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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
March 31, 2003 or                                                        
|           |  |                                                                                                 
|o          |  | 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                        |  | 23-2491707                          
|(State or Other Jurisdiction of |  | (I.R.S. Employer Identification No.)
|Incorporation or Organization)  |  |                                     

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)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

|                             |  |                                          
|---------------------------- |  | -----------------------------------------
|Title Of Each Class          |  | Name of Each Exchange On Which Registered
|                             |  |                                          
|Common Stock, $.01 par value |  | Nasdaq National Market                   

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 o

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

As of May 14, 2003, 7,738,641 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                                                     
|EX-99.1 SECTION 906 CERTIFICATIONS OF CEO AND CAO                                            



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PSYCHIATRIC SOLUTIONS, INC.

TABLE OF CONTENTS

|                                                                                                               |  |  |    | 
|-------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I. FINANCIAL INFORMATION                                                                                  |  |  |    | 
|Item 1. Financial Statements                                                                                   |  |  | 1  | 
|Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002                   |  |  | 1  | 
|Condensed Consolidated Statements of Income for the three months ended March 31, 2003 and 2002 (Unaudited)     |  |  | 2  | 
|Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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                  |  |  | 10 | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                             |  |  | 17 | 
|Item 4. Controls and Procedures                                                                                |  |  | 17 | 
|PART II. OTHER INFORMATION                                                                                     |  |  |    | 
|Item 1. Legal Proceedings                                                                                      |  |  | 18 | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                    |  |  | 18 | 
|Item 6. Exhibits and Reports on Form 8-K                                                                       |  |  | 18 | 





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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)

|                                                        |                                                                                                                               |   |        |        |             |   |              |        |   |  | 
|------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | - | ------ | ------ | ----------- | - | ------------ | ------ | - |  | 
|                                                        |                                                                                                                               |   |        |        | March 31,   |   | December 31,
|                                                        |                                                                                                                               |   |        |        | 2003        |   | 2002        
|                                                        |                                                                                                                               |   |        |        |             |   |             
|                                                        |                                                                                                                               |   |        |        | (Unaudited) |   |              |        |  
|ASSETS                                                 
|Current assets:                                         |                                                                                                                               |   |        |        |             |   |              |       
|                                                        | Cash                                                                                                                          |   | $      | 4,045  |             |   | $            | 2,392  |  
|                                                        | Accounts receivable, less allowance for doubtful accounts of
$4,936 (unaudited) and $5,284, respectively                      |   |        | 22,137 |             |   |              | 19,473 |  
|                                                        | Prepaids and other                                                                                                            |   |        | 2,832  |             |   |              | 2,219  |  
|                                                        |                                                                                                                               |   |        |        |             |   |              |       
|Total current assets                                    |                                                                                                                               |   | 29,014 |        |             |   | 24,084       |       
|Property and equipment, net of accumulated depreciation |                                                                                                                               |   | 33,764 |        |             |   | 33,547       |       
|Cost in excess of net assets acquired, net              |                                                                                                                               |   | 26,846 |        |             |   | 28,822       |       
|Contracts, net                                          |                                                                                                                               |   | 3,558  |        |             |   | 607          |       
|Other assets                                            |                                                                                                                               |   | 3,438  |        |             |   | 3,078        |       
|                                                        |                                                                                                                               |   |        |        |             |   |              |       
|Total assets                                            |                                                                                                                               | $ | 96,620 |        |             | $ | 90,138       |       
|                                                        |                                                                                                                               |   |        |        |             |   |              |       
|LIABILITIES AND STOCKHOLDERS EQUITY                   
|Current liabilities:                                    |                                                                                                                               |   |        |        |             |   |              |       
|                                                        | Accounts payable                                                                                                              |   | $      | 3,486  |             |   | $            | 3,338  |  
|                                                        | Salaries and benefits payable                                                                                                 |   |        | 3,647  |             |   |              | 4,825  |  
|                                                        | Other accrued liabilities                                                                                                     |   |        | 8,963  |             |   |              | 6,482  |  
|                                                        | Revolving line of credit                                                                                                      |   |        | 6,975  |             |   |              | 5,383  |  
|                                                        | Current portion of long-term debt                                                                                             |   |        | 2,554  |             |   |              | 1,687  |  
|                                                        |                                                                                                                               |   |        |        |             |   |              |       
|Total current liabilities                               |                                                                                                                               |   | 25,625 |        |             |   | 21,715       |       
|Long-term debt, less current portion                    |                                                                                                                               |   | 36,657 |        |             |   | 36,752       |       
|Deferred tax liability                                  |                                                                                                                               |   | 2,502  |        |             |   | 258          |       
|Other liabilities                                       |                                                                                                                               |   | 945    |        |             |   | 864          |       
|                                                        |                                                                                                                               |   |        |        |             |   |              |       
|Total liabilities                                       |                                                                                                                               |   | 65,729 |        |             |   | 59,589       |       
|Stockholders equity:                                   |                                                                                                                               |   |        |        |             |   |              |       
|                                                        | Preferred stock, $0.01 par value, 8,000 shares authorized;
no shares issued                                                   |   |        |       |             |   |              |       |  
|                                                        | Common stock, $0.01 par value, 48,000 shares authorized;
7,739 issued and outstanding at March 31, 2003
and December 31, 2002 |   |        | 77     |             |   |              | 77     |  
|                                                        | Additional paid-in capital                                                                                                    |   |        | 35,013 |             |   |              | 35,008 |  
|                                                        | Notes receivable from stockholders                                                                                            |   |        | (711   | )           |   |              | (259   | )
|                                                        | Accumulated deficit                                                                                                           |   |        | (3,488 | )           |   |              | (4,277 | )
|                                                        |                                                                                                                               |   |        |        |             |   |              |       
|Total stockholders equity                              |                                                                                                                               |   | 30,891 |        |             |   | 30,549       |       
|                                                        |                                                                                                                               |   |        |        |             |   |              |       
|Total liabilities and stockholders equity              |                                                                                                                               | $ | 96,620 |        |             | $ | 90,138       |       
|                                                        |                                                                                                                               |   |        |        |             |   |              |       

See notes to condensed consolidated financial statements

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

|                                            |                            |   |                              |       |      |   |        |       | 
|------------------------------------------- | -------------------------- | - | ---------------------------- | ----- | ---- | - | ------ | ----- | 
|                                            |                            |   | Three Months Ended March 31,
|                                            |                            |   |                             
|                                            |                            |   | 2003                         |       | 2002
|                                            |                            |   |                              |       |     
|Revenue                                     |                            | $ | 37,104                       |       |      | $ | 23,188 |      
|Salaries, wages and employee benefits       |                            |   | 17,785                       |       |      |   | 13,970 |      
|Professional fees                           |                            |   | 4,451                        |       |      |   | 3,108  |      
|Supplies                                    |                            |   | 1,691                        |       |      |   | 1,099  |      
|Rentals and leases                          |                            |   | 248                          |       |      |   | 190    |      
|Other operating expenses                    |                            |   | 7,159                        |       |      |   | 1,572  |      
|Provision for bad debts                     |                            |   | 1,322                        |       |      |   | 715    |      
|Depreciation and amortization               |                            |   | 667                          |       |      |   | 386    |      
|Interest expense                            |                            |   | 1,420                        |       |      |   | 1,372  |      
|Change in valuation of put warrants         |                            |   | 960                          |       |      |   |       |      
|Change in reserve on stockholder notes      |                            |   | (461                         | )     |      |   |       |      
|                                            |                            |   |                              |       |      |   |        |      
|                                            |                            |   | 35,242                       |       |      |   | 22,412 |      
|Income before income taxes                  |                            |   | 1,862                        |       |      |   | 776    |      
|                                            | Provision for income taxes |   |                              | 1,073 |      |   |        | 21    | 
|                                            |                            |   |                              |       |      |   |        |      
|Net income                                  |                            | $ | 789                          |       |      | $ | 755    |      
|                                            |                            |   |                              |       |      |   |        |      
|Earnings per common share:                  |                            |   |                              |       |      |   |        |      
|                                            | Basic                      |   | $                            | 0.10  |      |   | $      | 0.15  | 
|                                            |                            |   |                              |       |      |   |        |      
|                                            | Diluted                    |   | $                            | 0.10  |      |   | $      | 0.14  | 
|                                            |                            |   |                              |       |      |   |        |      
|Shares used in computing per share amounts: |                            |   |                              |       |      |   |        |      
|                                            | Basic                      |   |                              | 7,739 |      |   |        | 4,991 | 
|                                            | Diluted                    |   |                              | 8,209 |      |   |        | 5,327 | 

See notes to condensed consolidated financial statements

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PSYCHIATRIC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In Thousands)

|                                                                                            |                                              |                           |       |                              |        |      |       |     |        |  
|------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------- | ----- | ---------------------------- | ------ | ---- | ----- | --- | ------ | -
|                                                                                            |                                              |                           |       | Three Months Ended March 31,
|                                                                                            |                                              |                           |       |                             
|                                                                                            |                                              |                           |       | 2003                         |        | 2002
|                                                                                            |                                              |                           |       |                              |        |     
|Operating Activities                                                                        |                                              |                           |       |                              |        |      |       |    
|Net income                                                                                  |                                              | $                         | 789   |                              |        | $    | 755   |    
|Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |                                              |                           |       |                              |        |      |       |    
|                                                                                            | Depreciation and amortization                |                           |       | 667                          |        |      |       | 386 |       
|                                                                                            | Provision for doubtful accounts              |                           |       | 1,322                        |        |      |       | 715 |       
|                                                                                            | Accretion of detachable warrants             |                           |       | 77                           |        |      |       | 390 |       
|                                                                                            | Non-cash stock compensation expense          |                           |       | 5                            |        |      |       | 109 |       
|                                                                                            | Amortization of loan costs                   |                           |       | 160                          |        |      |       | 51  |       
|                                                                                            | Change in deferred tax liability             |                           |       | 1,033                        |        |      |       |    |       
|                                                                                            | Change in valuation of put warrants          |                           |       | 960                          |        |      |       |    |       
|                                                                                            | Change in reserve on stockholder notes       |                           |       | (461                         | )      |      |       |    |       
|                                                                                            | Long-term interest accrued                   |                           |       | 81                           |        |      |       | 81  |       
|                                                                                            | Changes in operating assets and liabilities: |                           |       |                              |        |      |       |     |       
|                                                                                            |                                              | Accounts receivable       |       |                              | (3,986 | )    |       |     | (2,430 | )
|                                                                                            |                                              | Prepaids and other assets |       |                              | (973   | )    |       |     | (101   | )
|                                                                                            |                                              | Accounts payable          |       |                              | 148    |      |       |     | 361    |  
|                                                                                            |                                              | Accrued liabilities       |       |                              | 1,303  |      |       |     | (662   | )
|                                                                                            |                                              |                           |       |                              |        |      |       |    
|Net cash provided by (used in) operating activities                                         |                                              |                           | 1,125 |                              |        |      | (345  | )  
|Investing activities:                                                                       |                                              |                           |       |                              |        |      |       |    
|Capital purchases of property and equipment                                                 |                                              |                           | (628  | )                            |        |      | (187  | )  
|Change in net assets of discontinued operations                                             |                                              |                           |      |                              |        |      | (36   | )  
|Other assets                                                                                |                                              |                           | (180  | )                            |        |      | (49   | )  
|                                                                                            |                                              |                           |       |                              |        |      |       |    
|Net cash used in investing activities                                                       |                                              |                           | (808  | )                            |        |      | (272  | )  
|Financing activities:                                                                       |                                              |                           |       |                              |        |      |       |    
|Net principal borrowings on long-term debt                                                  |                                              |                           | 1,336 |                              |        |      | 570   |    
|Payment of loan costs                                                                       |                                              |                           |      |                              |        |      | (62   | )  
|Proceeds from issuance of common stock                                                      |                                              |                           |      |                              |        |      | 4     |    
|                                                                                            |                                              |                           |       |                              |        |      |       |    
|Net cash used in financing activities                                                       |                                              |                           | 1,336 |                              |        |      | 512   |    
|Net increase (decrease) in cash                                                             |                                              |                           | 1,653 |                              |        |      | (105  | )  
|Cash at beginning of the period                                                             |                                              |                           | 2,392 |                              |        |      | 1,262 |    
|                                                                                            |                                              |                           |       |                              |        |      |       |    
|Cash at end of the period                                                                   |                                              | $                         | 4,045 |                              |        | $    | 1,157 |    
|                                                                                            |                                              |                           |       |                              |        |      |       |    
|Significant Non-cash Transactions:                                                          |                                              |                           |       |                              |        |      |       |    
|Issuance of detachable stock warrants as consideration for Bridge Loan                      |                                              | $                         |      |                              |        | $    | 299   |    
|                                                                                            |                                              |                           |       |                              |        |      |       |    

See notes to condensed consolidated financial statements

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003

1. 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. Operating results for the three months ended March 31, 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.

2. 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 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. The Company has calculated its 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):

|                                   |                                                                  |   |                              |       |      |   |      |       | 
|---------------------------------- | ---------------------------------------------------------------- | - | ---------------------------- | ----- | ---- | - | ---- | ----- | 
|                                   |                                                                  |   | Three months ended March 31,
|                                   |                                                                  |   |                             
|                                   |                                                                  |   | 2003                         |       | 2002
|                                   |                                                                  |   |                              |       |     
|Numerator:                         |                                                                  |   |                              |       |      |   |      |      
|                                   | Net income available to common stockholders                      |   | $                            | 789   |      |   | $    | 755   | 
|Denominator:                       |                                                                  |   |                              |       |      |   |      |      
|                                   | Weighted average shares outstanding for basic earnings per share |   |                              | 7,739 |      |   |      | 4,991 | 
|                                   | Effects of dilutive stock options and warrants outstanding       |   |                              | 470   |      |   |      | 336   | 
|                                   |                                                                  |   |                              |       |      |   |      |      
|                                   | Shares used in computing diluted earnings per common share       |   |                              | 8,209 |      |   |      | 5,327 | 
|                                   |                                                                  |   |                              |       |      |   |      |      
|Earnings per common share, basic   |                                                                  | $ | 0.10                         |       |      | $ | 0.15 |      
|                                   |                                                                  |   |                              |       |      |   |      |      
|Earnings per common share, diluted |                                                                  | $ | 0.10                         |       |      | $ | 0.14 |      
|                                   |                                                                  |   |                              |       |      |   |      |      

Diluted earnings per share for the three months ended March 31, 2003 and 2002,
do not include debt outstanding that is convertible into 422,000 and 483,000
shares, respectively, as its effect would be antidilutive.

3. Stock-Based Compensation

The Company accounts for its 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. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. The Company does 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 the Company had
accounted for its employee stock options under the fair value method. The fair
value of options was estimated using the Black-Scholes option pricing model.

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003

The following weighted-average assumptions were used:

|                        |  |                                      |       |      |  |  |        |  
|----------------------- |  | ------------------------------------ | ----- | ---- |  |  | ------ | -
|                        |  | For the three months ended March 31,
|                        |  |                                     
|                        |  | 2003                                 |       | 2002
|                        |  |                                      |       |     
|Risk-free interest rate |  |                                      | 2.44  | %    |  |  | 3.00   | %
|Volatility              |  |                                      | 68.70 | %    |  |  | 111.70 | %
|Expected life           |  |                                      | 4     |      |  |  | 4      |  
|Dividend yield          |  |                                      | 0.00  | %    |  |  | 0.00   | %

The weighted-average fair value of options granted are presented in the
following table:

|                                         |  |                                      |      |      |  |   |      | 
|---------------------------------------- |  | ------------------------------------ | ---- | ---- |  | - | ---- | 
|                                         |  | For the three months ended March 31,
|                                         |  |                                     
|                                         |  | 2003                                 |      | 2002
|                                         |  |                                      |      |     
|Exercise Price equal to Market Price     |  | $                                    | 3.25 |      |  | $ | 4.12 | 
|Exercise Price less than Market Price    |  | $                                    |     |      |  | $ | 3.74 | 
|Exercise Price greater than Market Price |  | $                                    | 5.04 |      |  | $ | 2.64 | 

Option valuation models require the input of highly subjective assumptions.
Because the Companys 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 its 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
Companys pro forma information follows (in thousands, except per share
amounts):

|                                                  |  |                                      |      |      |  |   |      | 
|------------------------------------------------- |  | ------------------------------------ | ---- | ---- |  | - | ---- | 
|                                                  |  | For the three months ended March 31,
|                                                  |  |                                     
|                                                  |  | 2003                                 |      | 2002
|                                                  |  |                                      |      |     
|Net income                                        |  | $                                    | 789  |      |  | $ | 755  | 
|Pro forma compensation expense from stock options |  |                                      | 25   |      |  |   | 67   | 
|                                                  |  |                                      |      |      |  |   |      | 
|Pro forma net income                              |  | $                                    | 764  |      |  | $ | 688  | 
|                                                  |  |                                      |      |      |  |   |      | 
|Basic pro forma earnings per share                |  | $                                    | 0.10 |      |  | $ | 0.14 | 
|                                                  |  |                                      |      |      |  |   |      | 
|Diluted pro forma earnings per share              |  | $                                    | 0.09 |      |  | $ | 0.13 | 
|                                                  |  |                                      |      |      |  |   |      | 

4. Mergers and Acquisitions

Acquiring free-standing psychiatric facilities is a key part of Psychiatric
Solutions business strategy. Because Psychiatric Solutions has grown through
mergers and acquisitions accounted for as purchases, it is difficult to make
meaningful comparisons between its financial statements for the fiscal periods
presented. In addition, because Psychiatric Solutions owns a relatively small
number of facilities, an individual acquisition may have a material effect on
its overall operating performance. At the time a facility is acquired,
Psychiatric Solutions implements a number of measures to lower costs and may
make significant investments in the facility. Therefore, the financial
performance of a newly acquired facility may adversely affect the Companys
overall performance in the short-term.

On July 1, 2002, Psychiatric Solutions 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 owns the assets and operations of Riveredge
Hospital located near Chicago, Illinois. The acquisition was financed in part
through an amendment to Psychiatric Solutions 2001 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.

As a part of the merger with PMR, the Company became the holder of promissory
notes with certain shareholders of PMR and
5Table of ContentsPSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003subsequently Psychiatric Solutions. A certain provision of the shareholder
notes allows the shareholders to repay those notes with stock of the Company at
the higher of a stated price or market value of the stock. Because the stated
price was higher than the market value at December 31, 2002, the Company
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 the
Companys common stock during the three months ended March 31, 2003, the
Company released $461,000 of the reserve on the shareholder notes.During the three months ended March 31, 2003, the Company finalized the
valuation of identifiable intangible assets acquired in the merger with PMR. As
a result, the Company reclassified approximately $3.7 million, the value of
contracts acquired in the PMR merger, from cost in excess of net assets
acquired to contracts.5. DebtIn November 2001, Psychiatric Solutions entered into a senior credit facility
of $33.2 million (2001 Senior Credit Facility). The 2001 Senior Credit
Facility was amended on June 28, 2002 to provide for an additional $7.95
million pursuant to a new non-revolving term note. The 2001 Senior Credit
Facility, as revised, provides for a total credit facility
of $41.15 million, consisting of $23.65 million of non-revolving term loans and
a $17.5 million revolving working capital line of credit. Both
facilities are
secured by substantially all of Psychiatric Solutions assets and the stock of
its subsidiaries. The term loans accrue interest at the Citibank, N.A. prime
rate plus 4.25% to 4.75% subject to a floor of 10%. The revolving line of credit accrues interest at the
Citibank, N.A. prime rate plus 2% subject to a floor of 7.25%, and is due in
November 2004. At March 31, 2003, the interest rate was 7.25%. Until the due
date, Psychiatric Solutions may borrow, repay and re-borrow an amount not to
exceed the lesser of $17.5 million or the borrowing base (as defined in the
2001 Senior Credit Facility). As of March 31, 2003, the Company had
approximately $7.2 million available under the revolving line of credit. Under
the revolving line of credit, all of Psychiatric Solutions collections, except
for Medicare and Medicaid payments, are deposited into lockbox accounts
controlled by the lender. The funds deposited in the lockbox are applied to
outstanding borrowings with the lender 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 March 31, 2003. Psychiatric Solutions
must pay an unused fee in the amount of 0.05% per month of the monthly unused
portion of the 2001 Senior Credit Facility. Such fees were approximately
$22,000 for the three months ended March 31, 2003.The 2001 Senior Credit Facility contains customary covenants which include: (i)
a specified monthly patient census for any owned, operated or leased
facilities, (ii) a limitation on capital expenditures, sales of assets,
mergers, changes of ownership and management, new lines of business and
dividends and (iii) various financial covenants. As of March 31, 2003,
Psychiatric Solutions was in compliance with all applicable debt covenant
requirements. If Psychiatric Solutions results of operations or cash flows
decline and result in violation of one or more of these covenants, amounts
outstanding under the 2001 Senior Credit Facility could become immediately
payable and additional borrowings could be restricted. As of March 31, 2003,
approximately $24.0 million was outstanding under the 2001 Senior Credit
Facility. As discussed in Note 9, the Senior Credit Facility was amended April
1, 2003.In connection with the acquisition of Sunrise Behavioral Health, Ltd., a
manager of inpatient psychiatric units in acute care hospitals, in May 2000,
Psychiatric Solutions issued subordinated convertible notes in the amount of
$3.6 million. These convertible notes are due May 1, 2005 and accrue interest
at 9% per annum. The principal amount of these convertible notes is convertible
into shares of the Companys common stock based on conversion prices of $8.53
to $9.59 per share.Psychiatric Solutions also issued promissory notes totaling $4.5 million in
connection with its acquisitions of three facilities. One note in the amount of
$2.5 million accrued interest at 9% per annum and matured on June 30, 2002.
Psychiatric Solutions paid this note in full with a portion of the proceeds of
its subordinated debt offering described below. The remaining $2.0 million note
accrues interest at 9% per annum and is due June 30, 2005. Among other
customary covenants, both notes contain cross default covenants triggered by a
default of any other indebtedness of at least $1.0 million. Psychiatric
Solutions was in compliance with these covenants as of March 31,
2003. As discussed in Note 9, the Company paid down $1.0 million on
its subordinated debt subsequent to March 31, 2003.On June 28, 2002, Psychiatric Solutions entered into a securities purchase
agreement with 1818 Mezzanine Fund II, L.P. (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. Approximately $7.5 million of the proceeds were used to fund
a portion of the acquisition of Riveredge Hospital in July 2002, and
approximately $2.5 million of the proceeds were used to reduce current
indebtedness. The remaining $10 million of senior subordinated notes may be
issued to fund additional acquisitions of free-standing psychiatric facilities
and for general working capital purposes, subject generally to approval by the
1818 Fund. The notes have a term of seven years and bear interest at 12%
annually, payable quarterly. The notes provide for a prepayment penalty of 6%,
3% and 1% if the notes are prepaid prior to the first anniversary, second
anniversary or third anniversary of the closing date, respectively. The notes
grant the holders the right to require prepayment in the event of a change of
control of Psychiatric Solutions, subject to a prepayment penalty of 1% if
redeemed on or before the third anniversary of the closing date. The notes also
require Psychiatric Solutions to comply with financial and other covenants.6Table of ContentsPSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003In connection with the issuance of the senior subordinated notes, the Company
issued detachable stock purchase warrants for the purchase of 372,412 shares of
the Companys stock at an exercise price of $.01 per share which provide the
holder with the ability to require the Company to repurchase their warrants or
stock acquired upon exercise of the warrants at fair market value for cash. The
agreement provides the holder of the warrant to exercise the warrant by payment
of cash or delivery of shares. The warrants are exercisable for ten years from
the effective date. The initial value of the warrants of approximately
$2,000,000 is being amortized to interest expense over the term of the senior
subordinated notes. The fair value of the warrants totaled approximately $3.0
million and $2.0 million at March 31, 2003 and December 31, 2002, respectively,
and is included as a component of long term debt. Because the holder of the
warrants has the ability to require the Company to repurchase the warrants for
cash, the warrants constitute a derivative which requires changes in value of
the warrants to be recorded as an increase or decrease to earnings. For each $1
increase in stock price, the Company will be required to record non-cash
expense of approximately $372,500. For the three months ended March 31, 2003,
the Company recorded non-cash expense related to the warrants of $960,000. The
stock purchase warrants contain provisions that allow the issuer to put their
warrants, or stock after exercise, back to the Company at fair market value for
cash or for the deliverance of shares. The put price under the agreement would
approximate $3 million or require the deliverance of 371,947 shares as of March
31, 2003. As discussed in Note 9, the Company and the 1818 Fund have
entered into a written agreement for the 1818 Fund to exercise its stock purchase
warrant to purchase 372,412 shares of the Companys common stock.6. Income TaxesDuring prior years, the Company generated net operating loss (NOL)
carryforwards for federal and state income tax purposes. As a result of the NOL
carryforwards, the Company has not recorded a provision for income tax for the
period ended March 31, 2002. During the fourth quarter of 2002, the Company
released its valuation allowance and recorded a corresponding income tax
benefit for the twelve months ended December 31, 2002. The provision recorded
for the three months ended March 31, 2003 reflects an effective tax rate of
approximately 58% due to the non deductible charge related to the valuation of
the put warrants discussed in Note 5.7. Disclosures About Reportable SegmentsIn accordance with the criteria of SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information,the Company determined that, as of March
31, 2003, it operates in 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. The Freestanding Psychiatric
Facilities division includes owned psychiatric facilities. As of March 31,
2003, the Company managed 48 behavioral health units and owned five psychiatric
facilities in three states. Activities classified as Other in the following
schedule relate primarily to unallocated home office items.The following is a financial summary by business segment for the periods
indicated. EBITDA represents income from continuing operations before interest
expense (net of interest income), income taxes, depreciation, and amortization.
EBITDA is commonly used as an analytical indicator within the healthcare
industry and serves as a measure of leverage capacity and debt service ability.
In addition, the Company uses EBITDA as the measure of operating profitability
of its segments and their components. EBITDA should not be considered as a
measure of financial performance under accounting principles generally accepted
in the United States, and the items excluded in determining EBITDA are
significant components in understanding and assessing financial performance.
Because neither is a measurement determined in accordance with accounting
principles generally accepted in the United States, it is susceptible to
varying calculations, and as a result our calculation of EBITDA as presented
may not be comparable to EBITDA or other similarly titled measures used by
other companies (in thousands):

|                                       |  |              |        |             |  |           |        |              |  |   |        |   |  |   |        |  
|-------------------------------------- |  | ------------ | ------ | ----------- |  | --------- | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|                                       |  | Freestanding |        | Psychiatric |  |           |        |              |  |   |        |  
|                                       |  | Psychiatric  |        | Unit        |  | Corporate |        |              |  |  
|                                       |  | Facilities   |        | Management  |  | and Other |        | Consolidated
|                                       |  |              |        |             |  |           |        |             
|Three months ended March 31, 2003      |  |              |        |             |  |           |        |              |  |   |        |   |  |   |        |  
|Revenue                                |  | $            | 26,087 |             |  | $         | 11,017 |              |  | $ |       |   |  | $ | 37,104 |  
|EBITDA                                 |  | $            | 4,090  |             |  | $         | 1,839  |              |  | $ | (1,476 | ) |  | $ | 4,453  |  
|Depreciation and amortization          |  |              | 385    |             |  |           | 265    |              |  |   | 17     |   |  |   | 667    |  
|Interest expense                       |  |              | 907    |             |  |           | 81     |              |  |   | 432    |   |  |   | 1,420  |  
|Inter-segment expenses                 |  |              | 940    |             |  |           | 674    |              |  |   | (1,614 | ) |  |   |       |  
|Change in valuation of put warrants    |  |              |       |             |  |           |       |              |  |   | 960    |   |  |   | 960    |  
|Change in reserve on stockholder notes |  |              |       |             |  |           | (461   | )            |  |   |       |   |  |   | (461   | )
|Non-cash stock compensation expense    |  |              |       |             |  |           |       |              |  |   | 5      |   |  |   | 5      |  
|                                       |  |              |        |             |  |           |        |              |  |   |        |   |  |   |        |  
|Income (loss) before income taxes      |  | $            | 1,858  |             |  | $         | 1,280  |              |  | $ | (1,276 | ) |  | $ | 1,862  |  
|                                       |  |              |        |             |  |           |        |              |  |   |        |   |  |   |        |  
|Segment assets                         |  | $            | 53,727 |             |  | $         | 34,449 |              |  | $ | 8,444  |   |  | $ | 96,620 |  

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003

|                                    |  |              |        |             |  |           |        |              |  |   |       |   |  |   |        | 
|----------------------------------- |  | ------------ | ------ | ----------- |  | --------- | ------ | ------------ |  | - | ----- | - |  | - | ------ | 
|                                    |  | Freestanding |        | Psychiatric |  |           |        |              |  |   |       |  
|                                    |  | Psychiatric  |        | Unit        |  | Corporate |        |              |  |  
|                                    |  | Facilities   |        | Management  |  | and Other |        | Consolidated
|                                    |  |              |        |             |  |           |        |             
|Three months ended March 31, 2002   |  |              |        |             |  |           |        |              |  |   |       |   |  |   |        | 
|Revenue                             |  | $            | 16,847 |             |  | $         | 6,341  |              |  | $ |      |   |  | $ | 23,188 | 
|EBITDA                              |  | $            | 1,664  |             |  | $         | 1,681  |              |  | $ | (702  | ) |  | $ | 2,643  | 
|Depreciation and amortization       |  |              | 272    |             |  |           | 82     |              |  |   | 32    |   |  |   | 386    | 
|Interest expense                    |  |              | 645    |             |  |           | 81     |              |  |   | 646   |   |  |   | 1,372  | 
|Inter-segment expenses              |  |              | 618    |             |  |           | 174    |              |  |   | (792  | ) |  |   |       | 
|Non-cash stock compensation expense |  |              |       |             |  |           |       |              |  |   | 109   |   |  |   | 109    | 
|                                    |  |              |        |             |  |           |        |              |  |   |       |   |  |   |        | 
|Income (loss) before income taxes   |  | $            | 129    |             |  | $         | 1,344  |              |  | $ | (697  | ) |  | $ | 776    | 
|                                    |  |              |        |             |  |           |        |              |  |   |       |   |  |   |        | 
|Segment assets                      |  | $            | 33,360 |             |  | $         | 20,341 |              |  | $ | 2,200 |   |  | $ | 55,901 | 

8. 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. The Company does not expect this new
interpretation to have a material effect on its future results of operations or
financial position.

9. Subsequent Events

During April 2003, Psychiatric Solutions completed the purchase of six
psychiatric facilities from The Brown Schools, Inc. for $63 million in cash.
The six facilities which have an aggregate of 792 beds, are located in Austin,
San Antonio and San Marcos, Texas; Charlottesville, Virginia; Colorado Springs,
Colorado; and Tulsa, Oklahoma. For 2002, the facilities produced combined
revenues of $76 million. The purchase was financed through borrowings on the
Companys 2001 Senior Credit Facility amounting to approximately $50.5 million and
$12.5 million from the private placement of Series A Convertible Preferred
Stock (the Convertible Preferred Stock).

On April 1, 2003, the Company received $12.5 million from the private placement
of 2,272,727 shares of Convertible Preferred Stock. The proceeds represent one
half of the commitment from the investors and were used to purchase six
facilities from The Brown Schools, Inc. The Company expects to receive the
second half of the commitment, or $12.5 million, in exchange for another
2,272,727 shares of Convertible Preferred Stock, on July 1, 2003. Each share of
Convertible Preferred Stock is convertible into one common share. The impact of
the Convertible Preferred Stock on diluted earnings per share will be
calculated using the if-converted method. The Company expects to use the
proceeds to fund additional acquisitions of freestanding psychiatric patient
facilities.

On April 1, 2003, the Company announced the expansion of its 2001 Senior Credit
Facility with its senior lender, CapitalSource Finance LLC. The aggregate 2001
Senior Credit Facility now exceeds $80 million with the increase of the
revolving credit facility to $28 million from $17.5 million and through a new
$36 million term loan. The Company borrowed approximately $52.2 million during
April 2003, including $16.2 million under the revolving line of credit, under
the expanded 2001 Senior Credit Facility to purchase six facilities from The
Brown Schools, Inc. The total amount borrowed to finance the
acquisition of these facilities included $1.0 million used to pay
down subordinated debt and approximately $700,000 in transaction
costs.

On April 9, 2003, Psychiatric Solutions announced the definitive agreement to
acquire Ramsay Youth Services, Inc. (Ramsay) in a transaction valued at
approximately $78 million, consisting of $58.1 million in cash, or $5.00 per
share, for Ramsays common stock, and the assumption of Ramsays outstanding
debt. Completion of the transaction, expected to occur in early July 2003, is
subject to customary closing conditions, including receipt of regulatory
approvals, as well as approval by Ramsays stockholders. Certain members of
Ramsays Board of Directors and executive management have executed voting
agreements with the Company in favor of the transaction, representing
approximately 64% of Ramsays outstanding common stock. The Company is in the
process of arranging financing for the transaction and has received a highly
confident letter from its senior lender. The Ramsay acquisition would add
11 free-standing behavioral health facilities, representing approximately 1,240 beds. Ramsay produced revenues of $145.2 million for 2002.

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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003

The Company and the 1818 Fund have entered into a
written agreement for the 1818 Fund to exercise its stock purchase warrant to purchase
372,412 shares of the Companys common stock. In addition, the
written agreement provides that, effective April 1, 2003, the 1818
Fund waived its ability to require that the Company repurchase its
stock purchase warrant to purchase 372,412 shares of the
Companys common stock. As such, the Company will no longer
be required to record non-cash expense for increases in the fair market value
of its common stock.

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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) the failure to complete the
acquisition of Ramsay Youth Services, Inc. (Ramsay); (2) potential
competition which alters or impedes the Companys acquisition strategy by
decreasing the Companys ability to acquire additional facilities on favorable
terms; (3) the ability of the Company to improve the operations of acquired
facilities; (4) the ability to maintain favorable and continuing relationships
with physicians who use the Companys facilities; (5) the limited operating
history of the Company; (6) the ability to receive timely additional financing
on terms acceptable to the Company to fund the Companys acquisition strategy
(including Ramsay) and capital expenditure needs; (7) 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
(8) potential difficulties in integrating the operations of Psychiatric
Solutions, Inc. with The Brown Schools, Inc., Ramsay and other acquired operations.
The forward-looking statements herein are qualified in their entirety by the
risk factors set forth in the Companys Annual Report on Form 10-K for the year
ended December 31, 2002, under the caption Risk Factors. A copy of the Form
10-K may be obtained from the Public Reference Room of the SEC at 450 Fifth
Street NW, Washington, DC at prescribed rates.

Overview

Psychiatric Solutions Inc. (Psychiatric Solutions or the Company) is a
leading provider of behavioral health care services in the United States.

As of March 31, 2003, Psychiatric Solutions owned and operated five
free-standing psychiatric facilities which provided psychiatric services to
patients in the Houston, Texas; Austin, Texas; Raleigh, North Carolina; and
Chicago, Illinois areas and managed 48 psychiatric units for third party acute
care hospitals in 14 states. Psychiatric Solutions also has 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.
Psychiatric Solutions objective is to provide high-quality, cost-effective
psychiatric services in the communities it serves. Through its managed and
freestanding psychiatric facilities, Psychiatric Solutions offers a
comprehensive array of behavioral health programs to critically ill children,
adolescents and adults.

The Company was 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

$25 Million Private Placement of Convertible Preferred Stock.On April 1,
2003, the Company received $12.5 million in connection with the private
placement of 2,272,727 shares of Series A Convertible Preferred Stock (the
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 investors are previous investors, with Oak Investment Partners and
Salix Ventures (or related entities) being among the co-founders of Psychiatric
Solutions. Representatives of Salix Ventures and Brown Brothers Harriman & Co.
serve on the Companys Board of Directors, and a representative of Oak
Investment Partners joined the Board in connection with the private placement.
The proceeds represent one half of the commitment from the investors and were
used to purchase six facilities from The Brown Schools, Inc. as described
below. The Company expects to receive the second half of the commitment, or
$12.5 million, for another 2,272,727 shares of Convertible Preferred Stock, on
July 1, 2003. Each share of Convertible Preferred Stock is convertible into one
share of common stock. The impact of the Convertible Preferred Stock on diluted
earnings per share will be calculated using the if-converted method. The
Company expects to use the proceeds to fund additional acquisitions of
freestanding psychiatric patient facilities.

The Brown Schools Acquisition.During April 2003, Psychiatric Solutions
completed the purchase of six psychiatric facilities from The Brown Schools,
Inc. (the Brown Schools) for $63 million in cash. The six facilities which have an aggregate of 792
beds, are located in Austin, San Antonio and San Marcos, Texas;
Charlottesville, Virginia; Colorado Springs, Colorado; and Tulsa, Oklahoma. For
2002, the facilities produced combined revenues of $76 million. The purchase
was financed through borrowings on the Companys 2001 Senior Credit Facility in
the amount of approximately $50.5 million and $12.5 million from the private
placement of shares of our Convertible Preferred Stock described above.

2001 Senior Credit Facility.On April 1, 2003, the Company announced the
expansion of its 2001 Senior Credit Facility with its senior lender,
CapitalSource Finance LLC (CapSource). The aggregate 2001 Senior Credit
Facility currently exceeds $80 million with the

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increase of the revolving credit facility to $28 million from $17.5 million and
a new $36 million term loan. The Company borrowed approximately
$52.2 million
during April 2003, including $16.2 million under the revolving line
of credit, under the expanded 2001 Senior Credit Facility to purchase
six facilities from Brown Schools. The total amount borrowed to
finance the acquisition of these facilities included $1.0 million
used to pay down subordinated debt and approximately $700,000 in
transaction costs.

Ramsay Acquisition.On April 9, 2003, Psychiatric Solutions announced the
definitive agreement to acquire Ramsay Youth Services, Inc. (Ramsay) in a
transaction valued at approximately $78 million, consisting of $58.1 million in
cash, or $5.00 per share, for Ramsays common stock, and the assumption of
Ramsays outstanding debt. Completion of the transaction, expected in occur in
early July 2003, is subject to customary closing conditions, including receipt
of regulatory approval, as well as approval by Ramsays stockholders. Certain
members of Ramsays Board of Directors and executive management have executed
voting agreements with the Company in favor of the transaction, representing
approximately 64% of Ramsays outstanding common stock. The Company is in the
process of arranging financing for the transaction and has received a highly
confident letter from CapSource. The Ramsay acquisition would add
11 free-standing behavioral health facilities, representing approximately 1,240 beds. Ramsay produced revenues of $145.2 million for 2002.

Impact of Mergers and Acquisitions

Acquiring free-standing psychiatric facilities is a key part of Psychiatric
Solutions business strategy. Because Psychiatric Solutions has grown through
mergers and acquisitions accounted for as purchases, it is difficult to make
meaningful comparisons between its financial statements for the fiscal periods
presented. In addition, because Psychiatric Solutions owns a relatively small
number of facilities, an individual acquisition may have a material effect on
its overall operating performance. At the time a facility is acquired,
Psychiatric Solutions implements a number of measures to lower costs and may
make significant investments in the facility. Therefore, the financial
performance of a newly acquired facility may adversely affect the Companys
overall performance in the short-term.

On July 1, 2002, Psychiatric Solutions 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 owns the assets and operations of Riveredge
Hospital located near Chicago, Illinois. The acquisition was financed in part
through an amendment to Psychiatric Solutions 2001 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 the Companys 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 Psychiatric
Solutions inpatient facilities as a result of services provided to patients
within the facility setting. 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. 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 quarter ended
March 31, 2003, patient service revenue comprised approximately 70% of total
revenue.

Management Fee Revenue.Management fee revenue is earned by Psychiatric
Solutions 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. For the quarter ended March 31, 2003, management fee revenue
comprised approximately 30% of total revenue.

Results of Operations

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

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|                                       |                                        |   |                              |      |      |  |        |      |   |   |        |     |  |  |       |     |  
|-------------------------------------- | -------------------------------------- | - | ---------------------------- | ---- | ---- |  | ------ | ---- | - | - | ------ | --- |  |  | ----- | --- | -
|                                       |                                        |   | Three Months Ended March 31,
|                                       |                                        |   |                             
|                                       |                                        |   | 2003                         |      | 2002
|                                       |                                        |   |                              |      |     
|                                       |                                        |   | Amount                       |      | %    |  | Amount |      | %
|                                       |                                        |   |                              |      |      |  |        |      |  
|Revenue                                |                                        | $ | 37,104                       |      |      |  | 100.0  | %    |   | $ | 23,188 |     |  |  | 100.0 | %  
|Salaries, wages, and employee benefits |                                        |   | 17,781                       |      |      |  | 47.9   | %    |   |   | 13,861 |     |  |  | 59.8  | %  
|Professional fees                      |                                        |   | 4,451                        |      |      |  | 12.0   | %    |   |   | 3,108  |     |  |  | 13.4  | %  
|Supplies                               |                                        |   | 1,690                        |      |      |  | 4.6    | %    |   |   | 1,099  |     |  |  | 4.7   | %  
|Provision for bad debts                |                                        |   | 1,322                        |      |      |  | 3.6    | %    |   |   | 715    |     |  |  | 3.1   | %  
|Other operating expenses               |                                        |   | 7,407                        |      |      |  | 20.0   | %    |   |   | 1,762  |     |  |  | 7.6   | %  
|                                       |                                        |   |                              |      |      |  |        |      |   |   |        |     |  |  |       |    
|EBITDA (1)                             |                                        |   | 4,453                        |      |      |  | 12.0   | %    |   |   | 2,643  |     |  |  | 11.4  | %  
|Depreciation and amortization          |                                        |   | 667                          |      |      |  | 1.8    | %    |   |   | 386    |     |  |  | 1.7   | %  
|Other non-cash expenses:               |                                        |   |                              |      |      |  |        |      |   |   |        |     |  |  |       |    
|                                       | Change in valuation of put warrants    |   |                              | 960  |      |  |        | 2.6  | % |   |        |    |  |  |       | 0.0 | %
|                                       | Change in reserve on stockholder notes |   |                              | (461 | )    |  |        | -1.2 | % |   |        |    |  |  |       | 0.0 | %
|                                       | Non-cash stock compensation expense    |   |                              | 5    |      |  |        | 0.0  | % |   |        | 109 |  |  |       | 0.5 | %
|Interest expense                       |                                        |   | 1,420                        |      |      |  | 3.8    | %    |   |   | 1,372  |     |  |  | 5.9   | %  
|                                       |                                        |   |                              |      |      |  |        |      |   |   |        |     |  |  |       |    
|Income before income taxes             |                                        |   | 1,862                        |      |      |  | 5.0    | %    |   |   | 776    |     |  |  | 3.3   | %  
|Provision for income taxes             |                                        |   | 1,073                        |      |      |  | 2.9    | %    |   |   | 21     |     |  |  | 0.1   | %  
|                                       |                                        |   |                              |      |      |  |        |      |   |   |        |     |  |  |       |    
|Net income                             |                                        | $ | 789                          |      |      |  | 2.1    | %    |   | $ | 755    |     |  |  | 3.3   | %  
|                                       |                                        |   |                              |      |      |  |        |      |   |   |        |     |  |  |       |    

|                                   |  |                              |        |      |  |          |        |  |  |  |      |  
|---------------------------------- |  | ---------------------------- | ------ | ---- |  | -------- | ------ |  |  |  | ---- | -
|                                   |  | Three Months Ended March 31,
|                                   |  |                             
|                                   |  | 2003                         |        | 2002 |  | % Change
|                                   |  |                              |        |      |  |         
|Consolidated:                      |  |                              |        |      |  |          |        |  |  |  |      |  
|Number of facilities at period end |  |                              | 5      |      |  |          | 4      |  |  |  | 25.0 | %
|Admissions                         |  |                              | 4,344  |      |  |          | 3,144  |  |  |  | 38.2 | %
|Patient days                       |  |                              | 45,785 |      |  |          | 30,821 |  |  |  | 48.6 | %
|Same facility (2):                 |  |                              |        |      |  |          |        |  |  |  |      |  
|Number of facilities at period end |  |                              | 4      |      |  |          | 4      |  |  |  |     |  
|Admissions                         |  |                              | 3,363  |      |  |          | 3,144  |  |  |  | 7.0  | %
|Patient days                       |  |                              | 33,213 |      |  |          | 30,821 |  |  |  | 7.8  | %



---

|(1) |  | EBITDA is defined as income from continuing operations before interest
expense (net of interest income), income taxes, depreciation,
amortization, and other items not considered operating items by
management. While you should not consider 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, management understands that
EBITDA is a commonly used analytical indicator within the health care
industry and also serves as a measure of leverage capacity and debt
service ability. In addition, the Company uses EBITDA as the measure of
operating profitability of its segments and their components. EBITDA, as
presented, may not be comparable to similarly titled measures of other
companies.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Same facility information excludes the operations of Riveredge Hospital
which was acquired July 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

Revenue. Revenue from continuing operations was $37.1 million for the quarter
ended March 31, 2003, compared to $23.2 million for the quarter ended March 31,
2002, an increase of $13.9 million or 59.9%. Revenue from owned facilities
accounted for $26.1 million of the first quarter 2003 results compared to $16.8
million of the first quarter 2002 results, an increase of $9.3 million or
55.4%. The increase in revenues from owned facilities relates primarily to
revenues of $7.2 million in the current period 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 7.0% and 7.8%,
respectively. Revenue from unit management contracts accounted for $11.0
million of the first quarter 2003 results compared to $6.3 million of the first
quarter 2002 results, an increase of $4.7 million or 74.6%. The increase in
revenues from unit management contracts relates to the additional unit
management operations acquired in the merger with PMR Corporation. See Impact
of Mergers and Acquisitions under this Item II.

Salaries, wage, and employee benefits. Salaries, wages and employee benefits
expense was $17.8 million, or 47.9% of revenue for the quarter ended March 31,
2003, compared to $13.9 million, or 59.8% of revenue for the quarter ended
March 31, 2002. Salaries, wages and employee benefits expense from owned
facilities was $13.7 million in first quarter 2003, or 52.5% of first quarter
2003 revenue

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##### Table of Contents



from owned facilities, compared to $10.1 million in first quarter 2002 or 60.1%
of first 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 cost containment efforts within the Companys owned
facilities. Salaries, wages and employee benefits expense from unit management
contracts was $3.4 million in first quarter 2003, or 30.9% of first quarter
2003 revenue from unit management contracts, compared to $3.3 million in first
quarter 2002, or 52.4% of first 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 the Companys
acquisition 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 the Companys
corporate office was $674,000 for first quarter 2003 compared to $459,000 for
first quarter 2002 as the result of the addition of staff necessary to manage
the acquisitions during the later part of 2001 and 2002.

Professional fees. Professional fees were $4.5 million, or 12.0% of revenue for
the quarter ended March 31, 2003, compared to $3.1 million, or 13.4% of revenue
for the quarter ended March 31, 2002.Professional fees from owned facilities
were $3.2 million in first quarter 2003, or 12.3% of first quarter 2003 revenue
from owned facilities, compared to $2.1 million in first quarter 2002, or 12.5%
of first quarter 2002 revenue from owned facilities. Professional fees from
unit management contracts were $881,000 in first quarter 2003, or 8.0% of first
quarter 2003 revenue from unit management contracts, compared to $893,000 in
first quarter 2002, or 14.2% of first 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
classification of the costs to provide case management services in and around
Nashville, Tennessee as other operating expenses. Professional fees for the
Companys corporate office were $416,000 in first quarter 2003 compared to
$90,000 in first quarter 2002. The increase in professional fees at the
Companys 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 $1.7 million, or 4.6% of revenue for the
quarter ended March 31, 2003, compared to $1.1 million, or 4.7% of revenue for
the quarter ended March 31, 2002. Supplies expense at owned facilities
comprises the majority of supplies expense for the Company as a whole. The
overall increase was due to the acquisition of 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 $1.3 million, or 3.6%
of revenue for the quarter ended March 31, 2003, compared to $715,000, or 3.1%
of revenue for the quarter ended March 31, 2002. The provision for bad debts at
owned facilities was $1.2 million in first quarter 2003, or 4.6% of first
quarter 2003 owned facility revenue, compared to $647,000 in first quarter
2002, or 3.9% of first quarter 2002 owned facility revenue. This increase in
provision for bad debts at owned facilities as a percentage of owned facility
revenue relates to changes in payor mix and the impact of acquisitions. 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 first quarter 2003 and 2002.

Other operating expenses. Other operating expenses were approximately $7.4
million, or 20.0% of revenue for the quarter ended March 31, 2003, compared to
$1.8 million, or 7.6% of revenue for the quarter ended March 31, 2002. Other
operating expenses for owned facilities were $2.3 million in first quarter
2003, or 8.8% of first quarter 2003 owned facility revenue, compared to $1.2
million in 2002, or 7.1% 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 $4.7 million in first quarter 2003,
or 42.7% of first quarter 2003 unit management revenue, compared to $387,000 in
first quarter 2002, or 6.1% of first 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 the
Companys corporate office increased to $378,000 in first quarter 2003 from
$148,000 in first quarter 2002 primarily due to increased insurance costs in
2003.

Depreciation and amortization. Depreciation and amortization expense was
$667,000 for the quarter ended March 31, 2003 compared to $386,000 for the
quarter ended March 31, 2002, an increase of $281,000 or 72.8%. This increase
in depreciation and amortization expense is the result of the acquisitions of
Riveredge Hospital in July 2002 and PMR in August 2002.

Other non-cash expenses.Other non-operating expenses totaled $504,000, or 1.4%
of revenue for the quarter ended March 31, 2003, compared to $109,000, or less
than 1.0% of revenue for the quarter ended March 31, 2002. Other non-operating
expenses for all periods presented represent non-cash items. Other
non-operating expenses for first quarter 2003 consisted of $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), the release $461,000 in reserves related to the
Companys stockholder notes and $5,000 in expense related to stock options
granted below market in first quarter 2002. Other non-operating expenses for
first quarter 2002 relate to stock options granted below market value in first
quarter 2002.

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Interest expense. Interest expense remained relatively unchanged at $1.4
million for the quarters ended March 31, 2003 and 2002. During the first
quarter 2002 the Company recorded $390,000 of interest expense related to
accretion of detachable stock purchase warrants. Such warrant accretion
accounted for $77,000 in the first quarter 2003.

Liquidity and Capital Resources

As of March 31, 2003, Psychiatric Solutions had working capital of $3.4
million, including cash and cash equivalents of $4.0 million, compared to
working capital of $2.4 million at December 31, 2002. Working capital includes
amounts due under terms of Psychiatric Solutions revolving credit agreement
under the 2001 Senior Credit Facility, which totaled $7.0 million and $5.4
million at March 31, 2003 and December 31, 2002, respectively. The revolving
credit agreement requires that all non-governmental cash receipts be applied to
reduce the outstanding balance under the revolving line of credit agreement.
Such amounts can then be re-borrowed to the extent that borrowing capacity
remains under the revolving line of credit. The increase in the working capital
is primarily due to higher accounts receivable as the result of increases in
the Companys revenues during the three months ended March 31, 2003.

Cash used in operating activities changed from $345,000 for the three months
ended March 31, 2002, to cash provided by operating activities of $1.1 million
for the three months ended March 31, 2003. The increase in cash flows from
operating activities was due to the acquisitions in the third quarter of 2002.
Cash used in investing activities increased from $272,000 for the three months
ended March 31, 2002 to cash used in investing activities of $808,000 for the
three months ended March 31, 2003. This increase was due to capital purchases
of certain computer equipment and software during the three months ended March
31, 2003. Cash provided by financing activities increased from $512,000 for the
three months ended March 31, 2002 to cash provided by financing activities of
$1.3 million for the three months ended March 31, 2003. This increase was due
to additional principal borrowed for working capital.

In conjunction with the acquisition of Holly Hill Hospital in December 2001,
Psychiatric Solutions entered into a senior credit facility of $33.2 million
with CapSource (2001 Senior Credit Facility). The 2001 Senior Credit Facility
was amended on June 28, 2002 to provide for an additional $7.95 million
pursuant to a new non-revolving term note. The 2001 Senior Credit Facility, as
revised, provides for a total credit facility of $41.15
million, consisting of $23.65 million of non-revolving term loans and a $17.5
million revolving working capital line of credit. Both facilities are secured by
substantially all of Psychiatric Solutions assets and the stock of its
subsidiaries. The term loans accrue interest at the Citibank, N.A. prime rate
plus 4.25% to 4.75% subject to a floor of 10%. The revolving line of credit accrues interest at the
Citibank, N.A. prime rate plus 2% subject to a floor of 7.25%, and is due in
November 2004. At March 31, 2003, the interest rate under the revolving credit
facility was 7.25%. Until the due date, Psychiatric Solutions may borrow, repay
and re-borrow an amount not to exceed the lesser of $17.5 million or the
borrowing base (as defined in the 2001 Senior Credit Facility). As of March 31,
2003, the Company had $10.5 million available under the revolving line of
credit. Under the revolving line of credit, all of Psychiatric Solutions
collections, except for Medicare and Medicaid payments, are deposited into
lockbox accounts controlled by the lender. The funds deposited in the lockbox
are applied to outstanding borrowings with the lender 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 March 31, 2003.
Psychiatric Solutions must pay an unused fee in the amount of 0.05% per month
of the monthly unused portion of the 2001 Senior Credit Facility. Such fees
were approximately $22,000 for the three months ended March 31, 2003.

The 2001 Senior Credit Facility contains customary covenants which include: (i)
a specified monthly patient census for any owned, operated or leased
facilities, (ii) a limitation on capital expenditures, sales of assets,
mergers, changes of ownership and management, new lines of business and
dividends and (iii) various financial covenants. As of March 31, 2003,
Psychiatric Solutions was in compliance with all applicable debt covenant
requirements. If Psychiatric Solutions results of operations or cash flows
decline and result in violation of one or more of these covenants, amounts
outstanding under the 2001 Senior Credit Facility could become immediately
payable and additional borrowings could be restricted. As of March 31, 2003,
approximately $24.0 million was outstanding.

On April 1, 2003, the Company announced the expansion of its 2001 Senior Credit
Facility with CapSource. The aggregate 2001 Senior Credit Facility currently
exceeds $80 million with the increase of the revolving credit facility to $28
million from $17.5 million and a new $36 million term loan. The Company
borrowed approximately $52.2 million during April 2003, including $16.2 million
under the revolving line of credit, under the expanded 2001 Senior Credit
Facility to purchase six facilities from The Brown Schools, Inc. The
total amount borrowed to finance the acquisition of these facilities
included $1.0 million used to pay down subordinated debt and
approximately $700,000 in transaction costs.

In connection with the acquisition of Sunrise Behavioral Health, Ltd., a
manager of inpatient psychiatric units in acute care hospitals, in May 2000,
Psychiatric Solutions issued subordinated convertible notes in the amount of
$3.6 million. These convertible notes are due May 1, 2005 and accrue interest
at 9% per annum. The principal amount of these convertible notes is convertible
into shares of the Companys common stock based on conversion prices of $8.53
to $9.59 per share.

In 2001, Psychiatric Solutions also issued promissory notes totaling $4.5
million in connection with its acquisitions of three facilities. One note in
the amount of $2.5 million accrued interest at 9% per annum and matured on June
30, 2002. Psychiatric Solutions paid off this note in full with a portion of
the proceeds of its subordinated debt offering described below. The remaining
$2.0 million note accrues interest at 9% per annum and is due June 30, 2005. In
connection with the purchase of facilities from The Brown Schools in
April 2003, $1.0 million of the $2.0 million note was repaid. Among other
customary covenants, both notes contain cross default

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##### Table of Contents



covenants triggered by a default of any other indebtedness of at least $1.0
million. Psychiatric Solutions was in compliance with these covenants as of
March 31, 2003.

On June 28, 2002, Psychiatric Solutions entered into a securities purchase
agreement with The 1818 Mezzanine Fund II, L.P. (the 1818 Fund) to issue up
to $20 million of senior subordinated notes with detachable nominal warrants.
At the closing on June 28, 2002, a total of $10 million of the senior
subordinated notes were issued. Approximately $7.5 million of the proceeds were
used to fund a portion of the acquisition of Riveredge Hospital, and
approximately $2.5 million of the proceeds were used to reduce current
indebtedness. The remaining $10 million of senior subordinated notes may be
issued to fund additional acquisitions of free-standing psychiatric facilities
and for general working capital purposes, subject generally to approval by the
1818 Fund. The notes have a term of seven years and bear interest at 12%
annually, payable quarterly. The notes provide for a prepayment penalty of 6%,
3% or 1% if the notes are prepaid prior to the first anniversary, second
anniversary and third anniversary of the closing date, respectively. The notes
grant the holders the right to require prepayment in the event of a change of
control of Psychiatric Solutions, subject to a prepayment penalty of 1% if
redeemed on or before the third anniversary of the closing date. The notes also
contain customary covenants which include: (i) a specified monthly patient
census for any owned, operated or leased facilities, (ii) limitations on sales
of assets (iii) maintenance of minimum interest coverage, leverage and fixed
charge ratios.

In connection with the issuance of the senior subordinated notes, the Company
issued detachable stock purchase warrants for the purchase of 372,412 shares of
the Companys stock at an exercise price of $.01 per share. As of the date of
issuance, the Companys shares were valued at $5.43 per share such that the
fair value of the warrants totaled approximately $2.0 million Under Accounting
Principles Board Opinion No. 14, Psychiatric Solutions is required to allocate
a portion of the cash proceeds received from the notes to the stock purchase
warrants with the offset recorded as a note discount and then amortized to the
face value of the notes over the life of the notes. Under EITF 00-19, the
Company is required to reclassify the amount initially recognized as capital in
excess of par value to a long term liability and changes in fair value recorded
to operations. For each $1 increase in stock price, the Company will be
required to record non-cash expense of approximately $372,000. For the three
months ended March 31, 2003 the Company recorded non cash expense related to
the warrants of $960,000. The stock purchase warrants contain provisions that
allow the issuer to put their warrants, or stock after exercise, back to the
Company at fair market value for cash or for the deliverance of shares. The put
price under the agreement would approximate $3 million or require the
deliverance of 371,947 shares as of March 31, 2003.

The Company and the 1818 Fund have entered into a
written agreement for the 1818 Fund to exercise its stock purchase warrant to purchase
372,412 shares of the Companys common stock. In addition, the
written agreement provides that, effective April 1, 2003, the 1818
Fund waived its ability to require that the Company repurchase its
stock purchase warrant to purchase 372,412 shares of the
Companys common stock. As such, the Company will no longer
be required to record non-cash expense for increases in the fair market value
of its common stock.

On November 25, 2002, the Company entered into a mortgage loan agreement to
borrow $4,928,000 from the U.S. Department of Housing and Urban Development
(HUD), 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. The Company used
proceeds from the loan to replace $4,385,000 of its senior term loan with
CapSource, pay certain refinancing costs, and fund required escrow amounts for
future improvements to the property.

On April 1, 2003, Psychiatric Solutions received $12.5 million in connection
with the private placement of 2,272,727 shares of Convertible Preferred Stock
with affiliates of Oak Investment Partners and Salix Ventures and with Brown
Brothers Harriman & Co.s The 1818 Fund. See Recent Developments in this
Item 2.

During April 2003, Psychiatric Solutions completed the purchase of six
psychiatric facilities from The Brown Schools for $63 million in cash.
See Recent Developments in this Item 2.

Psychiatric Solutions believes that its working capital on hand, cash flows
from operations and additional borrowings under the existing line of credit
will be sufficient to fund the Companys operating needs, planned capital
expenditures and debt service requirements for the next 12 months. As
previously announced, Psychiatric Solutions entered into a definitive agreement
to acquire Ramsay in a transaction valued at approximately $78 million,
consisting of $58.1 million in cash, or $5.00 per share, for Ramsays common
stock, and the assumption of Ramsays outstanding debt. The Company is in the
process of arranging financing for the transaction and has received a highly
confident letter from CapSource.

In addition, the Company intends to acquire additional psychiatric facilities
and is actively seeking acquisitions that fit its corporate growth strategy.
Management continually assesses its capital needs and will likely 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 the Company will be able to raise additional capital on terms
satisfactory to the Company. Failure to obtain additional financing on
reasonable terms could have a negative effect on the Companys plans to acquire
additional psychiatric facilities.

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##### Table of Contents



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                  |  | $                                     | 46,186 |        |  | $         | 9,529  |           |  | $       | 20,703 |  |  | $ | 52  |       |  | $ | 15,902 | 
|Lease obligations               |  |                                       | 2,064  |        |  |           | 862    |           |  |         | 980    |  |  |   | 222 |       |  |   |       | 
|Information systems commitments |  |                                       | 1,276  |        |  |           | 427    |           |  |         | 671    |  |  |   | 178 |       |  |   |       | 
|                                |  |                                       |        |        |  |           |        |           |  |         |        |  |  |   |     |       |  |   |        | 
|                                |  | $                                     | 49,526 |        |  | $         | 10,818 |           |  | $       | 22,354 |  |  | $ | 452 |       |  | $ | 15,902 | 
|                                |  |                                       |        |        |  |           |        |           |  |         |        |  |  |   |     |       |  |   |        | 

The carrying value of our total long-term debt, including current maturities,
of $46.2 million and $43.8 million at March 31, 2003 and December 31, 2002,
respectively, approximated fair value. We had $24.0 million of variable rate
debt outstanding at March 31, 2003. At the March 31, 2003 borrowing level, a
hypothetical 10% adverse change in interest rates, would decrease net income
and cash flows by $221,000.

Impact of Inflation

Although inflation has not had a material impact on
Psychiatric Solutions
results of operations, the health care industry is very labor intensive and
salaries and benefits are subject to inflationary pressures as are rising
supply costs which tend to escalate as vendors pass on the rising costs through
price increases. Some of Psychiatric Solutions freestanding specialty
psychiatric hospitals are experiencing the effects of the tight labor market,
including a shortage of nurses, which has caused and may continue to cause an
increase in its salaries, wages and benefits expense in excess of the inflation
rate. Although Psychiatric Solutions cannot predict its ability to cover future
cost increases, management believes that through adherence to cost containment
policies, labor management and reasonable price increases, the effects of
inflation on future operating margins should be manageable. Psychiatric
Solutions ability to pass on increased costs associated with providing health
care to Medicare and Medicaid patients is limited due to various federal, state
and local laws which have been enacted that, in certain cases, limit its
ability to increase prices. In addition, as a result of increasing regulatory
and competitive pressures and a continuing industry wide shift of patients into
managed care plans, Psychiatric Solutions ability to maintain margins through
price increases to non-Medicare patients is limited.

The psychiatric health care industry is typically not directly impacted by
periods of recession, erosions of consumer confidence or other general economic
trends as most health care services are not considered a component of
discretionary spending. However, Psychiatric Solutions facilities may be
indirectly negatively impacted to the extent such economic conditions result in
decreased reimbursements by federal or state governments or managed care
payers. Psychiatric Solutions is not aware of any economic trends that would
lead it to believe that Psychiatric Solutions will not be able to remain in
compliance with all debt covenants and meet all required obligations and
commitments in the near future.

Critical Accounting Policies

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

Allowance for doubtful accounts

Psychiatric Solutions ability to collect outstanding patient receivables from
third party payors and receivables due under its management contracts is
critical to its 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. Psychiatric Solutions estimates
the allowance for doubtful accounts primarily based upon the age of the
accounts since the patient discharge date. Psychiatric Solutions continually
monitors its accounts receivable balances and utilizes cash collection data to
support its estimates of the provision for doubtful accounts. Significant
changes in payor mix or business office operations could have a significant
impact on Psychiatric Solutions 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. Psychiatric
Solutions estimates the allowance for doubtful accounts for these receivables
based primarily upon the specific identification of potential collection
issues. As with its patient receivables, Psychiatric Solutions continually
monitors its accounts

16



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receivable balances and utilizes cash collection data to support its 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 Psychiatric Solutions facilities and cost settlement
provisions requiring complex calculations and assumptions subject to
interpretation. Psychiatric Solutions estimates the allowance for contractual
discounts on a payer-specific basis given its 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 Psychiatric Solutions estimates. Additionally, updated
regulations and contract renegotiations occur frequently necessitating
continual review and assessment of the estimation process by management.

Professional and General Liability

The Company is subject to medical malpractice and other lawsuits due to the
nature of the services provided. For the years ended December 31, 2000 and
2001, and through December 5, 2002, the Company has 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. The Company has established 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 $1.1 million as of March 31, 2003, with approximately $750,000
relating to previous years.

Income taxes

As part of the Companys process for preparing consolidated financial
statements, management is required to compute income taxes in each of the
jurisdictions in which it operates. 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 the
Companys 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 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 the Companys 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 II, 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

Within the 90 days prior to the date of this report, the Company 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-14 and 15d-14(c). Based upon
that 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 controls or in other factors
that could significantly affect internal controls subsequent to the date of our
most recent evaluation. Because there were no significant deficiencies or
material weaknesses identified in the Companys internal controls, the Company
did not take any corrective action.

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##### Table of Contents






PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

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




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

On February 4, 2003, Psychiatric Solutions held a special meeting of
stockholders. The following matters were submitted to a vote of stockholders:

(1)  The stockholders approved an amendment to Article V(A) of the
Companys Amended and Restated Certificate of Incorporation, as amended, to
increase the authorized number of shares of the Companys preferred stock, par
value $.01 per share, from 2,000,000 shares to 6,000,000 shares.

The votes were as follows:

|                   |  |  |           | 
|------------------ |  |  | --------- | 
|Votes cast for     |  |  | 5,911,056 | 
|Votes cast against |  |  | 165,801   | 
|Votes withheld     |  |  | 1,082     | 

(2)  The stockholders approved the issuance and sale of 4,545,454 shares of
Series A Convertible Preferred Stock in a private placement.

The votes were as follows:

|                   |  |  |           | 
|------------------ |  |  | --------- | 
|Votes cast for     |  |  | 5,911,005 | 
|Votes cast against |  |  | 165,852   | 
|Votes withheld     |  |  | 1,082     | 




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).
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 99.1 |  | Certification of Chief Executive Officer and Chief Accounting
Officer Pursuant to 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 February 4, 2003, Psychiatric Solutions filed a Report on
Form 8-K, which reported the issuance of a press release announcing
the signing of a definitive agreement with affiliates of Oak
Investment Partners, Salix Ventures and Brown Brothers Harriman &
Co.s The 1818 Mezzanine Fund II, L.P. for the purchase of $25
million of the Companys Series A Convertible Preferred Stock.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | On February 14, 2003, Psychiatric solutions filed a Report on
Form 8-K, which reported the issuance of a press release announcing
that the Company had signed a definitive agreement for the purchase
of six psychiatric facilities from The Brown Schools, Inc. for $63
million in cash.                                                                                                    
|
| | 3. |  | On March 14, 2003, Psychiatric Solutions filed a Report on Form
8-K, which reported the issuance of a press release announcing the
operating results of Psychiatric Solutions for the year ended
December 31, 2002.                                                                                                                                                                          

18



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##### Table of Contents



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: May 15, 2003 |  | /s/ Jack E. Polson                     
|                   
|                    |  | Jack E. Polson
Chief Accounting Officer

I, Joey A. Jacobs, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Psychiatric
Solutions, Inc.;                                                                                                                                                                                                                                                     
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the issuer as of, and for, the periods presented in this
quarterly report;                                
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                              

| |    |  |                                                                                                                                                                                                                                                                                                
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of the registrants board of directors (or persons
fulfilling the equivalent function):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |  |                                                                                                                                                                                                                                                                                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



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

May 15, 2003

| |                                                          | 
| | -------------------------------------------------------- | 
| | /s/ Joey A. JacobsJoey A. Jacobs
Chief Executive Officer | 





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##### Table of Contents



SIGNATURES

I, Jack E. Polson, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Psychiatric
Solutions, Inc.;                                                                                                                                                                                                                                                     
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the issuer as of, and for, the periods presented in this
quarterly report;                                
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                              

| |    |  |                                                                                                                                                                                                                                                                                                
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of the registrants board of directors (or persons
fulfilling the equivalent function):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |  |                                                                                                                                                                                                                                                                                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



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

May 15, 2003

| |                                                           | 
| | --------------------------------------------------------- | 
| | /s/ Jack E. PolsonJack E. Polson
Chief Accounting Officer |