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UNITED STATES
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
quarterly period ended September 30, 2003 or Exchange Act of 1934 for the      
|          
|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
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)

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

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

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No 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
October 31, 2003, 8,657,205 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 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      
|SIGNATURES                                                                                    
|EX-10.1 FIRST ADDENDUM TO CONSULTING AGREEMENT                                                
|EX-31.1   SECTION 302 CEO CERTIFICATION                                                       
|EX-31.2  SECTION 302 CFO CERTIFICATION                                                        
|EX-32.1  SECTION 906 CERTIFICATION                                                            



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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.

TABLE OF CONTENTS

|                                                                                                                                   |  |  |    | 
|---------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I. FINANCIAL INFORMATION                                                                                                      |  |  |    | 
|Item 1. Financial Statements                                                                                                       |  |  |    | 
|Condensed Consolidated Balance Sheets as of September 30, 2003 (Unaudited) and December 31, 2002                                   |  |  | 1  | 
|Condensed Consolidated Statements of Income for the three and nine month periods ended
September 30, 2003 and 2002 (Unaudited)     |  |  | 2  | 
|Condensed Consolidated Statements of Cash Flows for the three and nine month periods ended
September 30, 2003 and 2002 (Unaudited) |  |  | 3  | 
|Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                   |  |  | 4  | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                      |  |  | 15 | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                                                 |  |  | 24 | 
|Item 4. Controls and Procedures                                                                                                    |  |  | 24 | 
|PART II. OTHER INFORMATION                                                                                                         |  |  |    | 
|Item 1. Legal Proceedings                                                                                                          |  |  | 25 | 
|Item 6. Exhibits and Reports on Form 8-K                                                                                           |  |  | 25 | 





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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

PSYCHIATRIC SOLUTIONS,
INC.




CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)


|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |        |   |  | 
|------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | ------ | ------------- | - | ------------ | ------ | - |  | 
|                                                                                                                               |                                                                                                                                                           |   |         |        | September 30, |   | December 31,
|                                                                                                                               |                                                                                                                                                           |   |         |        | 2003          |   | 2002        
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |             
|                                                                                                                               |                                                                                                                                                           |   |         |        | (Unaudited)   |   |              |        |  
|ASSETS                                                                                                                        
|Current assets:                                                                                                                |                                                                                                                                                           |   |         |        |               |   |              |       
|                                                                                                                               | Cash                                                                                                                                                      |   | $       | 9,574  |               |   | $            | 2,392  |  
|                                                                                                                               | Accounts receivable, less allowance for doubtful accounts of
$7,895 (unaudited) and $5,284, respectively                                                  |   |         | 60,426 |               |   |              | 19,473 |  
|                                                                                                                               | Prepaids and other                                                                                                                                        |   |         | 6,554  |               |   |              | 2,219  |  
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |       
|Total current assets                                                                                                           |                                                                                                                                                           |   | 76,554  |        |               |   | 24,084       |       
|Property and equipment, net of accumulated depreciation                                                                        |                                                                                                                                                           |   | 134,869 |        |               |   | 33,547       |       
|Cost in excess of net assets acquired, net                                                                                     |                                                                                                                                                           |   | 55,733  |        |               |   | 28,822       |       
|Contracts, net                                                                                                                 |                                                                                                                                                           |   | 3,086   |        |               |   | 607          |       
|Other assets                                                                                                                   |                                                                                                                                                           |   | 20,009  |        |               |   | 3,078        |       
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |       
|Total assets                                                                                                                   |                                                                                                                                                           | $ | 290,251 |        |               | $ | 90,138       |       
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                           |                                                                                                                                                           |   |         |        |               |   |              |       
|Current liabilities:                                                                                                           |                                                                                                                                                           |   |         |        |               |   |              |       
|                                                                                                                               | Accounts payable                                                                                                                                          |   | $       | 11,323 |               |   | $            | 3,338  |  
|                                                                                                                               | Salaries and benefits payable                                                                                                                             |   |         | 10,096 |               |   |              | 4,825  |  
|                                                                                                                               | Other accrued liabilities                                                                                                                                 |   |         | 22,842 |               |   |              | 6,482  |  
|                                                                                                                               | Revolving line of credit                                                                                                                                  |   |         |       |               |   |              | 5,383  |  
|                                                                                                                               | Current portion of long-term debt                                                                                                                         |   |         | 786    |               |   |              | 1,687  |  
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |       
|Total current liabilities                                                                                                      |                                                                                                                                                           |   | 45,047  |        |               |   | 21,715       |       
|Long-term debt, less current portion                                                                                           |                                                                                                                                                           |   | 173,514 |        |               |   | 36,752       |       
|Deferred tax liability                                                                                                         |                                                                                                                                                           |   | 3,211   |        |               |   | 258          |       
|Other liabilities                                                                                                              |                                                                                                                                                           |   | 3,579   |        |               |   | 864          |       
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |       
|Total liabilities                                                                                                              |                                                                                                                                                           |   | 225,351 |        |               |   | 59,589       |       
|Series A convertible preferred stock, $0.01 par value, 6,000 shares
authorized; 4,545 shares outstanding at September 30, 2003 |                                                                                                                                                           |   | 25,042  |        |               |   |             |       
|Redeemable common stock                                                                                                        |                                                                                                                                                           |   | 5,145   |        |               |   |             |       
|Stockholders equity:                                                                                                          |                                                                                                                                                           |   |         |        |               |   |              |       
|                                                                                                                               | Common stock, $0.01 par value, 48,000 shares authorized;
8,644 and 7,739 issued and outstanding at September 30,
2003 and December 31, 2002, respectively |   |         | 83     |               |   |              | 77     |  
|                                                                                                                               | Additional paid-in capital                                                                                                                                |   |         | 37,130 |               |   |              | 35,008 |  
|                                                                                                                               | Notes receivable from stockholders                                                                                                                        |   |         | (338   | )             |   |              | (259   | )
|                                                                                                                               | Accumulated other comprehensive income                                                                                                                    |   |         | (6     | )             |   |              |       |  
|                                                                                                                               | Accumulated deficit                                                                                                                                       |   |         | (2,156 | )             |   |              | (4,277 | )
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |       
|Total stockholders equity                                                                                                     |                                                                                                                                                           |   | 34,713  |        |               |   | 30,549       |       
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |       
|Total liabilities and stockholders equity                                                                                     |                                                                                                                                                           | $ | 290,251 |        |               | $ | 90,138       |       
|                                                                                                                               |                                                                                                                                                           |   |         |        |               |   |              |       

See notes to condensed consolidated financial statements

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

|                                            |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |       | 
|------------------------------------------- | -------------------------- | - | -------------------------------- | ------ | ------------------------------- | - | ------ | ----- | ---- | - | ------- | ------ |  | - | ------ | ----- | 
|                                            |                            |   | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                            |                            |   |                                  |        |                                
|                                            |                            |   | 2003                             |        | 2002                            |   | 2003   |       | 2002
|                                            |                            |   |                                  |        |                                 |   |        |       |     
|Revenue                                     |                            | $ | 98,470                           |        |                                 | $ | 32,269 |       |      | $ | 193,002 |        |  | $ | 78,072 |      
|Salaries, wages and employee benefits       |                            |   | 53,164                           |        |                                 |   | 17,131 |       |      |   | 99,686  |        |  |   | 44,625 |      
|Professional fees                           |                            |   | 11,233                           |        |                                 |   | 3,897  |       |      |   | 22,561  |        |  |   | 10,284 |      
|Supplies                                    |                            |   | 6,204                            |        |                                 |   | 1,432  |       |      |   | 10,887  |        |  |   | 3,664  |      
|Rentals and leases                          |                            |   | 1,657                            |        |                                 |   | 260    |       |      |   | 2,439   |        |  |   | 637    |      
|Other operating expenses                    |                            |   | 13,475                           |        |                                 |   | 5,037  |       |      |   | 30,599  |        |  |   | 8,314  |      
|Provision for bad debts                     |                            |   | 1,218                            |        |                                 |   | 903    |       |      |   | 3,875   |        |  |   | 2,038  |      
|Depreciation and amortization               |                            |   | 1,896                            |        |                                 |   | 425    |       |      |   | 3,630   |        |  |   | 1,222  |      
|Interest expense, net                       |                            |   | 5,566                            |        |                                 |   | 1,578  |       |      |   | 9,363   |        |  |   | 4,070  |      
|Loss on refinancing long-term debt          |                            |   | 157                              |        |                                 |   |       |       |      |   | 4,744   |        |  |   |       |      
|Change in valuation of put warrants         |                            |   |                                 |        |                                 |   |       |       |      |   | 960     |        |  |   |       |      
|Change in reserve on stockholder notes      |                            |   |                                 |        |                                 |   |       |       |      |   | (545    | )      |  |   |       |      
|                                            |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |      
|                                            |                            |   | 94,570                           |        |                                 |   | 30,663 |       |      |   | 188,199 |        |  |   | 74,854 |      
|Income before income taxes                  |                            |   | 3,900                            |        |                                 |   | 1,606  |       |      |   | 4,803   |        |  |   | 3,218  |      
|                                            | Provision for income taxes |   |                                  | 1,482  |                                 |   |        |      |      |   |         | 2,190  |  |   |        |      | 
|                                            |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |      
|Net income                                  |                            | $ | 2,418                            |        |                                 | $ | 1,606  |       |      | $ | 2,613   |        |  | $ | 3,218  |      
|Accrued preferred stock dividends           |                            |   | 315                              |        |                                 |   |       |       |      |   | 492     |        |  |   |       |      
|                                            |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |      
|Net income available to common stockholders |                            | $ | 2,103                            |        |                                 | $ | 1,606  |       |      | $ | 2,121   |        |  | $ | 3,218  |      
|                                            |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |      
|Earnings per common share:                  |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |      
|                                            | Basic                      |   | $                                | 0.24   |                                 |   | $      | 0.24  |      |   | $       | 0.26   |  |   | $      | 0.58  | 
|                                            |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |      
|                                            | Diluted                    |   | $                                | 0.18   |                                 |   | $      | 0.22  |      |   | $       | 0.24   |  |   | $      | 0.54  | 
|                                            |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |      
|Shares used in computing per share amounts: |                            |   |                                  |        |                                 |   |        |       |      |   |         |        |  |   |        |      
|                                            | Basic                      |   |                                  | 8,628  |                                 |   |        | 6,687 |      |   |         | 8,177  |  |   |        | 5,563 | 
|                                            | Diluted                    |   |                                  | 13,515 |                                 |   |        | 7,561 |      |   |         | 10,978 |  |   |        | 5,934 | 

|                                                        
|--------------------------------------------------------
|See notes to condensed consolidated financial statements

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

|                                                                                       |                                              |                               |          |                                 |         |      |         |       |        |  
|-------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------- | -------- | ------------------------------- | ------- | ---- | ------- | ----- | ------ | -
|                                                                                       |                                              |                               |          | Nine Months Ended September 30,
|                                                                                       |                                              |                               |          |                                
|                                                                                       |                                              |                               |          | 2003                            |         | 2002
|                                                                                       |                                              |                               |          |                                 |         |     
|Operating Activities                                                                   |                                              |                               |          |                                 |         |      |         |      
|Net income                                                                             |                                              | $                             | 2,613    |                                 |         | $    | 3,218   |      
|Adjustments to reconcile net income to net cash
provided by operating activities:      |                                              |                               |          |                                 |         |      |         |      
|                                                                                       | Depreciation and amortization                |                               |          | 3,630                           |         |      |         | 1,222 |       
|                                                                                       | Provision for doubtful accounts              |                               |          | 3,875                           |         |      |         | 2,038 |       
|                                                                                       | Accretion of detachable warrants             |                               |          | 159                             |         |      |         | 592   |       
|                                                                                       | Non-cash stock compensation expense          |                               |          | 14                              |         |      |         | 114   |       
|                                                                                       | Amortization of loan costs                   |                               |          | 945                             |         |      |         | 250   |       
|                                                                                       | Loss on refinancing long-term debt           |                               |          | 4,744                           |         |      |         |      |       
|                                                                                       | Change in deferred tax liability             |                               |          | 1,742                           |         |      |         |      |       
|                                                                                       | Change in valuation of put warrants          |                               |          | 960                             |         |      |         |      |       
|                                                                                       | Change in reserve on stockholder notes       |                               |          | (545                            | )       |      |         |      |       
|                                                                                       | Long-term interest accrued                   |                               |          | 124                             |         |      |         | 243   |       
|                                                                                       | Changes in operating assets and liabilities: |                               |          |                                 |         |      |         |       |       
|                                                                                       |                                              | Accounts receivable           |          |                                 | (13,479 | )    |         |       | 127    |  
|                                                                                       |                                              | Prepaids and other assets     |          |                                 | 2,875   |      |         |       | 369    |  
|                                                                                       |                                              | Accounts payable              |          |                                 | (1,922  | )    |         |       | (1,407 | )
|                                                                                       |                                              | Accrued liabilities and other |          |                                 | 6,291   |      |         |       | 496    |  
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Net cash provided by operating activities                                              |                                              |                               | 12,026   |                                 |         |      | 7,262   |      
|Investing Activities:                                                                  |                                              |                               |          |                                 |         |      |         |      
|Cash paid for acquisitions, net of cash acquired                                       |                                              |                               | (97,480  | )                               |         |      | 6,243   |      
|Purchase of long-term securities                                                       |                                              |                               | (971     | )                               |         |      |        |      
|Capital purchases of property and equipment                                            |                                              |                               | (3,109   | )                               |         |      | (864    | )    
|Other assets                                                                           |                                              |                               | (650     | )                               |         |      | 21      |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Net cash (used in) provided by investing activities                                    |                                              |                               | (102,210 | )                               |         |      | 5,400   |      
|Financing Activities:                                                                  |                                              |                               |          |                                 |         |      |         |      
|Net principal borrowings (payments) on long-term debt                                  |                                              |                               | 77,615   |                                 |         |      | (9,205  | )    
|Payment of loan and issuance costs                                                     |                                              |                               | (5,451   | )                               |         |      | (1,878  | )    
|Proceeds from issuance of series A convertible preferred stock                         |                                              |                               | 25,000   |                                 |         |      |        |      
|Proceeds from issuance of common stock                                                 |                                              |                               | 202      |                                 |         |      | 21      |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Net cash provided by (used in) financing activities                                    |                                              |                               | 97,366   |                                 |         |      | (11,062 | )    
|Net increase in cash                                                                   |                                              |                               | 7,182    |                                 |         |      | 1,600   |      
|Cash at beginning of the period                                                        |                                              |                               | 2,392    |                                 |         |      | 1,262   |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Cash at end of the period                                                              |                                              | $                             | 9,574    |                                 |         | $    | 2,862   |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Significant Non-cash Transactions:                                                     |                                              |                               |          |                                 |         |      |         |      
|Issuance of detachable stock warrants as consideration for Bridge Loan                 |                                              | $                             |         |                                 |         | $    | 299     |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Issuance of detachable stock warrants as consideration for subordinated
debt financing |                                              | $                             |         |                                 |         | $    | 2,018   |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Issuance of common stock upon conversion of convertible debt                           |                                              | $                             | 4,588    |                                 |         | $    |        |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Conversion of stockholder receivable to common stock                                   |                                              | $                             | 477      |                                 |         | $    |        |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Refinancing of Long term debt                                                          |                                              | $                             | 5,770    |                                 |         | $    |        |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Issuance of common stock upon exercise of warrants                                     |                                              | $                             | 2,979    |                                 |         | $    |        |      
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Effect of Acquisitions:                                                                |                                              |                               |          |                                 |         |      |         |      
|Assets acquired, net of cash acquired                                                  |                                              | $                             | 181,601  |                                 |         | $    | 33,076  |      
|Liabilities assumed                                                                    |                                              |                               | (28,825  | )                               |         |      | (7,383  | )    
|Common stock and stock options issued                                                  |                                              |                               |         |                                 |         |      | (15,072 | )    
|Long-term debt issued                                                                  |                                              |                               | (55,296  | )                               |         |      | (16,864 | )    
|                                                                                       |                                              |                               |          |                                 |         |      |         |      
|Cash paid for acquisitions, net of cash acquired                                       |                                              | $                             | 97,480   |                                 |         | $    | (6,243  | )    
|                                                                                       |                                              |                               |          |                                 |         |      |         |      

See notes to condensed consolidated financial statements

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

1.      Recent Developments

On August 28, 2003, we borrowed
approximately $6.8 million under a mortgage loan agreement insured by the U.S. Department of
Housing and Urban Development (HUD), secured by real
estate located at West Oaks Hospital in Houston, Texas.
Interest accrues on the HUD loan at 5.85% and principal and interest are payable in 420 monthly installments
through September 2038. We used the proceeds from the loan to repay
approximately $5.8 million of our term debt under our amended and
restated senior secured credit facility, pay certain financing costs, and fund required escrow amounts for future
improvements to the property. The carrying amount of assets held as collateral approximated $2.7 million as of
September 30, 2003.

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

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

2.      Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States for audited
financial statements. The condensed consolidated balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date, but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation of our financial position
have been included. The majority of our expenses are cost of revenue items. General and administrative expenses
were approximately 2% of net revenue for the nine months ended September 30, 2003. Operating results for the
nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the
full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002 filed on March 27, 2003.

3.      Earnings Per Share

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

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

|                                   |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |      |      |        |       |   |      |       |       | 
|---------------------------------- | ------------------------------------------------------------------- | -------------------------------------------------------------- | ---- | -------------------------------- | ----- | ------------------------------- | ---- | ----- | ----- | ---- | ---- | ------ | ----- | - | ---- | ----- | ----- | 
|                                   |                                                                     |                                                                |      | Three months ended September 30, |       | Nine months ended September 30,
|                                   |                                                                     |                                                                |      |                                  |       |                                
|                                   |                                                                     |                                                                |      | 2003                             |       | 2002                            |      | 2003  |       | 2002
|                                   |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |     
|Numerator:                         |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |      |      |        |       |   |      |      
|                                   | Net income available to common stockholders                         |                                                                | $    | 2,103                            |       |                                 | $    | 1,606 |       |      | $    | 2,121  |       |   | $    | 3,218 |      
|                                   |                                                                     | Add: Interest on convertible notes                             |      |                                  |      |                                 |      |       | 81    |      |      |        |      |   |      |       |      | 
|                                   |                                                                     | Add: Accrued dividends on series A convertible preferred stock |      |                                  | 315   |                                 |      |       |      |      |      |        | 492   |   |      |       |      | 
|                                   |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |      |      |        |       |   |      |      
|                                   |                                                                     | Earnings used in computing diluted earnings per common share   |      | $                                | 2,418 |                                 |      | $     | 1,687 |      |      | $      | 2,613 |   |      | $     | 3,218 | 
|Denominator:                       |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |      |      |        |       |   |      |      
|                                   | Weighted average shares outstanding for basic earnings per share    |                                                                |      | 8,628                            |       |                                 |      | 6,687 |       |      |      | 8,177  |       |   |      | 5,563 |      
|                                   | Effects of dilutive stock options and warrants outstanding          |                                                                |      | 342                              |       |                                 |      | 452   |       |      |      | 429    |       |   |      | 371   |      
|                                   | Effect of dilutive convertible debt outstanding                     |                                                                |      |                                 |       |                                 |      | 422   |       |      |      |       |       |   |      |      |      
|                                   | Effect of dilutive series A convertible preferred stock outstanding |                                                                |      | 4,545                            |       |                                 |      |      |       |      |      | 2,372  |       |   |      |      |      
|                                   |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |      |      |        |       |   |      |      
|                                   | Shares used in computing diluted earnings per common share          |                                                                |      | 13,515                           |       |                                 |      | 7,561 |       |      |      | 10,978 |       |   |      | 5,934 |      
|                                   |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |      |      |        |       |   |      |      
|Earnings per common share, basic   |                                                                     | $                                                              | 0.24 |                                  |       | $                               | 0.24 |       |       | $    | 0.26 |        |       | $ | 0.58 |      
|                                   |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |      |      |        |       |   |      |      
|Earnings per common share, diluted |                                                                     | $                                                              | 0.18 |                                  |       | $                               | 0.22 |       |       | $    | 0.24 |        |       | $ | 0.54 |      
|                                   |                                                                     |                                                                |      |                                  |       |                                 |      |       |       |      |      |        |       |   |      |      

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

The computation of diluted earnings per share for the nine months ended September 30, 2003 does not include
interest on convertible notes of $124,000 and approximately 141,000 shares representing the weighted average of
convertible debt outstanding during the period as the effects would
have been anti-dilutive.

4.      Stock-Based Compensation

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

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

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

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

|                                                      |  |                                  |       |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|----------------------------------------------------- |  | -------------------------------- | ----- | ------------------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                      |  | Three months ended September 30, |       | Nine months ended September 30,
|                                                      |  |                                  |       |                                
|                                                      |  | 2003                             |       | 2002                            |  | 2003 |       | 2002
|                                                      |  |                                  |       |                                 |  |      |       |     
|Net income available to common stockholders           |  | $                                | 2,103 |                                 |  | $    | 1,606 |      |  | $ | 2,121 |  |  | $ | 3,218 | 
|Pro forma compensation expense from stock options     |  |                                  | 41    |                                 |  |      | 20    |      |  |   | 113   |  |  |   | 92    | 
|                                                      |  |                                  |       |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Pro forma net income available to common stockholders |  | $                                | 2,062 |                                 |  | $    | 1,586 |      |  | $ | 2,008 |  |  | $ | 3,126 | 
|                                                      |  |                                  |       |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Basic pro forma earnings per share                    |  | $                                | 0.24  |                                 |  | $    | 0.24  |      |  | $ | 0.25  |  |  | $ | 0.56  | 
|                                                      |  |                                  |       |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Diluted pro forma earnings per share                  |  | $                                | 0.18  |                                 |  | $    | 0.22  |      |  | $ | 0.23  |  |  | $ | 0.53  | 
|                                                      |  |                                  |       |                                 |  |      |       |      |  |   |       |  |  |   |       | 

5.      Mergers and Acquisitions

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

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

On June 30, 2003, we consummated the acquisition of Ramsay, a public company that traded on the Nasdaq SmallCap
Market under the symbol RYOU, for approximately $81.3 million, consisting of $56.2 million in cash, or
$5.00 per share, $22.3 million in net assumed debt that was repaid in connection with the acquisition and
$2.8 million in fees and expenses. We financed the acquisition of Ramsay with proceeds from the issuance of $150
million in 10 5/8% senior subordinated notes and the private placement of $12.5 million of our series A convertible preferred
stock. The 11 owned or leased inpatient behavioral health care facilities we acquired from Ramsay, which have an
aggregate of 1,292 beds, are located primarily in the Southeastern region of the United States with locations
also in Michigan, Missouri and Utah. In the acquisition, we also assumed 10 contracts to manage behavioral health
care facilities for government agencies in Florida, Georgia and Puerto Rico.

In April 2003, we consummated the acquisition of six inpatient behavioral health care facilities from The Brown
Schools, Inc. (The Brown Schools) for $63.0 million in cash. The six facilities,
which have an aggregate of 895 licensed beds, are
located in Austin, San Antonio and San Marcos, Texas; Charlottesville, Virginia; Colorado Springs, Colorado; and
Tulsa, Oklahoma. The Brown Schools offer a full continuum of care for troubled adolescents and adults. We
financed the acquisition of The Brown Schools with proceeds from the
private placement of $12.5 million of our series A
convertible preferred stock and an increase in funding under our senior credit facility.

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

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

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

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

|                                                        |  |                                  |        |                                 |  |      |        |      |  |   |         |   |  |   |         | 
|------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | 
|                                                        |  | Three months ended September 30, |        | Nine months ended September 30,
|                                                        |  |                                  |        |                                
|                                                        |  | 2003                             |        | 2002                            |  | 2003 |        | 2002
|                                                        |  |                                  |        |                                 |  |      |        |     
|Revenue                                                 |  | $                                | 98,470 |                                 |  | $    | 87,122 |      |  | $ | 288,063 |   |  | $ | 243,240 | 
|Net income (loss)                                       |  | $                                | 2,418  |                                 |  | $    | 4,784  |      |  | $ | (978    | ) |  | $ | 20,728  | 
|Net
income (loss) available to
     common stockholders |  | $                                | 2,103  |                                 |  | $    | 4,469  |      |  | $ | (1,470  | ) |  | $ | 19,783  | 
|Earnings per share, basic                               |  | $                                | 0.24   |                                 |  | $    | 0.67   |      |  | $ | (0.18   | ) |  | $ | 3.56    | 

The pro forma information given does not purport to be indicative of what our results of operations would have
been if the acquisitions had in fact occurred at the beginning of the periods presented, and is not intended to
be a projection of the impact on future results or trends. The pro forma information given includes non-recurring
items of $157,000 on loss from refinancing of debt for the three months ended September 30, 2003 and for the nine
months ended September 30, 2003, expense of $960,000 to revalue put warrants, income of $545,000 to release reserves on
stockholder notes, loss of $458,000 related to a sale of land and severance costs associated with the purchase of
Ramsay of approximately $2.3 million.

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.

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

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

6.      Debt

On August 28, 2003, we borrowed
approximately $6.8 million under a mortgage loan agreement insured by
HUD, secured by real estate located at West Oaks Hospital in
Houston, Texas. Interest accrues on the HUD loan at 5.85% and principal and interest are payable in 420 monthly installments
through September 2038. We used the proceeds from the loan to
repay approximately $5.8 million of our term debt under our amended and restated
senior secured credit facility, pay certain financing costs, and fund required escrow amounts for future
improvements to the property. The carrying amount of assets held as
collateral approximated $2.7 million as of
September 30, 2003.

On June 30, 2003, we issued
$150 million in 10 5/8% senior subordinated notes, which are fully and unconditionally
guaranteed on a senior subordinated basis by substantially all of our existing operating subsidiaries. Proceeds
from the issuance of the senior subordinated notes and the private
placement of $12.5 million in series A convertible
preferred stock were used to finance the acquisition of Ramsay and pay down substantially all of our long-term
debt. Interest on the senior subordinated notes accrues at the rate of 10.625% per annum and is payable
semi-annually in arrears on June 15 and December 15, commencing on December 15, 2003. The senior subordinated
notes will mature on June 15, 2013.

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

In connection with the closing of the sale of our senior subordinated notes on June 30, 2003, our senior credit
facility with our senior lender, CapitalSource Finance LLC
(CapSource), was amended and restated to increase our
senior secured revolving line of credit to
$50.0 million from $28.0 million and refinance $36.0 million in term loans with proceeds from the sale of the
senior subordinated notes. Our credit facility is secured by substantially all of
our assets and the stock of our existing operating subsidiaries. The term loans accrue interest at the Citibank,
N.A. prime rate plus 4.5% subject to a floor of 8.75% and are due in November 2003. The revolving line of credit
accrues interest at the Citibank, N.A. prime rate plus 2% subject to a floor of 6.25% and is due in June 2006. At
September 30, 2003, the interest rate under the revolving line of credit was 6.25%. Until the maturity date, we
may borrow, repay and re-borrow an amount not to exceed the lesser of $50.0 million or the borrowing base (as
defined in the amended and restated credit facility). As of September 30, 2003, we had $50.0 million available
under the revolving line of credit under our amended and restated credit facility. Under the revolving line of
credit, all of our collections, except for Medicare and Medicaid payments, are deposited into lockbox accounts
controlled by CapSource. The funds deposited in the lockboxes are returned to us on a daily basis. Prior to
amending and restating the senior credit facility, funds deposited in the lockboxes were applied to outstanding
borrowings on a daily basis. As a result, the outstanding borrowings
under the revolving line of credit were
classified as short-term as of December 31, 2002 and all periods prior to June 30, 2003. We must pay on a monthly
basis an unused fee in the amount of 0.5% per annum on the unused portion of our amended and restated credit
facility. Such fees were approximately $70,000 for the nine months ended September 30, 2003. We are required to pay interest on a minimum balance of $17.5 million under our revolving
line of credit. As of September 30, 2003, our amended and
restated senior secured credit facility consisted of approximately $11.2 million of term loans and a
$50.0 million revolving line of credit. We
refinanced the remaining $11.2 million outstanding on the term loan with borrowings insured by HUD on November 5,
2003, see Note 12.

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

On April 1, 2003, our senior credit facility was expanded to approximately $81.0 million with the increase of our
revolving line of credit to $28.0 million from
$17.5 million and a new $36.0 million term loan in addition
to our then-existing $17.0 million term loan. We borrowed
approximately $52.2 million during April 2003, including the $36.0 million term loan and $16.2 million under the
revolving line of credit, to partially fund our acquisition of The Brown Schools. The revolving line of credit
and new $36.0 million term loan were repaid on June 30,
2003 with proceeds from the issuance of our 10 5/8% senior
subordinated notes.

On November 25, 2002, we entered
into a mortgage loan agreement, insured by HUD, to borrow
approximately $4.9 million, secured by real estate located at Holly Hill Hospital in
Raleigh, North Carolina. Interest accrues on the HUD loan at 5.95% and principal and interest are payable in 420 monthly
installments through December 2037. We used proceeds from the loan to
replace approximately $4.4 million of our senior term loan
with CapSource, pay certain refinancing costs, and fund required escrow amounts for future improvements to the
property.

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

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

On June 28, 2002, we entered into
a securities purchase agreement with The 1818 Mezzanine Fund II, L.P.
(the 1818 Fund) where the 1818 fund agreed to issue up to $20 million
of senior subordinated notes with detachable nominal warrants. At closing on June 28, 2002, a total of $10
million of the senior subordinated notes were issued. On June 30, 2003, we repaid principal of $10 million,
accrued interest and a prepayment penalty of 3% to the 1818 Fund with
proceeds from our issuance of 10 5/8% senior
subordinated notes, and we no longer have the ability to borrow under the securities purchase agreement with the
1818 Fund.

In connection with the issuance of the senior subordinated notes to the 1818 Fund, we issued detachable stock
purchase warrants for the purchase of 372,412 shares of our common stock at an exercise price of $.01 per share.
Also, we provided the 1818 Fund with the ability to require us to repurchase their warrants or the common stock
acquired upon exercise of the warrants at fair market value for cash. As discussed in Note 1, the 1818 Fund
exercised its stock purchase warrant and received 372,039 shares of our common stock

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

on May 16, 2003. Because the
1818 Fund had the ability to require us to repurchase the warrants for cash, the warrants constituted a
derivative that required changes in value of the warrants to be recorded as an increase or decrease to our
earnings. In connection with the exercise of the warrants, the 1818 Fund provided us with a written consent to
waive its ability to require that we repurchase the warrants for cash effective April 1, 2003. As such, we are no
longer required to record non-cash expense for changes in the fair market value of our common stock.

7.      Mezzanine Equity and Stockholders Equity

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

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

As a part of the merger with PMR, we became the holder of promissory notes with certain stockholders of PMR.
Because a certain provision of the stockholder notes allows the stockholders to repay those notes with our common
stock at the higher of a stated price or the market value of our
common stock, the notes have been classified in our
stockholders equity. As the stated price was higher than the market value at December 31, 2002, we recorded a
reserve on the promissory notes equal to the difference between the stated price and market value. Due to the
increase in the market price of our common stock during the six months ended June 30, 2003, we released $545,000
of the reserve on the stockholder notes. At June 30, 2003 and September 30, 2003, we did not maintain a reserve
balance on our stockholder notes because the market value exceeded the stated price. We may have to establish
reserves in the future should the market value of our common stock decrease below the stated price. On July 10, 2003, we received
48,067 shares of our common stock as payment for approximately $466,000 of the promissory notes outstanding. These shares were subsequently cancelled and
returned to authorized but unissued status. The current outstanding
balance of these notes is $338,000.

8.      Income Taxes

During prior years, we generated net operating loss (NOL) carryforwards for federal and state income tax
purposes. As a result of the NOL carryforwards, we have not recorded a provision for income tax for the period
ended September 30, 2002. During the fourth quarter of 2002, we released our valuation allowance and recorded a
corresponding income tax benefit for the twelve months ended December 31, 2002. The provision recorded for the
nine months ended September 30, 2003 reflects an effective tax
rate of approximately 45.6% due in part to the
non-deductible charge related to the valuation of the put warrants discussed in Note 6.

9.      Disclosures About Reportable Segments

In accordance with the criteria of
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, we determined that, as of September 30, 2003, we operate two reportable
segments: (1) Owned and
Leased Facilities and (2) Management Contracts. As of
September 30, 2003, the Owned and Leased Facilities segment provides mental and
behavioral health services to patients in its 19 owned and 3 leased facilities in 12 states. The Management
Contracts segment provides psychiatric management and development services to 45 behavioral health units in
hospitals and clinics in 15 states and provides mental and behavioral
health services to 10 facilities for state
government agencies. Activities classified as Corporate and Other in the following schedule relate primarily to
unallocated home office items.

Adjusted EBITDA is a non-GAAP financial measure
    and is defined as net income (loss) before discontinued
    operations, interest expense (net of interest income), income
    taxes, depreciation, amortization, stock compensation and other
    items included in the caption labeled Other
    expenses. These
    other expenses may occur in future periods but the amounts
    recognized can vary significantly from period to period and do
    not directly relate to the ongoing operations of our health care
    facilities. Our management relies on adjusted EBITDA as the
    primary measure to review and assess operating performance of
    our facilities and their management teams. We believe it is
    useful to investors to provide disclosures of our operating
    results on the same basis as that used by management. Management
    and investors also review adjusted EBITDA to evaluate our
    overall performance and to compare our current operating results
    with corresponding periods and with other companies in the
    health care industry. You should not consider adjusted EBITDA in
    isolation or as a substitute for net income, operating cash
    flows or other cash flow statement data determined in accordance
    with accounting principles generally accepted in the United
    States. Because adjusted EBITDA is not a measure of financial
    performance under accounting principles generally accepted in the
United States and
    is susceptible to varying calculations, it may not be comparable
    to similarly titled measures of other companies. The following is a financial summary
by business segment for the periods indicated (dollars in thousands):

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

|                                      |                                     |                      |         |            |   |            |        |           |   |              |         |     |     |   |         |     |     | 
|------------------------------------- | ----------------------------------- | -------------------- | ------- | ---------- | - | ---------- | ------ | --------- | - | ------------ | ------- | --- | --- | - | ------- | --- | --- | 
|                                      |                                     |                      |         | Owned and  |   |            |        |           |   |              |         |     |     |   |         |    
|                                      |                                     |                      |         | Leased     |   | Management |        | Corporate |   |              |         |    
|                                      |                                     |                      |         | Facilities |   | Contracts  |        | and Other |   | Consolidated
|                                      |                                     |                      |         |            |   |            |        |           |   |             
|Three months ended September 30, 2003 |                                     |                      |         |            |   |            |        |           |   |              |         |     |     |   |         |    
|Revenue                               |                                     | $                    | 74,460  |            |   | $          | 24,010 |           |   | $            |        |     |     | $ | 98,470  |    
|Adjusted EBITDA                       |                                     | $                    | 8,521   |            |   | $          | 4,406  |           |   | $            | (1,403  | )   |     | $ | 11,524  |    
|Interest expense                      |                                     |                      | 1,816   |            |   |            | (5     | )         |   |              | 3,755   |     |     |   | 5,566   |    
|Provision for income taxes            |                                     |                      | 1,413   |            |   |            | 1,330  |           |   |              | (1,261  | )   |     |   | 1,482   |    
|Depreciation and amortization         |                                     |                      | 1,573   |            |   |            | 310    |           |   |              | 13      |     |     |   | 1,896   |    
|Inter-segment expenses                |                                     |                      | 1,413   |            |   |            | 601    |           |   |              | (2,014  | )   |     |   |        |    
|Stock compensation expense            |                                     |                      |        |            |   |            |       |           |   |              | 5       |     |     |   | 5       |    
|Other expenses:                       |                                     |                      |         |            |   |            |        |           |   |              |         |     |     |   |         |    
|                                      | Loss on refinance of long-term debt |                      |         |           |   |            |        |          |   |              |         | 157 |     |   |         | 157 |    
|                                      |                                     |                      |         |            |   |            |        |           |   |              |         |     |     |   |         |    
|                                      |                                     | Total other expenses |         |            |  |            |        |           |  |              |         |     | 157 |   |         |     | 157 | 
|                                      |                                     |                      |         |            |   |            |        |           |   |              |         |     |     |   |         |    
|Net income (loss)                     |                                     | $                    | 2,306   |            |   | $          | 2,170  |           |   | $            | (2,058  | )   |     | $ | 2,418   |    
|                                      |                                     |                      |         |            |   |            |        |           |   |              |         |     |     |   |         |    
|Segment assets                        |                                     | $                    | 134,056 |            |   | $          | 42,008 |           |   | $            | 114,187 |     |     | $ | 290,251 |    

|                                      |  |            |        |            |  |           |        |              |  |   |       |   |  |   |        | 
|------------------------------------- |  | ---------- | ------ | ---------- |  | --------- | ------ | ------------ |  | - | ----- | - |  | - | ------ | 
|                                      |  | Owned and  |        |            |  |           |        |              |  |   |       |   |  |  
|                                      |  | Leased     |        | Management |  | Corporate |        |              |  |  
|                                      |  | Facilities |        | Contracts  |  | and Other |        | Consolidated
|                                      |  |            |        |            |  |           |        |             
|Three months ended September 30, 2002 |  |            |        |            |  |           |        |              |  |   |       |   |  |   |        | 
|Revenue                               |  | $          | 22,864 |            |  | $         | 9,405  |              |  | $ |      |   |  | $ | 32,269 | 
|Adjusted EBITDA                       |  | $          | 2,563  |            |  | $         | 1,927  |              |  | $ | (876  | ) |  | $ | 3,614  | 
|Interest expense                      |  |            | 1,052  |            |  |           | 79     |              |  |   | 447   |   |  |   | 1,578  | 
|Depreciation and amortization         |  |            | 299    |            |  |           | 98     |              |  |   | 28    |   |  |   | 425    | 
|Inter-segment expenses                |  |            | 630    |            |  |           | 311    |              |  |   | (941  | ) |  |   |       | 
|Stock compensation expense            |  |            |       |            |  |           |       |              |  |   | 5     |   |  |   | 5      | 
|                                      |  |            |        |            |  |           |        |              |  |   |       |   |  |   |        | 
|Net income (loss)                     |  | $          | 582    |            |  | $         | 1,439  |              |  | $ | (415  | ) |  | $ | 1,606  | 
|                                      |  |            |        |            |  |           |        |              |  |   |       |   |  |   |        | 
|Segment assets                        |  | $          | 49,218 |            |  | $         | 31,867 |              |  | $ | 5,964 |   |  | $ | 87,049 | 

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

|                                     |                                        |                      |         |            |   |            |        |           |   |              |         |       |       |   |         |       |       | 
|------------------------------------ | -------------------------------------- | -------------------- | ------- | ---------- | - | ---------- | ------ | --------- | - | ------------ | ------- | ----- | ----- | - | ------- | ----- | ----- | 
|                                     |                                        |                      |         | Owned and  |   |            |        |           |   |              |         |       |       |   |         |      
|                                     |                                        |                      |         | Leased     |   | Management |        | Corporate |   |              |         |      
|                                     |                                        |                      |         | Facilities |   | Contracts  |        | and Other |   | Consolidated
|                                     |                                        |                      |         |            |   |            |        |           |   |             
|Nine months ended September 30, 2003 |                                        |                      |         |            |   |            |        |           |   |              |         |       |       |   |         |      
|Revenue                              |                                        | $                    | 145,510 |            |   | $          | 47,492 |           |   | $            |        |       |       | $ | 193,002 |      
|Adjusted EBITDA                      |                                        | $                    | 19,067  |            |   | $          | 8,907  |           |   | $            | (5,005  | )     |       | $ | 22,969  |      
|Interest expense                     |                                        |                      | 4,086   |            |   |            | 97     |           |   |              | 5,180   |       |       |   | 9,363   |      
|Provision for income taxes           |                                        |                      | 3,031   |            |   |            | 2,498  |           |   |              | (3,339  | )     |       |   | 2,190   |      
|Depreciation and amortization        |                                        |                      | 2,746   |            |   |            | 840    |           |   |              | 44      |       |       |   | 3,630   |      
|Inter-segment expenses               |                                        |                      | 4,259   |            |   |            | 1,397  |           |   |              | (5,656  | )     |       |   |        |      
|Stock compensation expense           |                                        |                      |        |            |   |            |       |           |   |              | 14      |       |       |   | 14      |      
|Other expenses:                      |                                        |                      |         |            |   |            |        |           |   |              |         |       |       |   |         |      
|                                     | Loss on refinance of long-term debt    |                      |         |           |   |            |        |          |   |              |         | 4,744 |       |   |         | 4,744 |      
|                                     | Change in valuation of put warrants    |                      |         |           |   |            |        |          |   |              |         | 960   |       |   |         | 960   |      
|                                     | Change in reserve on stockholder notes |                      |         |           |   |            |        |          |   |              |         | (545  | )     |   |         | (545  | )    
|                                     |                                        |                      |         |            |   |            |        |           |   |              |         |       |       |   |         |      
|                                     |                                        | Total other expenses |         |            |  |            |        |           |  |              |         |       | 5,159 |   |         |       | 5,159 | 
|                                     |                                        |                      |         |            |   |            |        |           |   |              |         |       |       |   |         |      
|Net income (loss)                    |                                        | $                    | 4,945   |            |   | $          | 4,075  |           |   | $            | (6,407  | )     |       | $ | 2,613   |      
|                                     |                                        |                      |         |            |   |            |        |           |   |              |         |       |       |   |         |      
|Segment assets                       |                                        | $                    | 134,056 |            |   | $          | 42,008 |           |   | $            | 114,187 |       |       | $ | 290,251 |      

|                                     |  |            |        |            |  |           |        |              |  |   |        |   |  |   |        | 
|------------------------------------ |  | ---------- | ------ | ---------- |  | --------- | ------ | ------------ |  | - | ------ | - |  | - | ------ | 
|                                     |  | Owned and  |        |            |  |           |        |              |  |   |        |   |  |  
|                                     |  | Leased     |        | Management |  | Corporate |        |              |  |  
|                                     |  | Facilities |        | Contracts  |  | and Other |        | Consolidated
|                                     |  |            |        |            |  |           |        |             
|Nine months ended September 30, 2002 |  |            |        |            |  |           |        |              |  |   |        |   |  |   |        | 
|Revenue                              |  | $          | 56,465 |            |  | $         | 21,607 |              |  | $ |       |   |  | $ | 78,072 | 
|Adjusted EBITDA                      |  | $          | 5,813  |            |  | $         | 5,054  |              |  | $ | (2,243 | ) |  | $ | 8,624  | 
|Interest expense                     |  |            | 2,358  |            |  |           | 242    |              |  |   | 1,470  |   |  |   | 4,070  | 
|Depreciation and amortization        |  |            | 850    |            |  |           | 272    |              |  |   | 100    |   |  |   | 1,222  | 
|Inter-segment expenses               |  |            | 1,834  |            |  |           | 612    |              |  |   | (2,446 | ) |  |   |       | 
|Stock compensation expense           |  |            |       |            |  |           |       |              |  |   | 114    |   |  |   | 114    | 
|                                     |  |            |        |            |  |           |        |              |  |   |        |   |  |   |        | 
|Net income (loss)                    |  | $          | 771    |            |  | $         | 3,928  |              |  | $ | (1,481 | ) |  | $ | 3,218  | 
|                                     |  |            |        |            |  |           |        |              |  |   |        |   |  |   |        | 
|Segment assets                       |  | $          | 49,218 |            |  | $         | 31,867 |              |  | $ | 5,964  |   |  | $ | 87,049 | 

10.      Recent Pronouncements

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

11.     
Financial Information for Psychiatric Solutions and Its Subsidiaries

We conduct substantially all of our business through our subsidiaries. Presented below is condensed consolidated
financial information for us and our subsidiaries as of September 30, 2003, and for the three and nine months
ended September 30, 2003. The information segregates the parent company (Psychiatric Solutions, Inc.), the combined wholly
owned subsidiary guarantors, the combined non-guarantors, and eliminations. All of the subsidiary guarantees are
both full and unconditional and joint and several. No combining financial information has been presented for
prior periods as there were no non-guarantor subsidiaries prior to November 2002.

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

Psychiatric Solutions, Inc.
Condensed Consolidating Balance Sheet
As of September 30, 2003 (Unaudited)
(Dollars in thousands)

|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |        | 
|------------------------------------------------------- | --------------------------------- | - | ------- | ----- | ---------- | - | ---------- | ------ | ----------- | - | ------------- | ----- | ------------ | - | -------- | ---- | - | - | ------- | ------ | 
|                                                        |                                   |   |         |       |            |   | Combined   |        | Combined    |   |               |       |              |   | Total   
|                                                        |                                   |   |         |       |            |   | Subsidiary |        | Non-        |   | Consolidating |       | Consolidated
|                                                        |                                   |   | Parent  |       | Guarantors |   | Guarantors |        | Adjustments |   | Amounts      
|                                                        |                                   |   |         |       |            |   |            |        |             |   |              
|Current Assets:                                         |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|                                                        | Cash                              |   | $       |      |            |   | $          | 8,270  |             |   | $             | 1,304 |              |   | $        |     |   |   | $       | 9,574  | 
|                                                        | Accounts receivable, net          |   |         |      |            |   |            | 60,426 |             |   |               |      |              |   |          |     |   |   |         | 60,426 | 
|                                                        | Prepaids and other                |   |         |      |            |   |            | 6,501  |             |   |               | 53    |              |   |          |     |   |   |         | 6,554  | 
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|Total current assets                                    |                                   |   |        |       |            |   | 75,197     |        |             |   | 1,357         |       |              |   |         |      |   |   | 76,554  |       
|Property and equipment, net of accumulated depreciation |                                   |   |        |       |            |   | 126,558    |        |             |   | 8,311         |       |              |   |         |      |   |   | 134,869 |       
|Cost in excess of net assets acquired                   |                                   |   |        |       |            |   | 55,733     |        |             |   |              |       |              |   |         |      |   |   | 55,733  |       
|Contracts, net                                          |                                   |   |        |       |            |   | 3,086      |        |             |   |              |       |              |   |         |      |   |   | 3,086   |       
|Investment in subsidiaries                              |                                   |   | 220,543 |       |            |   |            |        |             |   |               |       |              |   | (220,543 | )    |   |   |        |       
|Other assets                                            |                                   |   | 8,126   |       |            |   | 9,007      |        |             |   | 6,050         |       |              |   | (3,174   | )    |   |   | 20,009  |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|Total assets                                            |                                   | $ | 228,669 |       |            | $ | 269,581    |        |             | $ | 15,718        |       |              | $ | (223,717 | )    |   | $ | 290,251 |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|Current Liabilities:                                    |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|                                                        | Accounts payable                  |   | $       |      |            |   | $          | 11,323 |             |   | $             |      |              |   | $        |     |   |   | $       | 11,323 | 
|                                                        | Salaries and benefits payable     |   |         |      |            |   |            | 10,096 |             |   |               |      |              |   |          |     |   |   |         | 10,096 | 
|                                                        | Other accrued liabilities         |   |         | 4,089 |            |   |            | 18,691 |             |   |               | 1,042 |              |   |          | (980 | ) |   |         | 22,842 | 
|                                                        | Revolving line of credit          |   |         |      |            |   |            |       |             |   |               |      |              |   |          |     |   |   |         |       | 
|                                                        | Current portion of long-term debt |   |         |      |            |   |            | 686    |             |   |               | 100   |              |   |          |     |   |   |         | 786    | 
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|Total current liabilities                               |                                   |   | 4,089   |       |            |   | 40,796     |        |             |   | 1,142         |       |              |   | (980     | )    |   |   | 45,047  |       
|Long-term debt, less current portion                    |                                   |   | 161,884 |       |            |   |           |        |             |   | 11,630        |       |              |   |         |      |   |   | 173,514 |       
|Deferred tax liability                                  |                                   |   |        |       |            |   | 3,211      |        |             |   |              |       |              |   |         |      |   |   | 3,211   |       
|Other liabilities                                       |                                   |   | 2,599   |       |            |   |           |        |             |   |              |       |              |   | 980      |      |   |   | 3,579   |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|Total liabilities                                       |                                   |   | 168,572 |       |            |   | 44,007     |        |             |   | 12,772        |       |              |   |         |      |   |   | 225,351 |       
|Series A convertible preferred stock                    |                                   |   | 25,042  |       |            |   |           |        |             |   |              |       |              |   |         |      |   |   | 25,042  |       
|Redeemable common stock                                 |                                   |   | 5,145   |       |            |   |           |        |             |   |              |       |              |   |         |      |   |   | 5,145   |       
|Stockholders equity:                                   |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|Total stockholders equity                              |                                   |   | 29,910  |       |            |   | 225,574    |        |             |   | 2,946         |       |              |   | (223,717 | )    |   |   | 34,713  |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       
|Total liabilities and stockholders equity              |                                   | $ | 228,669 |       |            | $ | 269,581    |        |             | $ | 15,718        |       |              | $ | (223,717 | )    |   | $ | 290,251 |       
|                                                        |                                   |   |         |       |            |   |            |        |             |   |               |       |              |   |          |      |   |   |         |       

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

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2003 (Unaudited)
(Dollars in thousands)

|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |      |   |  |   |        | 
|-------------------------------------------------- |  | ------ | ------ | ---------- |  | ---------- | ------ | ----------- |  | ------------- | --- | ------------ |  | ----- | ---- | - |  | - | ------ | 
|                                                   |  |        |        |            |  | Combined   |        | Combined    |  |               |     |              |  | Total
|                                                   |  |        |        |            |  | Subsidiary |        | Non-        |  | Consolidating |     | Consolidated
|                                                   |  | Parent |        | Guarantors |  | Guarantors |        | Adjustments |  | Amounts      
|                                                   |  |        |        |            |  |            |        |             |  |              
|Revenue                                            |  | $      |       |            |  | $          | 98,470 |             |  | $             | 419 |              |  | $     | (419 | ) |  | $ | 98,470 | 
|Salaries, wages and employee benefits              |  |        |       |            |  |            | 53,164 |             |  |               |    |              |  |       |     |   |  |   | 53,164 | 
|Professional fees                                  |  |        |       |            |  |            | 11,192 |             |  |               | 41  |              |  |       |     |   |  |   | 11,233 | 
|Supplies                                           |  |        |       |            |  |            | 6,204  |             |  |               |    |              |  |       |     |   |  |   | 6,204  | 
|Rentals and leases                                 |  |        |       |            |  |            | 1,657  |             |  |               |    |              |  |       |     |   |  |   | 1,657  | 
|Other operating expenses                           |  |        |       |            |  |            | 13,642 |             |  |               | 252 |              |  |       | (419 | ) |  |   | 13,475 | 
|Provision for bad debts                            |  |        |       |            |  |            | 1,218  |             |  |               |    |              |  |       |     |   |  |   | 1,218  | 
|Depreciation and amortization                      |  |        | 608    |            |  |            | 1,218  |             |  |               | 70  |              |  |       |     |   |  |   | 1,896  | 
|Interest expense                                   |  |        | 5,457  |            |  |            |       |             |  |               | 109 |              |  |       |     |   |  |   | 5,566  | 
|Loss on refinancing long-term debt                 |  |        | 157    |            |  |            |       |             |  |               |    |              |  |       |     |   |  |   | 157    | 
|Change in reserve of stockholder notes             |  |        |       |            |  |            |       |             |  |               |    |              |  |       |     |   |  |   |       | 
|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |      |   |  |   |        | 
|                                                   |  |        | 6,222  |            |  |            | 88,295 |             |  |               | 472 |              |  |       | (419 | ) |  |   | 94,570 | 
|(Loss) income before income taxes                  |  |        | (6,222 | )          |  |            | 10,175 |             |  |               | (53 | )            |  |       |     |   |  |   | 3,900  | 
|(Benefit from) provision for income taxes          |  |        | (2,133 | )          |  |            | 3,635  |             |  |               | (20 | )            |  |       |     |   |  |   | 1,482  | 
|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |      |   |  |   |        | 
|Net (loss) income                                  |  |        | (4,089 | )          |  |            | 6,540  |             |  |               | (33 | )            |  |       |     |   |  |   | 2,418  | 
|Accrued preferred stock dividends                  |  |        | 315    |            |  |            |       |             |  |               |    |              |  |       |     |   |  |   | 315    | 
|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |      |   |  |   |        | 
|Net (loss) income available to common shareholders |  | $      | (4,404 | )          |  | $          | 6,540  |             |  | $             | (33 | )            |  | $     |     |   |  | $ | 2,103  | 
|                                                   |  |        |        |            |  |            |        |             |  |               |     |              |  |       |      |   |  |   |        | 

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

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2003 (Unaudited)
(Dollars in thousands)

|                                                   |  |        |         |            |  |            |         |             |  |               |       |              |  |       |        |   |  |   |         |  
|-------------------------------------------------- |  | ------ | ------- | ---------- |  | ---------- | ------- | ----------- |  | ------------- | ----- | ------------ |  | ----- | ------ | - |  | - | ------- | -
|                                                   |  |        |         |            |  | Combined   |         | Combined    |  |               |       |              |  | Total
|                                                   |  |        |         |            |  | Subsidiary |         | Non-        |  | Consolidating |       | Consolidated
|                                                   |  | Parent |         | Guarantors |  | Guarantors |         | Adjustments |  | Amounts      
|                                                   |  |        |         |            |  |            |         |             |  |              
|Revenue                                            |  | $      |        |            |  | $          | 193,002 |             |  | $             | 1,227 |              |  | $     | (1,227 | ) |  | $ | 193,002 |  
|Salaries, wages and employee benefits              |  |        |        |            |  |            | 99,686  |             |  |               |      |              |  |       |       |   |  |   | 99,686  |  
|Professional fees                                  |  |        |        |            |  |            | 22,477  |             |  |               | 84    |              |  |       |       |   |  |   | 22,561  |  
|Supplies                                           |  |        |        |            |  |            | 10,887  |             |  |               |      |              |  |       |       |   |  |   | 10,887  |  
|Rentals and leases                                 |  |        |        |            |  |            | 2,439   |             |  |               |      |              |  |       |       |   |  |   | 2,439   |  
|Other operating expenses                           |  |        | 571     |            |  |            | 30,512  |             |  |               | 743   |              |  |       | (1,227 | ) |  |   | 30,599  |  
|Provision for bad debts                            |  |        |        |            |  |            | 3,875   |             |  |               |      |              |  |       |       |   |  |   | 3,875   |  
|Equity in earnings of subsidiaries                 |  |        |        |            |  |            |        |             |  |               |      |              |  |       |       |   |  |   |        |  
|Depreciation and amortization                      |  |        | 936     |            |  |            | 2,507   |             |  |               | 187   |              |  |       |       |   |  |   | 3,630   |  
|Interest expense                                   |  |        | 8,984   |            |  |            | 124     |             |  |               | 255   |              |  |       |       |   |  |   | 9,363   |  
|Loss on refinancing of long-term debt              |  |        | 4,744   |            |  |            |        |             |  |               |      |              |  |       |       |   |  |   | 4,744   |  
|Change in valuation of put warrants                |  |        | 960     |            |  |            |        |             |  |               |      |              |  |       |       |   |  |   | 960     |  
|Change in reserve of stockholder notes             |  |        | (545    | )          |  |            |        |             |  |               |      |              |  |       |       |   |  |   | (545    | )
|                                                   |  |        |         |            |  |            |         |             |  |               |       |              |  |       |        |   |  |   |         |  
|                                                   |  |        | 15,650  |            |  |            | 172,507 |             |  |               | 1,269 |              |  |       | (1,227 | ) |  |   | 188,199 |  
|(Loss) income before income taxes                  |  |        | (15,650 | )          |  |            | 20,495  |             |  |               | (42   | )            |  |       |       |   |  |   | 4,803   |  
|(Benefit from) provision for income taxes          |  |        | (5,582  | )          |  |            | 7,788   |             |  |               | (16   | )            |  |       |       |   |  |   | 2,190   |  
|                                                   |  |        |         |            |  |            |         |             |  |               |       |              |  |       |        |   |  |   |         |  
|Net (loss) income                                  |  |        | (10,068 | )          |  |            | 12,707  |             |  |               | (26   | )            |  |       |       |   |  |   | 2,613   |  
|Accrued preferred stock dividends                  |  |        | 492     |            |  |            |        |             |  |               |      |              |  |       |       |   |  |   | 492     |  
|                                                   |  |        |         |            |  |            |         |             |  |               |       |              |  |       |        |   |  |   |         |  
|Net (loss) income available to common shareholders |  | $      | (10,560 | )          |  | $          | 12,707  |             |  | $             | (26   | )            |  | $     |       |   |  | $ | 2,121   |  
|                                                   |  |        |         |            |  |            |         |             |  |               |       |              |  |       |        |   |  |   |         |  

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

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2003 (Unaudited)
(Dollars in thousands)

|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |       |         |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------ | ---------- | ------ | ---------- | ------- | ----------- | ------ | ------------- | ----- | ------------ | ------ | ----- | ------ | - | -------- | ----- | ------- | -
|                                                                                                   |                                                                             |                                           |         |        |        |            |        | Combined   |         | Combined    |        |               |       |              |        | Total
|                                                                                                   |                                                                             |                                           |         |        |        |            |        | Subsidiary |         | Non-        |        | Consolidating |       | Consolidated
|                                                                                                   |                                                                             |                                           |         | Parent |        | Guarantors |        | Guarantors |         | Adjustments |        | Amounts      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |        |              
|Operating Activities                                                                               |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      
|Net (loss) income                                                                                  |                                                                             | $                                         | (10,068 | )      |        | $          | 12,707 |            |         | $           | (26    | )             |       | $            |       |       |        | $ | 2,613    |      
|Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      
|                                                                                                   | Depreciation and amortization                                               |                                           |         |       |        |            |        | 3,443      |         |             |        | 187           |       |              |        |      |        |   |          | 3,630 |        
|                                                                                                   | Provision for doubtful accounts                                             |                                           |         |       |        |            |        | 3,875      |         |             |        |              |       |              |        |      |        |   |          | 3,875 |        
|                                                                                                   | Accretion of detachable warrants                                            |                                           |         | 159    |        |            |        |           |         |             |        |              |       |              |        |      |        |   |          | 159   |        
|                                                                                                   | Non-cash stock compensation expense                                         |                                           |         |       |        |            |        | 14         |         |             |        |              |       |              |        |      |        |   |          | 14    |        
|                                                                                                   | Amortization of loan costs                                                  |                                           |         | 936    |        |            |        |           |         |             |        | 9             |       |              |        |      |        |   |          | 945   |        
|                                                                                                   | Loss on refinancing long-term debt                                          |                                           |         | 4,586  |        |            |        | 158        |         |             |        |              |       |              |        |      |        |   |          | 4,744 |        
|                                                                                                   | Change in deferred tax liability                                            |                                           |         |       |        |            |        | 1,742      |         |             |        |              |       |              |        |      |        |   |          | 1,742 |        
|                                                                                                   | Change in valuation of put warrants                                         |                                           |         | 960    |        |            |        |           |         |             |        |              |       |              |        |      |        |   |          | 960   |        
|                                                                                                   | Change in reserve on stockholder notes                                      |                                           |         | (545   | )      |            |        |           |         |             |        |              |       |              |        |      |        |   |          | (545  | )      
|                                                                                                   | Long-term interest accrued                                                  |                                           |         |       |        |            |        | 124        |         |             |        |              |       |              |        |      |        |   |          | 124   |        
|                                                                                                   | Changes in operating assets and liabilities, net of
effect of acquisitions: |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |       |        
|                                                                                                   |                                                                             | Accounts receivable                       |         |        |       |            |        |            | (13,479 | )           |        |               |      |              |        |       |       |   |          |       | (13,479 | )
|                                                                                                   |                                                                             | Prepaids and other current assets         |         |        | (8,126 | )          |        |            | 11,742  |             |        |               | 2,433 |              |        |       | (3,174 | ) |          |       | 2,875   |  
|                                                                                                   |                                                                             | Accounts payable                          |         |        |       |            |        |            | (1,922  | )           |        |               |      |              |        |       |       |   |          |       | (1,922  | )
|                                                                                                   |                                                                             | Accrued liabilities and other liabilities |         |        | 5,759  |            |        |            | 1,481   |             |        |               | (949  | )            |        |       |       |   |          |       | 6,291   |  
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      
|Net cash (used in) provided by continuing
operating activities                                     |                                                                             |                                           | (6,339  | )      |        |            | 19,885 |            |         |             | 1,654  |               |       |              | (3,174 | )     |        |   | 12,026   |      
|Investing Activities:                                                                              |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      
|Cash paid for acquisitions, net of cash acquired                                                   |                                                                             |                                           | (97,480 | )      |        |            |       |            |         |             |       |               |       |              |       |       |        |   | (97,480  | )    
|Purchase of long-term securities                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             | (971   | )             |       |              |       |       |        |   | (971     | )    
|Capital purchases of property and equipment                                                        |                                                                             |                                           |        |        |        |            | (3,109 | )          |         |             |       |               |       |              |       |       |        |   | (3,109   | )    
|Other assets                                                                                       |                                                                             |                                           |        |        |        |            | (644   | )          |         |             | (6     | )             |       |              |       |       |        |   | (650     | )    
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      
|Net used in investing activities                                                                   |                                                                             |                                           | (97,480 | )      |        |            | (3,753 | )          |         |             | (977   | )             |       |              |       |       |        |   | (102,210 | )    
|Financing Activities:                                                                              |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      
|Net principal borrowings on long-term debt                                                         |                                                                             |                                           | 77,615  |        |        |            |       |            |         |             | 6,834  |               |       |              | (6,834 | )     |        |   | 77,615   |      
|Net transfers to and from members                                                                  |                                                                             |                                           | 6,453   |        |        |            | (9,037 | )          |         |             | (7,424 | )             |       |              | 10,008 |       |        |   |         |      
|Payment of loan and issuance costs                                                                 |                                                                             |                                           | (5,451  | )      |        |            |       |            |         |             |       |               |       |              |       |       |        |   | (5,451   | )    
|Proceeds from issuance of series A convertible
preferred stock                                     |                                                                             |                                           | 25,000  |        |        |            |       |            |         |             |       |               |       |              |       |       |        |   | 25,000   |      
|Proceeds from issuance of common stock                                                             |                                                                             |                                           | 202     |        |        |            |       |            |         |             |       |               |       |              |       |       |        |   | 202      |      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      
|Net cash provided by (used in) financing activities                                                |                                                                             |                                           | 103,819 |        |        |            | (9,037 | )          |         |             | (590   | )             |       |              | 3,174  |       |        |   | 97,366   |      
|Net increase in cash                                                                               |                                                                             |                                           |        |        |        |            | 7,095  |            |         |             | 87     |               |       |              |       |       |        |   | 7,182    |      
|Cash at beginning of year                                                                          |                                                                             |                                           |        |        |        |            | 1,175  |            |         |             | 1,217  |               |       |              |       |       |        |   | 2,392    |      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      
|Cash at end of year                                                                                |                                                                             | $                                         |        |        |        | $          | 8,270  |            |         | $           | 1,304  |               |       | $            |       |       |        | $ | 9,574    |      
|                                                                                                   |                                                                             |                                           |         |        |        |            |        |            |         |             |        |               |       |              |        |       |        |   |          |      

12.      Subsequent Events

On November 5, 2003, we borrowed
approximately $12.1 million under a mortgage loan agreement insured by HUD, secured by real
estate located at Riveredge Hospital near Chicago, Illinois. Interest accrues on the HUD loan at 5.65% and
principal and interest are payable in 420 monthly installments
through December 2038. We used the proceeds from the
loan to repay approximately $11.2 million of our amended and restated senior secured credit facility, pay certain financing
costs and fund required escrow amounts for future improvements to the property.

On November 1, 2003, we acquired
the outstanding stock of Laurelwood Center, Inc., which operates Alliance Health
Center, a 109-bed acute care psychiatric hospital in Meridian,
Mississippi, for approximately $11 million.
Alliance Health Center is a licensed acute care hospital that provides psychiatric care for children, adolescents
and adults. In addition, a 60-bed residential treatment center is under construction and is scheduled to open
during the third quarter of 2004.

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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 and its management. Such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties that may cause
our actual results to differ
materially from the results discussed in the forward-looking statements. Risks and uncertainties that might cause
such differences include, but are not limited to: (1) potential
competition which alters or impedes our
acquisition strategy by decreasing our ability to acquire additional facilities on favorable terms; (2) our ability to improve the operations of acquired facilities;
(3) our ability to maintain
favorable and continuing relationships with physicians who use our
facilities; (4) our limited
operating history as a public company; (5) our ability to receive timely additional financing on terms acceptable to
us to fund our acquisition strategy and capital expenditure needs; (6) risks inherent to the
healthcare industry, including the impact of unforeseen changes in regulation, reimbursement rates from federal
and state healthcare programs or managed care companies and exposure to claims and legal actions by patients and
others; and (7) potential difficulties in integrating our operations with recently
acquired operations. The forward-looking statements herein are qualified in their entirety by the risk factors
set forth in our filings with the Securities and Exchange Commission, including the factors listed in
our Registration Statement on Form S-2 filed on November 3,
2003, under the caption Risk Factors. A copy of our filings may be obtained
from the Public Reference Room of the SEC at 450 Fifth Street NW, Washington, D.C. at prescribed rates.

Overview

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

As of September 30, 2003, we owned or leased 22 free-standing psychiatric facilities in 12 states and managed 10
free-standing psychiatric facilities for government agencies and 45 psychiatric units for third party
acute care hospitals in 15 states. The managed psychiatric unit
contracts include a contract to provide mental
health care management services to approximately 4,400 children and adults with serious mental illness in the
Nashville, Tennessee area. Our objective is to provide high-quality, cost-effective psychiatric services in the
communities we serve. Through our managed and freestanding psychiatric facilities, we offer a comprehensive array
of behavioral health programs to critically ill children, adolescents and adults.

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

Recent Developments

On November 5, 2003, we borrowed
approximately $12.1 million under a mortgage loan agreement
insured by the U.S. Department of Housing and Urban Development
(HUD), secured by real
estate located at Riveredge Hospital near Chicago, Illinois. Interest accrues on the HUD loan at 5.65% and
principal and interest are payable in 420 monthly installments
through December 2038. We used the proceeds from the
loan to repay $11.2 million of our amended and restated senior secured credit facility, pay certain financing
costs and fund required escrow amounts for future improvements to the property.

On November 1, 2003, we acquired
the outstanding stock of Laurelwood Center, Inc., which operates Alliance Health
Center, a 109-bed acute care psychiatric hospital in Meridian,
Mississippi, for approximately $11 million.
Alliance Health Center is a licensed acute care hospital that provides psychiatric care for children, adolescents
and adults. In addition, a 60-bed residential treatment center is under construction and is scheduled to open
during the third quarter of 2004.

On August 28, 2003, we borrowed
approximately $6.8 million under a mortgage loan agreement
insured by HUD, secured by real estate located at West Oaks Hospital
in Houston, Texas.
Interest accrues on the HUD loan at 5.85% and principal and interest are payable in 420 monthly installments
through September 2038. We used the proceeds from the loan to repay
approximately $5.8 million of our amended and
restated senior secured credit facility, pay certain financing costs, and fund required escrow amounts for future
improvements to the property. The carrying amount of assets held as collateral approximated $2.7 million as of
September 30, 2003.

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

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

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Impact of Mergers and Acquisitions

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

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

On June 30, 2003, we consummated the acquisition of Ramsay, a public company that traded on the Nasdaq SmallCap
Market under the symbol RYOU, for approximately $81.3 million, consisting of $56.2 million in cash, or
$5.00 per share, $22.3 million in net assumed debt that was repaid in connection with the acquisition and
$2.8 million in fees and expenses. We financed the acquisition of Ramsay with proceeds from the issuance of $150
million in 10 5/8% senior subordinated notes and the private placement of $12.5 million of our series A convertible preferred
stock. The 11 owned or leased inpatient behavioral health care facilities we acquired from Ramsay, which have an
aggregate of 1,292 beds, are located primarily in the Southeastern region of the United States with locations
also in Michigan, Missouri and Utah. In the acquisition, we also assumed 10 contracts to manage behavioral health
care facilities for government agencies in Florida, Georgia and Puerto Rico.

In April 2003, we consummated the acquisition of six inpatient behavioral health care facilities from The Brown
Schools, Inc. (The Brown Schools) for $63.0 million in cash. The six facilities,
which have an aggregate of 895 licensed beds, are
located in Austin, San Antonio and San Marcos, Texas; Charlottesville, Virginia; Colorado Springs, Colorado; and
Tulsa, Oklahoma. The Brown Schools offer a full continuum of care for
troubled children, adolescents and adults. We
financed the acquisition of The Brown Schools with proceeds from the
private placement of $12.5 million of our series A
convertible preferred stock and an increase in funding under our credit facility.

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

On 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 Statements in our
Annual Report on Form 10-K for the year ended December 31, 2002.

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

Sources of Revenue

Patient Service Revenue.Patient service revenue is generated by our inpatient facilities as a result of
services provided to patients at our facilities. Patient service revenue is reported on the accrual basis in the
period in which services are rendered, at established rates, regardless of whether collection in full is
expected. Patient service revenue includes amounts estimated by management to be reimbursable by Medicare and
Medicaid under provisions of cost or prospective reimbursement formulas in effect. Settlements under cost
reimbursement agreements are estimated and recorded in the period in which the related services are rendered and
are adjusted in future periods as final settlements are determined. There were no material adjustments under such
agreements during the three and nine months ended September 30, 2003. Amounts received are generally less than
the established billing rates of the facilities and the differences are reported as deductions from patient
service revenue at the time the service is rendered. For the three and nine months ended September 30, 2003,
patient service revenue comprised approximately 76% and 75% of our total revenue, respectively.

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Management Fee Revenue.Management fee revenue is earned by our management contract segment. The management
contract segment receives contractually determined management fees and director fees from hospitals, clinics and
contracting state and local agencies for providing psychiatric management and development services. Revenues for
fixed rate contracts are recognized in the period in which services are provided based on terms of the contract.
Revenues for variable rate contracts are recognized in the period in which services are provided to the patient.
For the three and nine months ended September 30, 2003, management fee revenue comprised approximately 24% and
25% of our total revenue, respectively.

Results of Operations

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

|                                       |                                        |   |                                  |     |                                 |  |        |     |      |   |        |   |   |  |        |     |   |   |         |       |   |  |       |      |   |   |        |   |  |  |       |     |  
|-------------------------------------- | -------------------------------------- | - | -------------------------------- | --- | ------------------------------- |  | ------ | --- | ---- | - | ------ | - | - |  | ------ | --- | - | - | ------- | ----- | - |  | ----- | ---- | - | - | ------ | - |  |  | ----- | --- | -
|                                       |                                        |   | Three Months Ended September 30, |     | Nine Months Ended September 30,
|                                       |                                        |   |                                  |     |                                
|                                       |                                        |   | 2003                             |     | 2002                            |  | 2003   |     | 2002
|                                       |                                        |   |                                  |     |                                 |  |        |     |     
|                                       |                                        |   | Amount                           |     | %                               |  | Amount |     | %    |   | Amount |   | % |  | Amount |     | %
|                                       |                                        |   |                                  |     |                                 |  |        |     |      |   |        |   |   |  |        |     |  
|Revenue                                |                                        | $ | 98,470                           |     |                                 |  | 100.0  | %   |      | $ | 32,269 |   |   |  | 100.0  | %   |   | $ | 193,002 |       |   |  | 100.0 | %    |   | $ | 78,072 |   |  |  | 100.0 | %  
|Salaries, wages, and employee benefits |                                        |   | 53,164                           |     |                                 |  | 54.0   | %   |      |   | 17,131 |   |   |  | 53.1   | %   |   |   | 99,686  |       |   |  | 51.7  | %    |   |   | 44,625 |   |  |  | 57.1  | %  
|Professional fees                      |                                        |   | 11,233                           |     |                                 |  | 11.4   | %   |      |   | 3,897  |   |   |  | 12.1   | %   |   |   | 22,561  |       |   |  | 11.7  | %    |   |   | 10,284 |   |  |  | 13.2  | %  
|Supplies                               |                                        |   | 6,204                            |     |                                 |  | 6.3    | %   |      |   | 1,432  |   |   |  | 4.4    | %   |   |   | 10,887  |       |   |  | 5.6   | %    |   |   | 3,664  |   |  |  | 4.7   | %  
|Provision for bad debts                |                                        |   | 1,218                            |     |                                 |  | 1.2    | %   |      |   | 903    |   |   |  | 2.8    | %   |   |   | 3,875   |       |   |  | 2.0   | %    |   |   | 2,038  |   |  |  | 2.6   | %  
|Other operating expenses               |                                        |   | 15,132                           |     |                                 |  | 15.4   | %   |      |   | 5,297  |   |   |  | 16.4   | %   |   |   | 33,038  |       |   |  | 17.1  | %    |   |   | 8,951  |   |  |  | 11.5  | %  
|Depreciation and amortization          |                                        |   | 1,896                            |     |                                 |  | 1.9    | %   |      |   | 425    |   |   |  | 1.3    | %   |   |   | 3,630   |       |   |  | 1.9   | %    |   |   | 1,222  |   |  |  | 1.6   | %  
|Interest expense, net                  |                                        |   | 5,566                            |     |                                 |  | 5.6    | %   |      |   | 1,578  |   |   |  | 4.9    | %   |   |   | 9,363   |       |   |  | 4.8   | %    |   |   | 4,070  |   |  |  | 5.2   | %  
|Other expenses:                        |                                        |   |                                  |     |                                 |  |        |     |      |   |        |   |   |  |        |     |   |   |         |       |   |  |       |      |   |   |        |   |  |  |       |    
|                                       | Loss on refinancing long-term debt     |   |                                  | 157 |                                 |  |        | 0.2 | %    |   |        |  |   |  |        | 0.0 | % |   |         | 4,744 |   |  |       | 2.5  | % |   |        |  |  |  |       | 0.0 | %
|                                       | Change in valuation of put warrants    |   |                                  |    |                                 |  |        | 0.0 | %    |   |        |  |   |  |        | 0.0 | % |   |         | 960   |   |  |       | 0.5  | % |   |        |  |  |  |       | 0.0 | %
|                                       | Change in reserve on stockholder notes |   |                                  |    |                                 |  |        | 0.0 | %    |   |        |  |   |  |        | 0.0 | % |   |         | (545  | ) |  |       | -0.3 | % |   |        |  |  |  |       | 0.0 | %
|                                       |                                        |   |                                  |     |                                 |  |        |     |      |   |        |   |   |  |        |     |   |   |         |       |   |  |       |      |   |   |        |   |  |  |       |    
|Income before income taxes             |                                        |   | 3,900                            |     |                                 |  | 4.0    | %   |      |   | 1,606  |   |   |  | 5.0    | %   |   |   | 4,803   |       |   |  | 2.5   | %    |   |   | 3,218  |   |  |  | 4.1   | %  
|Provision for income taxes             |                                        |   | 1,482                            |     |                                 |  | 1.5    | %   |      |   |       |   |   |  | 0.0    | %   |   |   | 2,190   |       |   |  | 1.1   | %    |   |   |       |   |  |  | 0.0   | %  
|                                       |                                        |   |                                  |     |                                 |  |        |     |      |   |        |   |   |  |        |     |   |   |         |       |   |  |       |      |   |   |        |   |  |  |       |    
|Net income                             |                                        | $ | 2,418                            |     |                                 |  | 2.5    | %   |      | $ | 1,606  |   |   |  | 5.0    | %   |   | $ | 2,613   |       |   |  | 1.4   | %    |   | $ | 3,218  |   |  |  | 4.1   | %  
|                                       |                                        |   |                                  |     |                                 |  |        |     |      |   |        |   |   |  |        |     |   |   |         |       |   |  |       |      |   |   |        |   |  |  |       |    

|                                   |  |                                  |         |                                 |  |          |        |      |  |      |       |          |  |  |         |  |  |  |         |  |  |  |       |  
|---------------------------------- |  | -------------------------------- | ------- | ------------------------------- |  | -------- | ------ | ---- |  | ---- | ----- | -------- |  |  | ------- |  |  |  | ------- |  |  |  | ----- | -
|                                   |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|                                   |  |                                  |         |                                
|                                   |  | 2003                             |         | 2002                            |  | % Change |        | 2003 |  | 2002 |       | % Change
|                                   |  |                                  |         |                                 |  |          |        |      |  |      |       |         
|Consolidated:                      |  |                                  |         |                                 |  |          |        |      |  |      |       |          |  |  |         |  |  |  |         |  |  |  |       |  
|Number of facilities at period end |  |                                  | 22      |                                 |  |          | 5      |      |  |      | 340.0 | %        |  |  | 22      |  |  |  | 5       |  |  |  | 340.0 | %
|Admissions                         |  |                                  | 7,939   |                                 |  |          | 4,211  |      |  |      | 88.5  | %        |  |  | 17,955  |  |  |  | 10,662  |  |  |  | 68.4  | %
|Patient days                       |  |                                  | 189,466 |                                 |  |          | 41,258 |      |  |      | 359.2 | %        |  |  | 333,755 |  |  |  | 103,096 |  |  |  | 223.7 | %
|Same facility (1):                 |  |                                  |         |                                 |  |          |        |      |  |      |       |          |  |  |         |  |  |  |         |  |  |  |       |  
|Number of facilities at period end |  |                                  | 5       |                                 |  |          | 5      |      |  |      |      |          |  |  | 5       |  |  |  | 5       |  |  |  |      |  
|Admissions                         |  |                                  | 4,330   |                                 |  |          | 4,211  |      |  |      | 2.8   | %        |  |  | 11,144  |  |  |  | 10,662  |  |  |  | 4.5   | %
|Patient days                       |  |                                  | 44,560  |                                 |  |          | 41,258 |      |  |      | 8.0   | %        |  |  | 110,896 |  |  |  | 103,096 |  |  |  | 7.6   | %



---

|(1) |  | For the three and nine months ended September 30, 2003, excludes statistics for facilities purchased from
Ramsay in June 2003 and from The Brown Schools in April 2003. Also for the nine months ended September 30, 2003, excludes
statistics for the six months ended June 30, 2003 for Riveredge
Hospital, which was acquired in July 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

Revenue.Revenue from continuing operations was $98.5 million for the quarter ended September 30, 2003 compared
to $32.3 million for the quarter ended September 30, 2002, an increase of $66.2 million or 204.9%. Revenue from
owned and leased facilities was $74.5 million in the third quarter of 2003 compared to $22.9 million in
the third quarter of 2002, an increase of $51.6 million or 225.3%. The increase in revenues from owned and leased
facilities relates primarily to revenues of $19.0 million in the quarter ended September 30, 2003 for The Brown
Schools acquired in April 2003 and $30.2 million in the quarter ended September 30, 2003 for Ramsay, which was
acquired June 30, 2003. The remainder of the increase in revenues from owned and leased facilities is
attributable to growth at our other five facilities as evidenced by
same-facility growth in admissions and
patient days of 2.8% and 8.0%, respectively. Revenue from management
contracts was $24.0 million in the
third quarter of 2003 compared to $9.4 million in the third quarter of 2002, an increase of $14.6 million or
155.3%. The increase in revenues from management contracts relates primarily to revenues of $11.8 million in the
quarter ended September 30, 2003 for Ramsays managed facilities, which includes $0.7 million of increased
revenue from the receipt of a prior period contractual settlement. The remainder of the increase in revenues from
management contracts relates to the additional management operations acquired in the merger with PMR in August
2002. See Impact of Mergers and Acquisitions under this Item 2.

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Salaries, wages, and employee benefits.Salaries, wages and employee benefits expense was $53.2 million, or 54.0%
of revenue for the quarter ended September 30, 2003, compared to $17.1 million, or 53.1% of revenue for the
quarter ended September 30, 2002. Salaries, wages and employee benefits expense from owned and leased facilities
was $42.0 million in the third quarter of 2003, or 56.4% of third quarter 2003 revenue from owned and leased
facilities, compared to $13.1 million in the third quarter of 2002 or 57.2% of third quarter 2002 revenue from
owned and leased facilities. Same-facility salaries wages and
employee benefits expense from owned and leased facilities
was $13.8 million in the third quarter 2003, or 54.7% of third
quarter 2003 same-facility revenue from owned and
leased facilities. This decrease in same-facility salaries, wages and employee benefits expense as a percentage
of revenue from owned and leased facilities relates to efforts within
our owned and leased facilities to maintain staffing levels on
higher volumes. Salaries, wages and employee benefits expense from management contracts was $10.5 million in the
third quarter of 2003, or 43.6% of third quarter 2003 revenue from management contracts, compared to $3.4 million
in the third quarter of 2002, or 36.2% of third quarter 2002 revenue
from management contracts. Same-facility
salaries wages and employee benefits expense from management contracts was
$2.9 million in the third quarter of 2003, or
29.2% of third quarter 2003 same-facility revenue from management
contracts. This decrease in same-facility
salaries, wages and employee benefits expense as a percentage of revenue from management contracts relates to
growth in our business because of the assumption of a contract to provide case management services in and around Nashville,
Tennessee. All costs to provide these services are recorded in other operating expenses because the actual
services provided are subcontracted. Salaries, wages and employee benefits expense for our corporate office was
$713,000 for the third quarter of 2003 compared to $559,000 for the third quarter of 2002 as the result of the
addition of staff necessary to manage the facilities and management contracts acquired during 2003.

Professional fees.Professional fees were $11.2 million, or 11.4% of revenue for the quarter ended September 30,
2003, compared to $3.9 million, or 12.1% of revenue for the quarter ended September 30, 2002. Professional fees
from owned and leased facilities were $9.2 million in the third
quarter of 2003, or 12.4% of third quarter 2003 revenue
from owned and leased facilities, compared to $2.8 million in the third quarter of 2002, or 12.2% of third
quarter 2002 revenue from owned and leased facilities. Same-facility professional fees from owned and leased
facilities was $3.0 million in the third quarter of 2003, or 11.7%
of third quarter 2003 same-facility revenue from
owned and leased facilities. This decrease in professional fees from
owned and leased facilities as a percentage of revenue
from owned and leased facilities was the result of efforts within owned and leased facilities to reduce our
reliance on contract labor as patient volumes increase. Professional fees from management contracts were $1.7
million in the third quarter of 2003, or 7.0% of third quarter 2003 revenue from management contracts, compared
to $914,000 in the third quarter of 2002, or 9.7% of third quarter
2002 revenue from management contracts. Same-facility professional fees from management contracts was $952,000 in the third quarter 2003, or 9.5% of third
quarter 2003 same-facility revenue from management contracts. Professional fees for our corporate office were
$324,000 in the third quarter of 2003 compared to $148,000 in the third quarter of 2002. The increase in
professional fees at our corporate office relates to accounting, legal, and other services required to meet the
needs of a public company and the newly integrated acquisitions.

Supplies.Supplies expense was $6.2 million, or 6.3% of revenue for the quarter ended September 30, 2003,
compared to $1.4 million, or 4.4% of revenue for the quarter ended September 30, 2002. Supplies expense from
owned and leased facilities was $5.4 million in the third
quarter of 2003, or 7.2% of third quarter 2003 revenue from
owned and leased facilities, compared to $1.4 million in the third quarter of 2002, or 6.1% of third quarter 2002
revenue from owned and leased facilities. Same-facility supplies expense from owned and leased facilities was
$1.7 million in the third quarter of 2003, or 6.9% of third quarter
2003 same-facility revenue from owned and leased
facilities. Supplies expense from management contracts was $834,000 in the third quarter of 2003, or 3.5% of
third quarter 2003 revenue from management contracts, compared to $11,000 in the third quarter of 2002, or less
than 1% of third quarter 2002 revenue from management contracts. Same-facility supplies expense from management
contracts was $5,000 in the third quarter of 2003, or less than 1% of
third quarter 2003 same-facility revenue from
management contracts. Supplies expense at owned and leased facilities has historically comprised the majority of
our supplies expense as a whole; however, because the management contracts acquired from Ramsay are for
freestanding facilities our management contracts segment will have higher supplies expense as a percentage of
revenue. Supplies expense for our corporate office consists of
office supplies and is negligible to our supplies
expense overall.

Provision for bad debts.The provision for bad debts was $1.2 million, or 1.2% of revenue for the quarter ended
September 30, 2003, compared to $903,000, or 2.8% of revenue for the quarter ended September 30, 2002. The
provision for bad debts at owned and leased facilities was $1.7 million in the third quarter of 2003, or 2.3% of
third quarter 2003 owned and leased facility revenue, compared to $839,000 in the third quarter of 2002, or 3.7%
of third quarter 2002 owned and leased facility revenue. Same-facility provision for bad debts from owned and
leased facilities was $933,000 in the third quarter 2003, or 3.7% of
third quarter 2003 same-facility revenue
from owned and leased facilities. The decrease in provision for bad
debts as a percentage of revenue is due to our acquisitions in 2003.
The facilities acquired during 2003 reported provision for bad debts
of approximately 1.0% of revenue for the quarter ended September 30, 2003.

Other operating expenses.Other operating expenses were approximately $15.1 million, or 15.4% of revenue for the
quarter ended September 30, 2003, compared to $5.3 million, or 16.4% of revenue for the quarter ended September
30, 2002. Other operating expenses for owned and leased facilities
were $7.7 million for the third quarter of
2003, or 10.4% of third quarter 2003 owned and leased facility revenue, compared to $2.1 million in the third
quarter of 2002, or 9.1% of third quarter 2002 owned and leased
facility revenue. Same-facility other operating
expenses from owned and leased facilities were $2.2 million in
the third quarter of 2003, or 8.6% of third quarter
2003 same-facility revenue from owned and leased facilities. Other operating expenses for management contracts
were $7.1 million in the third quarter of 2003, or 29.4% of third quarter 2003 management contract revenue,
compared to $3.0 million in

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the third quarter of 2002, or 32.4% of third quarter 2002 management contract
revenue. Same-facility other operating expenses from management contracts were $4.1 million in the third quarter
of 2003, or 41.3% of third quarter 2003 same-facility revenue from management contracts. This increase in
same-facility other operating expenses for management contracts as a
percentage of same-facility management contract
revenue is attributable to growth in our business because of the
assumption from PMR of a contract to provide case management services in and
around Nashville, Tennessee where actual services provided are subcontracted and the associated expenses are
reported in other operating expenses. Other operating expenses at our corporate office increased to $350,000 in
the third quarter of 2003 from $169,000 in the third quarter of 2002 primarily due to increased insurance costs
in 2003.

Depreciation and amortization.Depreciation and amortization expense was $1.9 million for the quarter ended
September 30, 2003 compared to $425,000 for the quarter ended September 30, 2002, an increase of $1.5 million or
346.1%. This increase in depreciation and amortization expense is the result of the acquisitions of The Brown
Schools in April 2003 and Ramsay in June 2003.

Interest expense.Interest expense was $5.6 million for the quarter ended September 30, 2003 compared to $1.6
million for the quarter ended September 30, 2002, an increase of $4.0 million or 250.0%. This increase is
primarily attributable to the increase in our long-term debt from approximately $42.3 million at September 30,
2002 to approximately $174.3 million at September 30, 2003
due to our 10 5/8% senior subordinated note offering and the
expansion of our senior credit facility.

Other expenses.Other expenses represent items which management considers non-operating. Other expenses for the
third quarter of 2003 consisted of $157,000 in loss on the refinancing of our long-term debt.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Revenue.Revenue from continuing operations was $193.0 million for the nine months ended September 30, 2003
compared to $78.1 million for the nine months ended September 30, 2002, an increase of $114.9 million or 147.1%.
Revenue from owned and leased facilities was $145.5 million during the first nine months of 2003
compared to $56.5 million during the first nine months of 2002, an increase of $89.0 million or 157.5%. The
increase in revenues from owned and leased facilities relates primarily to revenues of $14.9 million for
Riveredge Hospital acquired in July 2002, $37.5 million in the nine months ended September 30, 2003 for The Brown
Schools acquired in April 2003 and $30.2 million in the nine months ended September 30, 2003 for Ramsay, which
was acquired June 30, 2003. The remainder of the increase in revenues from owned and leased facilities is
attributable to growth at our other four facilities as evidenced by
same-facility growth in admissions and
patient days of 4.5% and 5.5%, respectively. Revenue from management
contracts was $47.5 million during
the first nine months of 2003 compared to $21.6 million during the first nine months of 2002, an increase of
$25.9 million or 119.9%. The increase in revenues from management contracts in the nine months ended September
30, 2003 relates primarily to revenues of $13.6 million from management contracts acquired from PMR in August
2002 and $11.8 million for Ramsays managed facilities acquired in June 2003. See Impact of Mergers and
Acquisitions under this Item 2.

Salaries, wages, and employee benefits.Salaries, wages and employee benefits expense was $99.7 million, or 51.7%
of revenue for the nine months ended September 30, 2003, compared to $44.6 million, or 57.1% of revenue for the
nine months ended September 30, 2002. Salaries, wages and employee benefits expense from owned and leased
facilities was $80.5 million in the first nine months of 2003, or 55.3% of the first nine months of 2003 revenue
from owned and leased facilities, compared to $33.3 million in the first nine months of 2002, or 58.9% of the
first nine months of 2002 revenue from owned facilities.
Same-facility salaries wages and employee benefits expense from
owned and leased facilities was $34.5 million in the first nine months of 2003, or 55.0% of the first nine months
of 2003 same-facility revenue from owned and leased facilities. This decrease in salaries, wages and employee
benefits expense as a percentage of revenue from owned and leased facilities relates to efforts within our owned
and leased facilities to maintain staffing levels on higher volumes. Salaries, wages and employee benefits
expense from management contracts was $17.1 million in the first nine months of 2003, or 35.9% of the first nine
months of 2003 revenue from management contracts, compared to $9.8 million in the first nine months of 2002, or
45.6% of the first nine months of 2002 revenue from management
contracts. Same-facility salaries, wages and
employee benefits expense from management contracts was $9.2 million in the first nine months of 2003, or 41.5% of the
first nine months of 2003 same-facility revenue from management
contracts. This increase in same-facility
salaries, wages and employee benefits expense as a percentage of revenue from management contracts relates to our
assumption from PMR of a contract to provide case management services in and around Nashville, Tennessee. All costs to provide these services are recorded as other operating expenses because the actual services
provided are subcontracted. Salaries, wages and employee benefits expense for our corporate office was $2.2
million for the first nine months of 2003 compared to $1.5 million for the first nine months of 2002 as the
result of the addition of staff necessary to manage the facilities and management contracts acquired during 2002
and 2003.

Professional fees.Professional fees were $22.6 million, or 11.7% of revenue for the nine months ended September
30, 2003, compared to $10.3 million, or 13.2% of revenue for the nine months ended September 30, 2002.
Professional fees from owned and leased facilities were $17.8 million in the first nine months of 2003, or 12.3%
of the first nine months of 2003 revenue from owned and leased facilities, compared to $7.3 million in the first
nine months of 2002, or 12.9% of the first nine months of 2002
revenue from owned and leased facilities. Same-facility professional fees from owned and leased facilities were $7.6 million in the first nine months of 2003,
or 12.1% of the first nine months of 2003 same-facility revenue from owned and leased facilities. This decrease
in

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professional fees from owned and leased facilities as a percentage of revenue from owned and leased facilities
was the result of efforts within owned and leased facilities to reduce our reliance on contract labor as patient
volumes increase. Professional fees from management contracts were $3.5 million in the first nine months of 2003,
or 7.3% of the first nine months of 2003 revenue from management contracts, compared to $2.6 million in the first
nine months of 2002, or 12.2% of the first nine months of 2002
revenue from management contracts. Same-facility
professional fees from management contracts were $2.7 million in the first nine months of 2003, or 12.2% of the
first nine months of 2003 same-facility revenue from management contracts. Professional fees for our corporate
office were $1.2 million in the first nine months of 2003 compared to $332,000 in the first nine months of 2002.
The increase in professional fees at our corporate office relates to accounting, legal, and other services
required to meet the needs of a public company and the integration of
our acquired facilities.

Supplies.Supplies expense was $10.9 million, or 5.6% of revenue for the nine months ended September 30, 2003,
compared to $3.7 million, or 4.7% of revenue for the nine months ended September 30, 2002. Supplies expense from
owned and leased facilities was $10.0 million in the first nine months of 2003, or 6.9% of the first nine months
of 2003 revenue from owned and leased facilities, compared to $3.6 million in the first nine months of 2002, or
6.4% of the first nine months of 2002 revenue from owned and leased
facilities. Same-facility supplies expense
from owned and leased facilities was $4.2 million in the first nine months of 2003, or 6.8% of the first nine
months of 2003 same-facility revenue from owned and leased facilities. Supplies expense from management contracts
was $853,000 in the first nine months of 2003, or 1.8% of the first nine months of 2003 revenue from management
contracts, compared to $31,000 in the first nine months of 2002, or less than 1% of the first nine months of 2002
revenue from management contracts. Same-facility supplies expense from management contracts was $24,000 in the
first nine months of 2003, or less than 1% of the first nine months
of 2003 same-facility revenue from management
contracts. Supplies expense at owned and leased facilities has historically comprised the majority of our
supplies expense as a whole; however, because the management
contracts acquired from Ramsay are for free standing
facilities our management contracts segment will have higher supplies expense as a percentage of revenue.
Supplies expense for the corporate office consists of office supplies
and are negligible to our supplies expense
overall.

Provision for bad debts.The provision for bad debts was $3.9 million, or 2.0% of revenue for the nine months
ended September 30, 2003, compared to $2.0 million, or 2.6% of revenue for the nine months ended September 30,
2002. The provision for bad debts at owned and leased facilities was $3.9 million in the first nine months of
2003, or 2.7% of the first nine months of 2003 owned and leased facility revenue, compared to $1.8 million in the
first nine months of 2002, or 3.3% of the first nine months of 2002
owned and leased facility revenue. Same-facility provision for bad debts from owned and leased facilities was $2.7 million in the first nine months of
2003, or 4.4% of the first nine months of 2003 same-facility revenue from owned and leased facilities. This
increase in same-facility provision for bad debts at owned and leased
facilities as a percentage of same-facility
owned and leased facility revenue relates to slight increases in self pay accounts receivable as a percentage of
total accounts receivable.

Other operating expenses.Other operating expenses were approximately $33.0 million, or 17.1% of revenue for the
nine months ended September 30, 2003, compared to $9.0 million, or 11.5% of revenue for the nine months ended
September 30, 2002. Other operating expenses for owned and leased facilities were $14.2 million in the first nine
months of 2003, or 9.8% of the first nine months of 2003 owned facility revenue, compared to $8.2 million in the
first nine months of 2002, or 8.2% of the first nine months of 2002
owned facility revenue. Same-facility other operating expenses from
owned and leased facilities were $5.8 million in the first nine months of 2003, or 9.2% of the first nine months
of 2003 same-facility revenue from owned and leased facilities. This
increase in same-facility other operating
expenses for owned and leased facilities as a percentage of same-facility owned and leased facility revenue
relates primarily to increased insurance costs in 2003. Other operating expenses for management contracts were
$17.8 million in the first nine months of 2003, or 37.4% of the first nine months of 2003 management contracts
revenue, compared to $3.9 in the first nine months of 2002, or 17.8% of the first nine months of 2002 management
contracts revenue. Same-facility other operating expenses from management contracts were $4.9 million in the
first nine months of 2003, or 22.2% of the first nine months of 2003
same-facility revenue from management
contracts. This increase in same-facility other operating expenses for management contracts as a percentage of
same-facility management contracts revenue is attributable to growth
in our business because of our assumption from PMR of a contract to
provide case management services in and around Nashville, Tennessee where actual services provided are
subcontracted and the associated expenses are reported in other operating expenses. Other operating expenses at
our corporate office increased to $1.1 million in the first nine months of 2003 from $493,000 in the first nine
months of 2002 primarily due to increased insurance costs in 2003.

Depreciation and amortization.Depreciation and amortization expense was $3.6 million for the nine months ended
September 30, 2003 compared to $1.2 million for the nine months ended September 30, 2002, an increase of $2.4
million or 200.0%. This increase in depreciation and amortization expense is the result of the acquisitions of
Riveredge Hospital in July 2002, PMR in August 2002, The Brown Schools in April 2003 and Ramsay in June 2003.

Interest expense.Interest expense was $9.4 million for the nine months ended September 30, 2003 compared to
$4.1 million for the nine months ended September 30, 2002, an increase of $5.3 million or 129.3%. This increase
is primarily attributable to the increase in our long-term debt from approximately $42.3 million at September 30,
2002 to approximately $174.3 million at September 30, 2003
due to our 10 5/8% senior subordinated note offering and the
expansion of our senior credit facility.

Other expenses.Other expenses totaled $5.2 million for the nine months ended September 30, 2003. Other expenses
represent items that management considers non-operating. Other expenses for the first nine months of 2003
consisted of $4.7 million in loss on the

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

Liquidity and Capital Resources

As of September 30, 2003, we had working capital of $31.5 million, including cash and cash equivalents of $9.6
million, compared to working capital of $2.4 million at December 31, 2002. We did not maintain a balance under
terms of our revolving line of credit at September 30, 2003 whereas we had a balance of $5.4 million on our
revolving line of credit on December 31, 2002. The increase in
our working capital is due to acquisitions during
the nine months ended September 30, 2003, which were financed with long-term debt, as well as higher accounts
receivable as the result of increases in our revenues during the nine months ended September 30, 2003.

Cash provided by operating activities was $12.0 million for the nine months ended September 30, 2003 compared to
cash provided by operating activities of $7.3 million for the nine months ended September 30, 2002. The increase
in cash flows from operating activities was due to the acquisitions in the third quarter of 2002 and second
quarter of 2003. Cash used in investing activities was $102.2 million for the nine months ended September 30,
2003 compared to cash provided by investing activities of $5.4 million for the nine months ended September 30,
2002. Cash used in investing activities for the nine months ended September 30, 2003 was the result of
acquisitions of The Brown Schools, Ramsay and the real estate for a
facility in Macon, Georgia during the nine months ended September
30, 2003. Cash provided by investing activities for the nine months ended September 30, 2002 was primarily the
result of cash acquired in the acquisition of PMR. Cash provided
by financing activities increased to $97.4 million for the nine months ended September 30, 2003 from cash used in
financing activities of $11.1 million for the nine months ended September 30, 2002. This increase was due to
borrowings for the acquisitions of The Brown Schools and Ramsay and the issuance of our series A
convertible preferred stock.

On August 28, 2003, we borrowed
approximately $6.8 million under a mortgage loan agreement insured by HUD, secured by real estate located at West Oaks Hospital in
Houston, Texas.
Interest accrues on the HUD loan at 5.85% and principal and interest are payable in 420 monthly installments
through September 2038. We used the proceeds from the loan to repay
approximately $5.8 million of our amended and restated
senior secured credit facility, pay certain financing costs, and fund required escrow amounts for future
improvements to the property. The carrying amount of assets held as
collateral approximated $2.7 million as of
September 30, 2003.

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

On June 30, 2003, we issued
$150 million in 10 5/8% senior subordinated notes, which are fully and unconditionally
guaranteed on a senior subordinated basis by substantially all of our existing operating subsidiaries. Proceeds
from the issuance of the senior subordinated notes and the private
placement of $12.5 million in series A convertible
preferred stock were used to finance the acquisition of Ramsay and pay down substantially all of our long-term
debt. Interest on the senior subordinated notes accrues at the rate of 10.625% per annum and is payable
semi-annually in arrears on June 15 and December 15, commencing on December 15, 2003. The senior subordinated
notes will mature on June 15, 2013.

On April 1, 2003, concurrent with the acquisition of The Brown Schools, we received $12.5 million from the
private placement of 2,272,727 shares of our series A convertible preferred stock with affiliates of Oak
Investment Partners and Salix Ventures and with the 1818 Fund. These investors purchased an additional 2,272,727
shares of our series A convertible preferred stock for $12.5 million on June 19, 2003. The proceeds were used to
acquire The Brown Schools and Ramsay. These investors have previously
invested in us with Oak Investment
Partners and Salix Ventures (or related entities) being among our co-founders. Representatives of Oak Investment
Partners, Salix Ventures and Brown Brothers Harriman & Co. currently serve on our Board of Directors. Each share
of series A convertible preferred stock is convertible into one share of
our common stock. Holders of our series A convertible preferred stock are entitled to receive pay-in-kind dividends,
compounded quarterly, equal to 5% per share of the original share price through March 31, 2005. Thereafter,
pay-in-kind dividends will compound quarterly at 7% per share of the original share price. The impact of the
series A convertible preferred stock on diluted earnings per share is calculated using the if-converted method.

In connection with the closing of the sale of our senior subordinated notes, our expanded senior credit facility
with our senior lender, CapitalSource Finance LLC (CapSource),
was amended and restated to increase our senior secured revolving
line of credit to
$50.0 million from $28.0 million and refinance
$36.0 million in term loans with proceeds from the sale of our
10 5/8%
senior subordinated notes. Our credit facility is secured by substantially all of
our assets and the stock of our existing operating subsidiaries. The term loans accrue interest at the Citibank,
N.A. prime rate plus 4.5% subject to a floor of 8.75% and are due in November 2003. The revolving line of credit
accrues interest at the Citibank, N.A. prime rate plus 2% subject to a floor of 6.25% and is due in June 2006. At
September 30, 2003, the interest rate under the revolving line of credit was 6.25%. Until the maturity date, we
may borrow, repay and re-borrow an amount not to exceed the lesser of $50.0 million or the borrowing base (as
defined in the amended and restated credit facility). As of September 30, 2003, we had $50.0 million available

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under the revolving line of credit. Under the revolving line of
credit, all of our collections, except for Medicare and Medicaid payments, are deposited into lockbox accounts
controlled by CapSource. The funds deposited in the lockboxes are returned to us on a daily basis. Prior to
amending and restating the senior credit facility, funds deposited in the lockboxes were applied to outstanding
borrowings on a daily basis. As a result, the outstanding borrowings
under the revolving line of credit were
classified as short-term as of December 31, 2002 and all periods prior to June 30, 2003. We must pay on a monthly
basis an unused fee in the amount of 0.5% per annum on the unused portion of the amended and restated credit
facility. Such fees were approximately $70,000 for the nine months
ended September 30, 2003. We are required to pay interest on a minimum balance of $17.5 million under our revolving
line of credit. As of September 30, 2003, our amended and
restated senior secured credit facility consisted of approximately $11.2 million of term loans and a
$50.0 million revolving line of credit. We
refinanced the remaining $11.2 million outstanding on the term loan with borrowings insured by HUD on November 5,
2003, see Recent Developments in this Item 2.

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

On April 1, 2003, our senior credit facility was expanded to approximately $81.0 million with the increase of our
revolving line of credit to $28.0 million from
$17.5 million and a new $36.0 million term loan in
additional to our then-existing $17.0 million term loan. We borrowed
approximately $52.2 million during April 2003, including the $36.0 million term loan and $16.2 million under the
revolving line of credit, to partially fund our acquisition of The Brown Schools. The revolving line of credit
and new $36.0 million term loan were repaid on June 30,
2003 with proceeds from the issuance of our 10 5/8% senior
subordinated notes.

On May 16, 2003, the 1818 Fund exercised its stock purchase warrant to purchase 372,412 shares of our common
stock. Deducting the exercise price of $0.01 per share based on the closing price of our common stock on May 15,
2003, the 1818 Fund received 372,039 shares of our common stock
from the exercise of its warrant. In certain circumstances, the 1818 Fund has the right to require that we
repurchase the 372,039 shares of our common stock that the 1818 Fund
received upon the exercise of its stock
purchase warrant.

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

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

On June 28, 2002, we entered into
a Securities Purchase Agreement with the 1818 Fund where the 1818
Fund agreed to issue up
to $20 million of senior subordinated notes with detachable nominal warrants. At closing on June 28, 2002, a
total of $10 million of the senior subordinated notes were issued. On June 30, 2003, we repaid principal of $10
million, accrued interest and a prepayment penalty of 3% to the 1818 Fund with proceeds from our issuance of
10 5/8% senior subordinated notes, and we no longer have the ability to borrow under the Securities Purchase Agreement
with the 1818 Fund.

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

On November 25, 2002, we entered
into a mortgage loan agreement, insured by the HUD, to borrow
approximately $4.9 million, secured by real estate located at Holly Hill Hospital in
Raleigh, North Carolina. Interest accrues on the HUD loan at 5.95% and principal and interest are payable in 420 monthly
installments through December 2037. We used

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the proceeds from the loan to replace
approximately $4.4 million of our senior term loan
with CapSource, pay certain refinancing costs, and fund required escrow amounts for future improvements to the
property.

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

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

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    |  | $                                     | 174,271 |        |  | $         | 754   |           |  | $       | 887   |  |  | $ | 126   |       |  | $ | 172,504 | 
|Lease obligations |  |                                       | 19,182  |        |  |           | 4,930 |           |  |         | 7,256 |  |  |   | 4,360 |       |  |   | 2,636   | 
|                  |  |                                       |         |        |  |           |       |           |  |         |       |  |  |   |       |       |  |   |         | 
|                  |  | $                                     | 193,453 |        |  | $         | 5,684 |           |  | $       | 8,143 |  |  | $ | 4,486 |       |  | $ | 175,140 | 
|                  |  |                                       |         |        |  |           |       |           |  |         |       |  |  |   |       |       |  |   |         | 

The carrying value of our total long-term debt, including current maturities, of $174.3 million and $43.8 million
at September 30, 2003 and December 31, 2002, respectively, approximated fair value. We had $11.2 million of
variable rate debt outstanding at September 30, 2003. At the September 30, 2003 borrowing level, a hypothetical
10% adverse change in interest rates, would decrease our net income and cash flows by $100,000.

Critical Accounting Policies

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

Allowance for doubtful accounts

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

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

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

Allowances for contractual discounts

The Medicare regulations and various managed care contracts are often complex and may include multiple
reimbursement mechanisms for different types of services provided in our facilities and cost settlement
provisions requiring complex calculations and assumptions subject to interpretation. We estimate the allowance
for contractual discounts on a payer-specific basis given our interpretation of the applicable regulations or
contract terms. The services authorized and provided and related reimbursement are

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often subject to interpretation that could result in payments that differ from our estimates. These differences are recorded as a
component of revenue in the period they are identified. Additionally, updated regulations and contract
renegotiations occur frequently necessitating continual review and assessment of the estimation process by
management.

Professional and General Liability

We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. For the
years ended December 31, 2000 and 2001, and through December 5, 2002, we have obtained professional and general
liability insurance for claims in excess of $100,000, up to a maximum of $1 million per occurrence and $3 million
aggregate, with an additional $5 million in excess coverage. On December 6, 2002, the deductible on individual
malpractice claims was raised to $3 million and the insured limit to $10 million to mitigate the increases in the
cost of professional and general liability insurance and to increase coverage for additional exposures due to
acquisitions. The reserve for professional and general liability risks is based on historical claims, demographic
factors, industry trends, severity factors, and other actuarial assumptions calculated by an independent third
party. This estimate is discounted to its present value using a 5% discount rate. This estimated accrual for
professional and general liabilities could be significantly affected should current and future occurrences differ
from historical claim trends and expectations. We have established 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 $4.3 million as of September 30, 2003, with approximately $750,000 relating to previous years.

Income taxes

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




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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




ITEM 4. CONTROLS AND PROCEDURES

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

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PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

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




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | ---- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1  |   | Amended Restated
Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on
March 9, 1998 (incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form
10-K for the fiscal year ended April 30, 1998).                                                                                         
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 3.2  |   | Certificate of Amendment to Amended and Restated
Certificate of Incorporation of PMR Corporation, filed with the
Delaware Secretary of State on August 5, 2002 (incorporated by reference to Exhibit 3.2 to the
Companys Quarterly Report on Form 10-Q for the quarter ended July 31, 2002).                                                          
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 3.3  |   | Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the
Delaware Secretary of State on March 21, 2003 (incorporated by reference to Appendix A of the
Companys Definitive Proxy Statement filed January 22, 2003).                                                               
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 3.4  |   | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K for the fiscal year ended April 30, 1997).                                                                                                                                                                                           
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.1  |   | Reference is made to
Exhibits 3.1 through 3.4.                                                                                                                                                                                                                                                                                                         
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.2  |   | Common Stock
Specimen Certificate (incorporated by reference to Exhibit 4.2
to the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2002) (the 2002 10-K)).                                                                                                                                                               
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.3  |   | Contingent Value
Rights Agreement, dated August 2, 2002 (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K, filed on August 5, 2002).                                                                                                                                                                               
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.4  |   | Warrant to Purchase
Shares of Common Stock of Psychiatric Solutions, Inc. to the
1818 Mezzanine Fund II, L.P., dated June 28, 2002
(incorporated by reference to Exhibit 10.19 to Amendment No.
1 to the Companys Registration Statement on Form S-4, filed on
July 11, 2002 (Reg. No. 333-90372)).                                                   
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.5  |   | Common Stock
Purchase Warrant of Psychiatric Solutions, Inc. to CapitalSource
Holdings LLC, dated August 5, 2002 (incorporated by reference to
Exhibit 4.5 to Amendment No. 1 to the Companys
Registration Statement on Form S-4, filed on November 4,
2003 (Reg. No. 333-107453)).                                                                   
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.6  |   | Stock Purchase
Agreement, dated as of January 6, 2003, by and among Psychiatric
Solutions, Inc. and the Purchasers named therein (incorporated by
reference to Appendix B of the Companys Definitive Proxy
Statement, filed January 22, 2003).                                                                                                        
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.7  |   | Registration Rights
Agreement, dated as of January 6, 2003, by and among Psychiatric
Solutions, Inc. and the Purchasers named therein (incorporated by
reference to Appendix C of the Companys Definitive Proxy
Statement, filed January 22, 2003).                                                                                                   
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.8  |   | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of
the Company (Incorporated by reference to Appendix D of the Companys Definitive Proxy Statement
filed January 22, 2003).                                                                                                                               
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.9  |   | Third Amended and
Restated Voting Agreement, dated as of January 6, 2003, by and
among Psychiatric Solutions, Inc., certain holders of Psychiatric
Solutions, Inc.s capital stock named therein and The 1818
Mezzanine Fund II, L.P. (incorporated by reference to
Exhibit 4.5 of the Companys Current Report on
Form 8-K, filed on January 7, 2003).
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.10 |   | Indenture, dated as of June 30, 2003, between Psychiatric Solutions, Inc., the Guarantors named
therein and Wachovia Bank, National Association, as Trustee (incorporated by reference to
Exhibit 4.10 to the Companys Registration Statement on Form S-4, filed on July 30, 2003 (Reg.
No. 333-107453)) (the S-4).                                 
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.11 |   | Form of Notes (incorporated by reference to Exhibit 4.11 to the S-4).                                                                                                                                                                                                                                                                                  
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.12 |   | Purchase Agreement, dated as of June 19, 2003, between Psychiatric Solutions, Inc., the
Guarantors named therein, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Jefferies & Company, Inc. (incorporated by reference to Exhibit 4.12 to the S-4).                                                                       
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 4.13 |   | Exchange and Registration Rights Agreement, dated as of June 30, 2003, among Psychiatric
Solutions, Inc., the Guarantors named therein, Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Jefferies & Company, Inc. (incorporated by reference to
Exhibit 4.13 to the S-4).                                                 
| |      |   |                                                                                                                                                                                                                                                                                                                                                        
| | 10.1 | * | First Addendum to
Consulting Agreement, dated August 5, 2003, by and between
Psychiatric Solutions, Inc. and Allen Tepper.                                                                                                                                                                                                                             
| |      |   |                                                                                                                                                                                                                                                                                                                                                        

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| |       |  |                                                                                                                                                                                                                                                                                        
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1* |  | Certification of the Chief Executive Officer of Psychiatric Solutions, Inc. Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                                                          
| |       |  |                                                                                                                                                                                                                                                                                        
|
| | 31.2* |  | Certification of the Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                                                         
| |       |  |                                                                                                                                                                                                                                                                                        
|
| | 32.1* |  | Certifications of the Chief Executive Officer and Chief Accounting Officer of Psychiatric
Solutions, Inc. Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



---

(b)  Reports on Form 8-K

| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. |  | On July 1, 2003 we filed a Report on Form 8-K, which reported the issuance of press releases
announcing the completion of our acquisition of Ramsay Youth
Services, Inc., the
completion of our private placement of $150.0 million in 10 5/8% senior subordinated notes, the receipt
of the second half of the net proceeds from the $25.0 million
private placement of our series A convertible
preferred stock and the consummation of the amendment and restatement
of our senior
credit facility with CapitalSource Finance LLC.
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 2. |  | On August 7, 2003, we furnished pursuant to Item 12 of Form 8-K, a copy of our press release
announcing our operating results for the second quarter ended June 30, 2003.                                                                                                                                                                                                                                                                                                                                                            



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Notwithstanding the foregoing, information furnished under Item 9 and Item 12 of our Current
Reports on Form 8-K, including the related exhibits shall not be deemed to be filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended,
(the Exchange Act) or incorporated by reference in any
filing under the Securities Act of 1933, as amended, or the Exchange
Act, except as shall be expressly set forth by specific reference in
such a filing.

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SIGNATURES

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



| | PSYCHIATRIC SOLUTIONS, INC.
| | ---------------------------

|                         |                                                           
|------------------------ | ----------------------------------------------------------
|Dated:
November 12, 2003 | /s/ Jack E. Polson
Jack E. Polson
Chief Accounting Officer