benefits expense for
our corporate office was $800,000 for the second quarter of 2003 compared to
$400,000 for the second quarter of 2002 as the result of the addition of staff
necessary to manage the facilities and unit management contracts acquired
during 2002 and 2003.

Professional fees. Professional fees were $6.9 million, or 12.0% of revenue for
the quarter ended June 30, 2003, compared to $3.3 million, or 14.5% of revenue
for the quarter ended June 30, 2002.Professional fees from owned facilities
were $5.5 million in the second quarter of 2003, or 12.2% of quarter 2003
revenue from owned facilities, compared to $2.4 million in the second quarter
of 2002, or 14.1% of second quarter 2002 revenue from owned facilities.
This decrease in professional fees from owned facilities as a
percentage of revenue from owned facilities was the result of efforts
within owned facilities to reduce our reliance on contract labor as
patient volumes increase. Professional fees from unit management contracts were $900,000 in the second
quarter of 2003, or 7.4% of second quarter 2003 revenue from unit management
contracts, compared to $800,000 in the second quarter of 2002, or 13.6% of
second quarter 2002 revenue from unit management contracts. This decrease in
professional fees from unit management contracts as a percentage of revenue
from unit management contracts relates primarily to the

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classification of the costs to provide case management services in and around Nashville, Tennessee as
other operating expenses. Professional fees for our corporate office
were $500,000 in the second quarter of 2003 compared to $100,000 in
the second quarter of 2002. The increase in professional fees at our corporate
office relates to accounting, legal, and other services required to meet the
needs of a public company and the newly integrated acquisitions.

Supplies.Supplies expense was $3.0 million, or 5.2% of revenue for the
quarter ended June 30, 2003, compared to $1.1 million, or 5.0% of revenue for
the quarter ended June 30, 2002. Supplies expense at owned facilities comprises
the majority of our supplies expense as a whole. The overall increase was
due to the acquisition of The Brown Schools in April 2003 and Riveredge
Hospital in July 2002. Supplies necessary at owned facilities include medical,
pharmaceutical and office supplies. Supplies expense for our unit management
division and our corporate office consist of office supplies and are negligible
to supplies expense overall.

Provision for bad debts. The provision for bad debts was $1.3 million, or 2.3%
of revenue for the quarter ended June 30, 2003, compared to $420,000, or 1.9%
of revenue for the quarter ended June 30, 2002. The provision for bad debts at
owned facilities was $1.1 million in the second quarter of 2003, or 2.5% of
second quarter 2003 owned facility revenue, compared to $360,000 in the second
quarter of 2002, or 2.2% of second quarter 2002 owned facility revenue. This
increase in provision for bad debts at owned facilities as a percentage of
owned facility revenue relates to slight increases in self pay
accounts receivable as a percentage of total accounts receivable. The provision for bad debts related to unit management contracts
was negligible for both periods presented, as the provision represents
approximately 1% to 2% of revenue from unit management contracts in the second
quarter of 2003 and 2002.

Other operating expenses. Other operating expenses were approximately $10.5
million, or 18.3% of revenue for the quarter ended June 30, 2003, compared to
$1.9 million, or 8.3% of revenue for the quarter ended June 30, 2002. Other
operating expenses for owned facilities were $4.2 million in the second quarter
of 2003, or 9.3% of second quarter 2003 owned facility revenue, compared to
$1.3 million in the second quarter of 2002, or 7.7% of second quarter 2002
owned facility revenue. This increase in other operating expenses for owned
facilities as a percentage of owned facility revenue relates primarily to
increased insurance costs in 2003. Other operating expenses for unit management
contracts were $6.0 million in the second quarter of 2003, or 48.2% of second
quarter 2003 unit management revenue, compared to $300,000 in the second
quarter of 2002, or 5.3% of second quarter 2002 unit management revenue. This
increase in other operating expenses for unit management contracts as a
percentage of unit management revenue is attributable to the contract to
provide case management services in and around Nashville, Tennessee where
actual services provided are subcontracted. Other operating expenses
at our corporate office increased to $300,000 in the second quarter of 2003
from $200,000 in the second quarter of 2002 primarily due to increased
insurance costs in 2003.

Depreciation and amortization. Depreciation and amortization expense was $1.1
million for the quarter ended June 30, 2003 compared to $400,000 for the
quarter ended June 30, 2002, an increase of $700,000 or 175.0%. This increase
in depreciation and amortization expense is the result of the acquisitions of
The Brown Schools in April 2003, Riveredge Hospital in July 2002 and PMR in
August 2002.

Interest expense. Interest expense was $2.4 million for the quarter ended June
30, 2003, compared to $1.1 million for the quarter ended June 30, 2002, an
increase of $1.3 million, or 118.2%. This increase is primarily attributable to
the increase in our long-term debt from approximately $35.1 million at June 30,
2002 to approximately $173.3 million at June 30, 2003 due to our senior
subordinated note offering and the expansion of our senior credit facility.

Other expenses.Other expenses totaled $4.5 million for the quarter ended June
30, 2003. Other expenses represent items which management considers
non-operating. Other expenses for the second quarter of 2003 consisted of $4.6
million in loss on the refinancing of our long-term debt and the
release of $81,000 in reserves related to our stockholder notes.

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Revenue. Revenue from continuing operations was $94.5 million for the six
months ended June 30, 2003, compared to $45.8 million for the six months ended
June 30, 2002, an increase of $48.7 million or 106.3%. Revenue from owned
facilities accounted for $71.0 million during the first six months of 2003
compared to $33.6 million during the first six months of 2002, an increase of
$37.4 million or 111.3%. The increase in revenues from owned facilities relates
primarily to revenues of $18.5 million in the six months ended June 30, 2003
for The Brown Schools acquired in April 2003 and $14.9 million in the six
months ended June 30, 2003 at Riveredge Hospital, which was acquired July 1,
2002. The remainder of the increase in revenues from owned facilities is
attributable to growth at the other four facilities as evidenced by same
facility growth in admissions and patient days of 5.6% and 7.3%, respectively.
Revenue from unit management contracts accounted for $23.5 million during the
first six months of 2003 compared to $12.2 million during the first six months
of 2002, an increase of $11.3 million or 92.6%. The increase in revenues from
unit management contracts relates to the additional unit management operations
acquired in the merger with PMR. See Impact of Mergers and Acquisitions under
this Item 2.

Salaries, wages, and employee benefits. Salaries, wages and employee benefits
expense was $46.5 million, or 49.2% of revenue for the six months ended June
30, 2003, compared to $27.5 million, or 60.0% of revenue for the six months
ended June 30, 2002. Salaries, wages and employee benefits expense from owned
facilities was $38.5 million in the first six months of 2003, or 54.2% of the
first six

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months of 2003 revenue from owned facilities, compared to $20.1
million in the first six months of 2002, or 59.9% of the first six months of
2002 revenue from owned facilities. This decrease in salaries, wages and
employee benefits expense as a percentage of revenue from owned facilities
relates to efforts within our owned facilities to maintain staffing
levels on higher volumes. Salaries,
wages and employee benefits expense from unit management contracts was $6.6
million in the first six months of 2003, or 28.1% of the first six months of
2003 revenue from unit management contracts, compared to $6.4 million in the
first six months of 2002, or 52.5% of the first six months of 2002 revenue from
unit management contracts. This decrease in salaries, wages and employee
benefits expense as a percentage of revenue from unit management contracts
relates to our assumption from PMR of a contract to provide case management
services in and around Nashville, Tennessee. All costs to provide these
services are recorded as other operating expenses because the actual services
provided are subcontracted. Salaries, wages and employee benefits expense for
our corporate office was $1.4 million for the first six months of 2003 compared
to $1.0 million for the first six months of 2002 as the result of the addition
of staff necessary to manage the facilities and unit management contracts
acquired during 2002 and 2003.

Professional fees. Professional fees were $11.3 million, or 12.0% of revenue
for the six months ended June 30, 2003, compared to $6.4 million, or 13.9% of
revenue for the six months ended June 30, 2002.Professional fees from owned
facilities were $8.7 million in the first six months of 2003, or 12.2% of the
first six months of 2003 revenue from owned facilities, compared to $4.5
million in the first six months of 2002, or 13.3% of the first six months of
2002 revenue from owned facilities. This decrease in professional
fees from owned facilities as a percentage of revenue from owned
facilities was the result of efforts within owned facilities to
reduce our reliance on contract labor as patient volumes increase. Professional fees from unit management
contracts were $1.8 million in the first six months of 2003, or 7.7% of the
first six months of 2003 revenue from unit management contracts, compared to
$1.7 million in the first six months of 2002, or 14.1% of the first six months
of 2002 revenue from unit management contracts. This decrease in professional
fees from unit management contracts as a percentage of revenue from unit
management contracts relates primarily to the classification of the costs to
provide case management services in and around Nashville, Tennessee as other
operating expenses. Professional fees for our corporate office were $900,000 in
the first six months of 2003 compared to $200,000 in the first six months of
2002. The increase in professional fees at our corporate office relates to
accounting, legal, and other services required to meet the needs of a public
company and the newly integrated acquisitions.

Supplies.Supplies expense was $4.7 million, or 5.0% of revenue for the six
months ended June 30, 2003, compared to $2.2 million, or 4.9% of revenue for
the six months ended June 30, 2002. Supplies expense at owned facilities
comprises the majority of our supplies expense as a whole. The overall increase
was due to the acquisition of The Brown Schools in April 2003 and Riveredge
Hospital in July 2002. Supplies necessary at owned facilities include medical,
pharmaceutical and office supplies. Supplies expense for the unit management
division and the corporate office consist of office supplies and are negligible
to supplies expense overall.

Provision for bad debts. The provision for bad debts was $2.7 million, or 2.8%
of revenue for the six months ended June 30, 2003, compared to $1.1 million, or
2.5% of revenue for the six months ended June 30, 2002. The provision for bad
debts at owned facilities was $2.3 million in the first six months of 2003, or
3.2% of the first six months of 2003 owned facility revenue, compared to $1.0
million in the first six months of 2002, or 3.0% of the first six months of
2002 owned facility revenue. This increase in provision for bad debts at owned
facilities as a percentage of owned facility revenue relates to
slight increases in self pay accounts receivable as a percentage of
total accounts receivable. The provision for bad debts related
to unit management contracts was negligible for both periods presented, as the
provision represents approximately 1% of revenue from unit management contracts
in the first six months of 2003 and 2002.

Other operating expenses. Other operating expenses were approximately $17.9
million, or 18.9% of revenue for the six months ended June 30, 2003, compared
to $3.6 million, or 7.9% of revenue for the six months ended June 30, 2002.
Other operating expenses for owned facilities were $6.5 million in the first
six months of 2003, or 9.1% of the first six months of 2003 owned facility
revenue, compared to $2.5 million in the first six months of 2002, or 7.5% of
2002 owned facility revenue. This increase in other operating expenses for
owned facilities as a percentage of owned facility revenue relates primarily to
increased insurance costs in 2003. Other operating expenses for unit management
contracts were $10.7 million in the first six months of 2003, or 45.7% of the
first six months of 2003 unit management revenue, compared to $700,000 in the
first six months of 2002, or 5.3% of the first six months of 2002 unit
management revenue. This increase in other operating expenses for unit
management contracts as a percentage of unit management revenue is attributable
to the contract to provide case management services in and around Nashville,
Tennessee where actual services provided are subcontracted. Other operating
expenses at our corporate office increased to $700,000 in the first six months
of 2003 from $300,000 in the first six months of 2002 primarily due to
increased insurance costs in 2003.

Depreciation and amortization. Depreciation and amortization expense was $1.7
million for the six months ended June 30, 2003 compared to $800,000 for the six
months ended June 30, 2002, an increase of $900,000 or 112.5%. This increase in
depreciation and amortization expense is the result of the acquisitions of The
Brown Schools in April 2003, Riveredge Hospital in July 2002 and PMR in August
2002.

Interest expense. Interest expense was $3.8 million for the six months ended
June 30, 2003, compared to $2.5 million for the six months ended June 30, 2002,
an increase of $1.3 million, or 52.0%. This increase is primarily attributable
to the increase in our long-term debt from approximately $35.1 million at June
30, 2002 to approximately $173.3 million at June 30, 2003 due to the senior
subordinated note offering and the expansion of our senior credit facility.

Other expenses.Other expenses totaled $5.0 million for the six months ended
June 30, 2003. Other expenses represent items that management considers
non-operating. Other expenses for the first six months of 2003 consisted of
$4.6 million in loss on the

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refinancing of our long-term debt, $960,000 in
expense recorded to recognize the change in fair value of stock purchase put
warrants (for additional information on these warrants, see Liquidity and
Capital Resources in this Item 2) and the release of $545,000 in reserves related
to our stockholder notes.

Liquidity and Capital Resources

As of June 30, 2003, we had working capital of $33.7 million, including cash
and cash equivalents of $9.9 million, compared to working capital of $2.4
million at December 31, 2002. We did not maintain a balance under terms of our
revolving line of credit at June 30, 2003. Whereas, we had a balance of $5.4
million on our revolving line of credit on December 31, 2002. The increase in
the working capital is due to acquisitions during the six months ended June 30,
2003, which were financed with long-term debt, as well as higher accounts
receivable as the result of increases in the Companys revenues during the six
months ended June 30, 2003.

Cash provided by operating activities
was $4.2 million for the six months ended
June 30, 2003, compared to cash provided by operating activities of $2.7
million for the six months ended June 30, 2002. The increase in cash flows from
operating activities was due to the acquisitions in the third quarter of 2002
and second quarter of 2003. Cash used in investing activities increased to
$95.0 million for the six months ended June 30, 2003 from cash used in
investing activities of $483,000 for the six months ended June 30, 2002. This
increase was due to acquisitions of The Brown Schools and Ramsay during the six
months ended June 30, 2003. Cash provided by financing activities increased to
$98.4 million for the six months ended June 30, 2003 from cash used in
financing activities of $1.8 million for the six months ended June 30, 2002.
This increase was due to borrowings for the acquisitions of the Brown Schools
facilities and Ramsay and the issuance of our series A convertible preferred
stock.

On June 30, 2003, we issued $150 million in senior subordinated notes, which
are fully and unconditionally guaranteed on a senior subordinated basis by
substantially all of our existing operating subsidiaries. Proceeds from the
issuance of the senior subordinated notes and the issuance of $12.5 million in
series A convertible preferred stock were used to finance the acquisition of
Ramsay and pay down substantially all of our long-term debt. Interest on the
senior subordinated notes accrues at the rate of 10.625% per annum and is
payable semi-annually in arrears on June 15 and December 15, commencing on
December 15, 2003. The senior subordinated notes will mature on June 15, 2013.

On April 1, 2003, concurrent with the acquisition of The Brown Schools, we
received $12.5 million from the private placement of 2,272,727 shares of our
series A convertible preferred stock with affiliates of Oak Investment Partners
and Salix Ventures and with The 1818 Fund. These investors purchased an additional
2,272,727 shares of our series A convertible preferred stock for $12.5 million
on June 19, 2003. The proceeds were used to acquire The Brown Schools and
Ramsay. The investors are previous investors in the Company, with Oak
Investment Partners and Salix Ventures (or related entities) being among our
co-founders. Representatives of Oak Investment Partners, Salix Ventures and Brown Brothers Harriman &
Co. currently serve on our Board of Directors.
Each share of series A convertible preferred stock is convertible into one
share of our common stock. The impact of the series A convertible preferred
stock on diluted earnings per share is calculated using the if-converted
method.

In connection with the closing of the sale of our senior subordinated notes,
our expanded senior credit facility with our senior lender, CapSource, was amended and restated to increase our senior
secured revolver to $50.0 million from $28.0 million and refinance $36.0
million in term loans with proceeds from the sale of the senior subordinated
notes. The term loans remain outstanding with a balance of $17.0 million. Our
amended and restated senior secured credit facility currently consists of
approximately $17.0 million of term loans and a $50.0 million revolving working
capital line of credit. Our credit facility is secured by substantially all of our assets and
the stock of our existing operating subsidiaries. The term loans accrue
interest at the Citibank, N.A. prime rate plus 4.5% subject to a floor of 8.75%
and are due in November 2003. The revolving line of credit accrues interest at
the Citibank, N.A. prime rate plus 2% subject to a floor of 6.25% and is due in
June 2006. At June 30, 2003, the effective interest rate under the revolving
line of credit was 6.59%. Until the maturity date, we may borrow, repay and
re-borrow an amount not to exceed the lesser of $50.0 million or the borrowing
base (as defined in the amended and restated credit facility). As of June 30,
2003, we had $50.0 million available under the revolving line of credit under
our amended and restated credit facility. Under the revolving line of credit,
all of our collections, except for Medicare and Medicaid payments, are
deposited into lockbox accounts controlled by CapSource. The funds deposited in
the lockboxes are returned to us on a daily basis. Prior to amending and
restating the senior credit facility, funds deposited in the lockboxes were
applied to outstanding borrowings on a daily basis. As a result, the
outstanding borrowings under the revolving line of credit are classified as
short-term as of December 31, 2002 and all periods prior to June 30, 2003. We
must pay on a monthly basis an unused fee in the amount of 0.5% per annum on
the unused portion of the amended and restated credit facility. Such fees were
approximately $28,000 for the six months ended June 30, 2003.

Our amended and restated credit facility contains customary covenants which
include: (1) a specified monthly patient census for any owned, operated or
leased facilities; (2) a limitation on capital expenditures, sales of assets,
mergers, changes of ownership, new principal lines of business, indebtedness,
dividends and redemptions; and (3) various financial covenants. In addition,
the amended and restated credit facility provides CapSource with a right of
first refusal to provide additional debt financing to us. As of June 30,
2003, we were in compliance with all debt covenant requirements. If we violate
one or more of these covenants, amounts outstanding under the amended and
restated credit facility could become immediately payable and additional
borrowings could be restricted. As of

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June 30, 2003, no balance was outstanding under the revolver portion of our amended and restated senior credit facility.

On April 1, 2003, our senior credit facility was expanded to approximately
$81.0 million with the increase of our revolving credit facility to $28.0
million from $17.5 million and a new $36.0 million term loan. We borrowed
approximately $52.2 million during April 2003, including the $36.0 million term
loan and $16.2 million under the revolving line of credit, to partially fund
our acquisition of The Brown Schools. The revolving line of credit and new
$36.0 million term loan were repaid on June 30, 2003 with proceeds from the
issuance of our senior subordinated notes.

On May 16, 2003, The 1818 Fund exercised its stock purchase warrant to purchase
372,412 shares of our common stock. Deducting the exercise price of $0.01 per
share based on the closing price of our common stock on May 15, 2003, The 1818
Fund received 372,039 shares of our common stock from the exercise of the
warrant. In addition, The 1818 Fund provided us with a written consent to waive
its ability to require that we repurchase the warrants for cash effective April
1, 2003. Thus, we are no longer required to record non-cash expense for
increases in the fair market value of our common stock. In certain
circumstances, The 1818 Fund has the right to require that we repurchase the
372,039 shares of our common stock that The 1818 Fund received upon the
exercise of the stock purchase warrant.

In connection with our acquisition of
Sunrise Behavioral Health, Ltd. in May
2000, we issued subordinated convertible notes in the amount of $3.6 million.
The principal amount of these convertible notes and the interest thereon was
converted into 537,908 shares of our common stock in April and May 2003, based
on a conversion price of $8.53 per share.

We also issued two promissory notes totaling $4.5 million in connection with
our acquisitions of three facilities in 2001. At June 30, 2003, one note with a
current principal balance of $1.0 million remained outstanding. This note
accrues interest at 9% per annum and is due June 30, 2005. Among other
customary covenants, the notes contains cross default covenants triggered by a
default of any other indebtedness of at least $1.0 million. We were in
compliance with these covenants as of June 30, 2003.

On June 28, 2002, Psychiatric Solutions entered into a securities purchase
agreement with The 1818 Fund to issue up to $20 million of senior subordinated
notes with detachable nominal warrants. At closing on June 28, 2002, a total of
$10 million of the senior subordinated notes were issued. On June 30, 2003, we
repaid principal of $10 million, accrued interest and a prepayment penalty of
3% to The 1818 Fund with proceeds from our issuance of senior subordinated
notes, and we no longer have the ability to borrow under the
securities purchase agreement with The 1818 Fund.

In connection with the issuance of the
senior subordinated notes to The 1818
Fund, we issued detachable stock purchase warrants for the purchase of 372,412
shares of our common stock at an exercise price of $.01 per share. Also, we
provided The 1818 Fund with the ability to require us to repurchase their
warrants or the common stock acquired upon exercise of the warrants at fair
market value for cash. The 1818 Fund exercised its
stock purchase warrant and received 372,039 shares of our common stock on May
16, 2003. Because The 1818 Fund had the ability to require us to repurchase the
warrants for cash, the warrants constituted a derivative that required changes
in value of the warrants to be recorded as an increase or decrease to our
earnings. In connection with the exercise of the warrants, The 1818 Fund
provided us with a written consent to waive its ability to require that we
repurchase the warrants for cash effective April 1, 2003. As such, we are no
longer required to record non-cash expense for increases in the fair market
value of our common stock.

On November 25, 2002, we entered into a mortgage loan agreement, insured by the
U.S. Department of Housing and Urban Development (HUD), to borrow $4,928,000,
secured by real estate located at Holly Hill Hospital in Raleigh, NC. Interest
accrues on the HUD loan at 5.95% and principal and interest are payable in 420
monthly installments through December 2037. We used proceeds from the loan to
replace $4,385,000 of our senior term loan with CapSource, pay certain
refinancing costs, and fund required escrow amounts for future improvements to
the property.

During April 2003, we completed the purchase of six psychiatric facilities from
The Brown Schools for $63 million in cash. On June 30, 2003, we acquired
Ramsay for approximately $85 million in cash, assumed debt and related fees.
See Recent Developments in this Item 2.

We believe that our working capital on hand, cash flows from operations and
additional borrowings under our line of credit will be sufficient to fund our
operating needs, planned capital expenditures and debt service requirements for
the next 12 months.

In addition, we intend to acquire additional psychiatric facilities and are
actively seeking acquisitions that fit our corporate growth strategy.
Management continually assesses our capital needs and, should the need arise,
we will seek additional financing, including debt or equity, to fund potential
acquisitions or for other corporate purposes. In negotiating such financing,
there can be no assurance that we will be able to raise additional capital on
terms satisfactory to us. Failure to obtain additional financing on reasonable
terms could have a negative effect on our plans to acquire additional
psychiatric facilities.

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Contractual Obligations

|                  |  |                                       |         |        |  |           |       |           |  |         |       |  |  |   |       |       |  |   |         | 
|----------------- |  | ------------------------------------- | ------- | ------ |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | ----- | ----- |  | - | ------- | 
|                  |  | Payments Due by Period (in thousands)
|                  |  |                                      
|                  |  |                                       |         |        |  | Less than |       |           |  |         |       |  |  |   |       | After
|                  |  | Total                                 |         | 1 year |  | 1-3 years |       | 4-5 years |  | 5 years
|                  |  |                                       |         |        |  |           |       |           |  |        
|Long term debt    |  | $                                     | 173,268 |        |  | $         | 761   |           |  | $       | 742   |  |  | $ | 53    |       |  | $ | 171,712 | 
|Lease obligations |  |                                       | 21,368  |        |  |           | 5,535 |           |  |         | 8,673 |  |  |   | 2,855 |       |  |   | 4,305   | 
|                  |  |                                       |         |        |  |           |       |           |  |         |       |  |  |   |       |       |  |   |         | 
|                  |  | $                                     | 194,636 |        |  | $         | 6,296 |           |  | $       | 9,415 |  |  | $ | 2,908 |       |  | $ | 176,017 | 
|                  |  |                                       |         |        |  |           |       |           |  |         |       |  |  |   |       |       |  |   |         | 

The carrying value of our total long-term debt, including current maturities,
of $761,000 and $43.8 million at June 30, 2003 and December 31, 2002,
respectively, approximated fair value. We had $17.0 million of variable rate
debt outstanding at June 30, 2003. At the June 30, 2003 borrowing level, a
hypothetical 10% adverse change in interest rates, would decrease net income
and cash flows by $150,000.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. In preparing our
financial statements, we are required to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, and expenses
included in our financial statements. Estimates are based on historical
experience and other information currently available, the results of which form
the basis of such estimates. While we believe our estimation processes are
reasonable, actual results could differ from those estimates. The following
represent the estimates considered most critical to our operating performance
and involve the most subjective and complex assumptions and assessments.

Allowance for doubtful accounts

Our ability to collect outstanding patient receivables from third party payors
and receivables due under our management contracts is critical to our operating
performance and cash flows.

The primary collection risk with regard to patient receivables lies with
uninsured patient accounts or patient accounts for which primary insurance has
paid but a patient portion remains outstanding. We estimate the allowance for
doubtful accounts primarily based upon the age of the accounts since the
patient discharge date. We continually monitor our accounts receivable balances
and utilize cash collection data to support our estimates of the provision for
doubtful accounts. Significant changes in payor mix or business office
operations could have a significant impact on our results of operations and
cash flows.

The primary collection risk with regard to receivables due under management
contracts is attributable to liquidity of client financial capital. We estimate
the allowance for doubtful accounts for these receivables based primarily upon
the specific identification of potential collection issues. As with our patient
receivables, we continually monitor our accounts receivable balances and
utilize cash collection data to support our estimates of the provision for
doubtful accounts.

Allowances for contractual discounts

The Medicare regulations and various managed care contracts are often complex
and may include multiple reimbursement mechanisms for different types of
services provided in our facilities and cost settlement provisions requiring
complex calculations and assumptions subject to interpretation. We estimate the
allowance for contractual discounts on a payer-specific basis given our
interpretation of the applicable regulations or contract terms. The services
authorized and provided and related reimbursement are often subject to
interpretation that could result in payments that differ from our
estimates. These differences are recorded as a component of revenue
in the period they are identified. Additionally, updated regulations and contract renegotiations occur frequently
necessitating continual review and assessment of the estimation process by
management.

Professional and General Liability

We are subject to medical malpractice and other lawsuits due to the nature of
the services we provide. For the years ended December 31, 2000 and 2001, and
through December 5, 2002, we have obtained professional and general liability
insurance for claims in excess of $100,000, up to a maximum of $1 million per
occurrence and $3 million aggregate, with an additional $5 million in excess
coverage. On December 6, 2002, the deductible on individual malpractice claims
was raised to $3 million and the insured limit to $10 million to mitigate the
increases in the cost of professional and general liability insurance and to
increase coverage for additional exposures due to acquisitions. The reserve for
professional and general liability risks is based on historical claims,
demographic factors, industry trends, severity factors, and other actuarial
assumptions calculated by an independent third party. This estimate is
discounted to its present value using a 5% discount rate. This estimated
accrual for professional and general liabilities could be
significantly affected should current and future occurrences differ from
historical claim trends and expectations. We have established

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a captive insurance company to manage this additional self-insured retention. While
claims are monitored closely when estimating professional and general liability
accruals, the complexity of the claims and wide range of potential outcomes
often hampers timely adjustments to the assumptions used in these estimates.
The reserve for professional and general liability was approximately
$1.8 million as of June 30, 2003, with approximately $750,000 relating to previous
years.

Income taxes

As part of our process for preparing consolidated financial statements,
management is required to compute income taxes in each of the jurisdictions in
which we operate. This process involves estimating the current tax benefit or
expense of future deductible and taxable temporary differences. The future
deductible and taxable temporary differences are recorded as deferred tax
assets and liabilities that are components of our balance sheet. Management
then assesses the realizability of the deferred tax assets based on reversals
of deferred tax liabilities and, if necessary, estimates of future taxable
income. If management determines that some or all of a deferred tax asset will
more likely than not be realized, then a valuation allowance is recorded
against the deferred tax asset. Management must also assess the impact of our
acquisitions on the realization of deferred tax assets subject to a valuation
allowance to determine if all or a portion of the valuation allowance will be
offset by reversing taxable differences or future taxable income of the
acquired entity. To the extent the valuation allowance can be reversed due to
the estimated future taxable income of an acquired entity, then our valuation
allowance is reduced accordingly as an adjustment to purchase price.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The information included in this Item 3 is considered to constitute
forward-looking statements for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Act of 1934, as amended. The additional information required by
this item is provided under Part I, Item 2 of this Quarterly Report under the
heading Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources.




ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon their evaluation, the Chief Executive Officer and Chief Accounting Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in our periodic SEC filings.
There have been no significant changes in internal control over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

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PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

We are subject to various claims and legal actions which arise in the ordinary
course of our business. In the opinion of management, we are not currently a
party to any proceeding which would have a material adverse effect on our
financial condition or results of operations.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 6, 2003, we held our annual meeting of stockholders. The following
matters were submitted to a vote of stockholders:

(1) The stockholders elected Class I directors, Christopher Grant, Jr. and
Ann H. Lamont. The votes were as follows:

|                       |  |  |           | 
|---------------------- |  |  | --------- | 
|Christopher Grant, Jr. |  |  |           | 
|Votes cast for         |  |  | 7,215,237 | 
|Votes withheld         |  |  | 21,382    | 
|                      
|Ann H. Lamont          |  |  |           | 
|Votes cast for         |  |  | 7,215,237 | 
|Votes withheld         |  |  | 21,382    | 

(2) The stockholders approved the Amended and Restated Psychiatric
Solutions, Inc. Equity Incentive Plan. The votes were as follows:

|                   |  |  |           | 
|------------------ |  |  | --------- | 
|Votes cast for     |  |  | 7,193,114 | 
|Votes cast against |  |  | 42,268    | 
|Abstentions        |  |  | 1,237     | 
|Broker non-votes   |  |  |          | 

(3) The stockholders approved the Amended and Restated Psychiatric
Solutions, Inc. Outside Directors Non-Qualified Stock Option Plan. The votes
were as follows:

|                   |  |  |           | 
|------------------ |  |  | --------- | 
|Votes cast for     |  |  | 7,177,730 | 
|Votes cast against |  |  | 54,380    | 
|Abstentions        |  |  | 4,509     | 
|Broker non-votes   |  |  |          | 




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits



| | 2.1 |  | Asset Purchase Agreement, dated February 13, 2003, by and between
The Brown Schools, Inc. and Psychiatric Solutions, Inc. as amended by
Amendment No. 1 to Asset Purchase Agreement, dated March 31, 2003, by
and between The Brown Schools, Inc. and Psychiatric Solutions, Inc.
(incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K, filed on April 9, 2003).
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2.2 |  | Agreement and Plan of Merger, dated April 8, 2003, by and between
Psychiatric Solutions, Inc., PSI Acquisition Sub, Inc. and Ramsay
Youth Services, Inc. (incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K, filed on April 10, 2003).                                                                                                                        
|
| | 2.3 |  | Stockholder Voting Agreement, dated April 8, 2003, between
Psychiatric Solutions, Inc., Paul J. Ramsay, Ramsay Holdings HSA
Limited, Paul Ramsay Holdings Pty. Limited, and Paul Ramsay Hospitals
Pty. Limited (incorporated by reference to Exhibit 2.2 to the
Companys Current Report on Form 8-K, filed on April 10, 2003).                                                                  
|
| | 2.4 |  | Stockholder Voting Agreement, dated April 8, 2003, between
Psychiatric Solutions, Inc. and Luis E. Lamela (incorporated by
reference to Exhibit 2.3 to the Companys Current Report on Form 8-K,
filed on April 10, 2003).                                                                                                                                                                       
|
| | 3.1 |  | Amended Restated Certificate of Incorporation, filed with
the Delaware Secretary of State on March 9, 1998 (incorporated by
reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K
for the fiscal year ended April 30, 1998).                                                                                                                                                      

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| | 3.2  |  | Certificate of Amendment to
Amended and Restated Certificate of Incorporation,
filed with the Delaware Secretary of State on August 5, 2002
(incorporated by reference to Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended July 31, 2002).                                                                
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 3.3  |  | Certificate of Amendment to
Amended and Restated Certificate of Incorporation, filed with the
Delaware Secretary of State on March 21, 2003 (incorporated by
reference to Appendix A of the Companys Definitive Proxy
Statement filed January 22, 2003).                                                                                 
|
| | 3.4  |  | The Companys Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K
for the fiscal year ended April 30, 1997).                                                                                                                                                                
|
| | 4.1  |  | Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock
of the Company (incorporated by reference to Appendix D of the
Companys Definitive Proxy Statement filed January 22, 2003).                                                                                                                  
|
| | 4.2  |  | Indenture, dated as of June 30, 2003, between Psychiatric
Solutions, Inc., the Guarantors named therein and Wachovia Bank,
National Association, as Trustee (incorporated by reference to Exhibit
4.10 to the Companys Registration Statement on Form S-4, filed on
July 30, 2003 (Reg. No. 333-107453)) (the S-4).                    
|
| | 4.3  |  | Form of Notes (incorporated by reference to Exhibit 4.11 to the
S-4).                                                                                                                                                                                                                                                                     
|
| | 4.4  |  | Purchase Agreement, dated as of June 19, 2003, between
Psychiatric Solutions, Inc., the Guarantors named therein, Lehman
Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Jefferies & Company, Inc. (incorporated by reference to Exhibit 4.12
to the S-4).                                                          
|
| | 4.5  |  | Exchange and Registration Rights Agreement, dated as of June 30,
2003, among Psychiatric Solutions, Inc., the Guarantors named therein,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Jefferies & Company, Inc. (incorporated by reference
to Exhibit 4.13 to the S-4).                                    
|
| | 10.1 |  | Second Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of June 30, 2003, among Psychiatric Solutions,
Inc., the Guarantors named therein, CapitalSource Finance LLC, as
administrative agent and collateral agent for Lenders, and the Lenders
thereunder (incorporated by reference to Exhibit 10.27 to the S-4).
|
| | 31.1 |  | Certification of the Chief Executive Officer of Psychiatric
Solutions, Inc. Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                             
|
| | 31.2 |  | Certification of the Chief
Accounting Officer of Psychiatric
Solutions, Inc. Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                            
|
| | 32.1 |  | Certifications of the Chief Executive Officer and Chief
Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as amended, and 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                   



| | (b) Reports
on Form 8-K |  | 
| | ----------------------- |  | 



| | 1. |  | On April 9, 2003, we filed a Report on Form 8-K, which reported
the issuance of a press release announcing the acquisition of five
freestanding psychiatric facilities from The Brown Schools, Inc. and
our expectation to complete the acquisition of the sixth facility
later in April 2003.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | On April 10, 2003, we filed a Report on Form 8-K, which
reported the issuance of a press release announcing that we had
entered into an Agreement and Plan of Merger for the acquisition of
Ramsay Youth Services, Inc. for approximately $78 million in cash.                                
|
| | 3. |  | On April 15, 2003, we
furnished pursuant to Item 9 of Form 8-K a copy of our press release announcing updated
earnings guidance for the year ending December 31, 2003, assuming the
completion of our acquisition of Ramsay Youth Services, Inc.                                              
|
| | 4. |  | On May 6, 2003, we furnished pursuant to Item 9 of Form 8-K a
copy of our press release containing our first
quarter 2003 earnings results.                                                                                                                                                   
|
| | 5. |  | On June 9, 2003, we filed a Report on Form 8-K, which reported
the issuance of a press release announcing our planned private
placement offering of $150 million of senior subordinated notes.                                                                                                
|
| | 6. |  | On June 9, 2003, we furnished pursuant to Item 9 of Form 8-K
information that had not been previously publicly reported that was
disclosed in our preliminary offering memorandum for our senior
subordinated note offering.                                                                  
|
| | 7. |  | On June 16, 2003, we filed a Form 8-K/A regarding the
acquisition of six facilities from The Brown Schools, Inc. to include
the financial statements and pro forma information required by Form
8-K.                                                                                          

Notwithstanding the foregoing, information furnished
under Item 9 and Item 12 of our Current Reports on Form 8-K,
including the related exhibits shall not be deemed to be filed for
purposes of Section 18 of the Securities Exchange Act of 1934.

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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 thereunto duly authorized.

|                       |  |                            
|---------------------- |  | ---------------------------
|                       |  | PSYCHIATRIC SOLUTIONS, INC.
|                       |  |                            
|Dated: August 14, 2003 |  | /s/ Jack E. Polson         
|                       |  |                            
|                       |  | Jack E. Polson             
|                       |  | Chief Accounting Officer