Document:

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                                                                   EXHIBIT 10.20

                      SECOND AMENDMENT TO REVOLVING CREDIT
                             AND TERM LOAN AGREEMENT

         THIS SECOND AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT (this
"Amendment") is made and entered into as of June 28, 2002, by and among
PSYCHIATRIC SOLUTIONS, INC., a Delaware corporation ("PSI"), PSYCHIATRIC
SOLUTIONS OF ALABAMA, INC., a Tennessee corporation ("PS ALABAMA"), PSYCHIATRIC
SOLUTIONS OF FLORIDA, INC., a Tennessee corporation ("PS FLORIDA"), PSYCHIATRIC
SOLUTIONS OF TENNESSEE, INC., a Tennessee corporation ("PS TENNESSEE"),
SOLUTIONS CENTER OF LITTLE ROCK, INC., a Tennessee corporation ("LITTLE ROCK"),
PSYCHIATRIC SOLUTIONS OF NORTH CAROLINA, INC., a Tennessee corporation ("PS
NORTH CAROLINA"), PSI COMMUNITY MENTAL HEALTH AGENCY MANAGEMENT, INC., a
Tennessee corporation ("PSI COMMUNITY"), PSI-EAP, INC., a Delaware corporation
("PSI-EAP"), SUNSTONE BEHAVIORAL HEALTH, INC., a Tennessee corporation
("SUNSTONE"), THE COUNSELING CENTER OF MIDDLE TENNESSEE, INC., a Tennessee
corporation ("COUNSELING CENTER"), PSI HOSPITALS, INC., a Delaware corporation
("PSI HOSPITALS"), PSI TEXAS HOSPITALS, LLC, a Texas limited liability company
("TEXAS HOSPITALS"), PSYCHIATRIC PRACTICE MANAGEMENT OF ARKANSAS, INC., a
Tennessee corporation ("PPM ARKANSAS"), TEXAS CYPRESS CREEK HOSPITAL, L.P., a
Texas limited partnership ("CYPRESS CREEK"), TEXAS WEST OAKS HOSPITAL, L.P., a
Texas limited partnership ("WEST OAKS"), NEURO INSTITUTE OF AUSTIN, L.P., a
Texas limited partnership ("NEURO INSTITUTE") (individually and collectively,
the "ORIGINAL BORROWER"), AERIES HEALTHCARE CORPORATION, a Delaware corporation
("AERIES"), AERIES HEALTHCARE OF ILLINOIS, INC., an Illinois corporation
("AERIES ILLINOIS"), HOLLY HILL REAL ESTATE, LLC, a North Carolina limited
liability company ("HOLLY HILL REAL ESTATE"), CYPRESS CREEK REAL ESTATE, L.P., a
Texas limited partnership ("CYPRESS CREEK REAL ESTATE"), WEST OAKS REAL ESTATE,
L.P., a Texas limited partnership ("WEST OAKS REAL ESTATE"), NEURO REHAB REAL
ESTATE, L.P., a Texas limited partnership ("NEURO REHAB REAL ESTATE")
(individually and collectively with Original Borrower, "BORROWER"),
CAPITALSOURCE FINANCE LLC, a Delaware limited liability company
("CAPITALSOURCE"), as administrative agent and collateral agent for Lenders (in
such capacities, the "AGENT"), and the Lenders.

                                    RECITALS

         A. WHEREAS, pursuant to the terms and subject to the conditions of that
certain Revolving Credit and Term Loan Agreement, dated as of November 30, 2001
by and among Agent, the Lenders and Original Borrower, as amended by that
certain First Amendment to Revolving Credit and Term Loan Agreement, dated as of
April 30, 2002 by and among Agent, the Lenders and Original Borrower (such
Revolving Credit and Term Loan Agreement, as the same is hereby amended and may
hereafter be amended from time to time, being hereinafter referred to as the
"LOAN AGREEMENT"), Borrower was provided a Term Loan in the amount of
$15,656,305, a Revolving Loan Facility in an aggregate amount not to exceed
$17,500,000 and a

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Bridge Facility as a sub-facility of the Revolving Loan Facility in an aggregate
amount not to exceed $1,200,000;

         B. WHEREAS, Borrower has requested, among other things, the Lenders add
a term loan in the amount of $7,950,000; and

         C. WHEREAS, in furtherance of the foregoing and to evidence the
agreements of the parties hereto in relation thereto the parties hereto desire
to amend the Loan Agreement as hereinafter provided.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:

                                   ARTICLE I
                                   DEFINITIONS

         1.01 Capitalized terms used in this Amendment are defined in the Loan
Agreement, as amended hereby, unless otherwise stated.

                                   ARTICLE II
                          AMENDMENTS TO LOAN AGREEMENT

         The Loan Agreement is hereby amended as follows:

         2.01 AMENDMENT TO THE PREAMBLE. Effective as of the date of this
Amendment, the preamble shall be amended and restated as follows:

                  "THIS REVOLVING CREDIT AND TERM LOAN AGREEMENT (the
         "AGREEMENT") dated as of November 30, 2001, is entered into among
         PSYCHIATRIC SOLUTIONS, INC., a Delaware corporation ("PSI"),
         PSYCHIATRIC SOLUTIONS OF ALABAMA, INC., a Tennessee corporation ("PS
         ALABAMA"), PSYCHIATRIC SOLUTIONS OF FLORIDA, INC., a Tennessee
         corporation ("PS FLORIDA"), PSYCHIATRIC SOLUTIONS OF TENNESSEE, INC., a
         Tennessee corporation ("PS TENNESSEE"), SOLUTIONS CENTER OF LITTLE
         ROCK, INC., a Tennessee corporation ("LITTLE ROCK"), PSYCHIATRIC
         SOLUTIONS OF NORTH CAROLINA, INC., a Tennessee corporation ("PS NORTH
         CAROLINA"), PSI COMMUNITY MENTAL HEALTH AGENCY MANAGEMENT, INC., a
         Tennessee corporation ("PSI COMMUNITY"), PSI-EAP, INC., a Delaware
         corporation ("PSI-EAP"), SUNSTONE BEHAVIORAL HEALTH, INC., a Tennessee
         corporation ("SUNSTONE"), THE COUNSELING CENTER OF MIDDLE TENNESSEE,
         INC., a Tennessee corporation ("COUNSELING CENTER"), PSI HOSPITALS,
         INC., a Delaware corporation ("PSI HOSPITALS"), PSI TEXAS HOSPITALS,
         LLC, a Texas limited liability company ("TEXAS HOSPITALS"),

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         PSYCHIATRIC PRACTICE MANAGEMENT OF ARKANSAS, INC., a Tennessee
         corporation ("PPM ARKANSAS"), TEXAS CYPRESS CREEK HOSPITAL, L.P., a
         Texas limited partnership ("CYPRESS CREEK"), TEXAS WEST OAKS HOSPITAL,
         L.P., a Texas limited partnership ("WEST OAKS"), NEURO INSTITUTE OF
         AUSTIN, L.P., a Texas limited partnership ("NEURO INSTITUTE"), AERIES
         HEALTHCARE CORPORATION, a Delaware corporation ("AERIES"), AERIES
         HEALTHCARE OF ILLINOIS, INC., an Illinois corporation ("AERIES
         ILLINOIS"), HOLLY HILL REAL ESTATE, LLC, a North Carolina limited
         liability company ("HOLLY HILL REAL ESTATE"), CYPRESS CREEK REAL
         ESTATE, L.P., a Texas limited partnership ("CYPRESS CREEK REAL
         ESTATE"), WEST OAKS REAL ESTATE, L.P., a Texas limited partnership
         ("WEST OAKS REAL ESTATE"), NEURO REHAB REAL ESTATE, L.P., a Texas
         limited partnership ("NEURO REHAB REAL ESTATE") (individually and
         collectively, the "BORROWER"), CAPITALSOURCE FINANCE LLC, a Delaware
         limited liability company ("CAPITALSOURCE"), as administrative agent
         and collateral agent for Lenders (in such capacities, the "AGENT"), and
         the Lenders."

         2.02 DELETION OF WHEREAS CLAUSE. Effective as of the date of this
Amendment, the fourth "WHEREAS" clause shall be deleted in its entirety.

         2.03 AMENDMENT TO SECTION 2.6. Effective as of the date of this
Amendment, Section 2.6 shall be amended and restated as follows:

                  "2.6 TERM LOAN. Subject to the terms and conditions set forth
         in this Agreement, each Lender agrees to loan to Borrower its Pro Rata
         Share of the Term Loan, which is in the aggregate original principal
         amount equal to the Maximum Loan Amount. The Term Loan shall be
         evidenced by Term Notes, payable to the order of each Lender in the
         principal amount of the Commitment of the applicable Lender, duly
         executed and delivered by Borrower. On the Closing Date, Borrower will
         authorize (a) the assignment by Healthcare to CapitalSource of Term
         Note A, Term Note B and Term Note C and the modification of each note
         pursuant to the Modification of Notes and Liens and (b) the issuance of
         Term Note D, which shall be in the original principal amount of
         $4,531,305 payable to the order of CapitalSource, duly executed and
         delivered by Borrower and dated the Closing Date (the "TERM NOTE D").
         On the date of the Second Amendment, Borrower will authorize the
         issuance of Term Note E, which shall be in the original principal
         amount of $7,950,000 payable to the order of CapitalSource, duly
         executed and delivered by Borrower and dated as of the date of the
         Second Amendment (the "TERM NOTE E" and collectively with Term Note A,
         Term Note B, Term Note C and Term Note D, the "TERM NOTES"). Each
         Lender agrees to loan to Borrower on the Closing Date or the date of
         the Second Amendment, as applicable, the Maximum Loan Amount, in an
         amount not to exceed its Pro Rata Share, in the form of the Term Loan
         equal to such Maximum Loan Amount to be disbursed to (x) Healthcare,
         pursuant to the General Assignment and (y) the

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         appropriate Borrower's account(s) as set forth on Schedule 2.4. The
         Term Loan is not a revolving credit facility, and any repayments of
         principal shall be applied to permanently reduce the Term Loan. The
         Term Loan shall be evidenced by the Term Notes."

         2.04     AMENDMENT TO SECTION 2.8. Effective as of the date of this
Amendment, Section 2.8 shall be amended and restated as follows:

         "2.8     REPAYMENT OF TERM LOAN; MATURITY

                  Payment of principal (in addition to the interest payments in
         Section 2.7) and all other amounts outstanding under the Term Loan
         shall be made monthly as follows:

                  (a) (i) $98,360 per month shall be due and payable, beginning
         July 1, 2002 and continuing on the 1st day of each month thereafter
         through the last month of the Term Loan Term or (ii) upon the payment
         of such amount required pursuant to Section 2.11(d), $94,190 per month
         shall be due and payable, beginning on the earlier to occur of (A) the
         PMR Merger Date and (B) September 1, 2002 and continuing on the 1st day
         of each month thereafter through the last month of the Term Loan Term;
         and

                  (b) the unpaid principal of the Term Loan and all other
         Obligations under the Term Loan shall be due and payable in full, and
         the Term Notes shall mature, if not earlier in accordance with this
         Agreement, on the earlier of (i) the occurrence of an Event of Default
         if required pursuant hereto or Agent's demand upon an Event of Default,
         and (ii) the last day of the Term Loan Term (such earlier date being
         the "TERM LOAN MATURITY DATE")."

         2.05     AMENDMENT TO SECTION 2.11. Effective as of the date of this
Amendment, Section 2.11 shall be amended by amending and restating subsection
(c) in its entirety, and adding new subsections (d) and (e), which subsections
shall read in their entirety as follows:

                  "(c) until such time as the Obligations relating to the Term
         Loan are indefeasibly paid in full in cash and fully performed, 50% of
         Borrower's Excess Cash Flow for each fiscal quarter shall be paid by
         Borrower to Agent, for the benefit of Lenders, and shall be applied by
         Agent to reduce the Obligations relating to the Term Loan. Such
         payments shall be made no later than sixty (60) calendar days after the
         end of the fiscal quarter to which such Cash Flow relates, but in any
         event, if any Borrower is public, not later than fifteen (15) calendar
         days after the required delivery to the Securities and Exchange
         Commission of Borrower's quarterly financial statements; provided,
         however, that such payments are to be applied to the Obligations
         relating to the Term Loan at such time and in such manner and order as
         Agent shall decide in its sole discretion. Borrower shall provide Agent
         with a year-end reconciliation report of Borrower's quarterly Excess
         Cash Flow sweeps for each fiscal year, which reconciliation report
         shall be

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         based on Borrower's audited financial statements for such fiscal year
         and which shall be delivered not later than thirty (30) days after
         preparation of Borrower's audited financial statements for such fiscal
         year;

                  (d) on or before the earlier to occur of (i) the PMR Merger
         Date and (ii) August 30, 2002, Borrower shall pay to Agent, for the
         benefit of Lenders, an aggregate amount equal to (A) $1,200,000 which
         amount shall be applied by Agent to reduce the Obligations relating to
         the Bridge Facility and (B) $1,000,000, which amount shall be applied
         by Agent to reduce the Obligations relating to Term Note E; and

                  (e) until such time as Term Loan E is indefeasibly paid in
         full in cash, an amount each month (if positive) equal to (i) the
         aggregate amount outstanding on the Term Loan E minus (ii) (A) 2.5
         multiplied by (B) as of the end of such month, the twelve-month rolling
         average of EBITDA on the Riveredge Hospital Facility minus (iii) the
         aggregate amount of principal paid on Term Loan E for such month
         pursuant to Section 2.8(a). For purposes of Subsection 2.11(e)(ii)
         only, (x) for any month prior to and including April 2002, such EBITDA
         shall be deemed to be $241,670 per month, and (y) for any month after
         April 2002, such EBITDA shall be as provided by Borrower and approved
         by Lender."

         2.06     AMENDMENT TO SECTION 6.13. Effective as of the date of this
Amendment, Section 6.13 shall be amended and restated as follows:

                  "6.13    RIGHT OF FIRST REFUSAL.

                  If at any time Borrower receives from a third party an offer,
         term sheet or commitment or makes a proposal (including without
         limitation any application filed in connection with a HUD Financing)
         accepted by any Person (each, an "OFFER") which provides for any type
         of debt financing to or for Borrower, Borrower shall notify Agent and
         Lenders of the Offer in writing (including all material terms of the
         Offer) and Agent and Lenders shall have 30 calendar days after Receipt
         of such notice (the "OPTION PERIOD") to agree to provide similar debt
         financing in the place of such Person upon substantially the same terms
         and conditions (or terms more favorable to such Borrower) as set forth
         in the Offer. Agent shall notify Borrower in writing of Agent's and
         Lenders' acceptance of the Offer pursuant hereto (the "ACCEPTANCE
         NOTICE"), in which case Borrower shall obtain such debt financing from
         Agent and Lenders and shall not accept the Offer from such other
         Person. If no Acceptance Notice has been Received from Agent within the
         Option Period, Borrower may consummate the Offer with the other Person
         on the terms and conditions set forth in the Offer (the "TRANSACTION");
         provided, however, that none of foregoing or any failure by Agent to
         issue an Acceptance Notice shall be construed as a waiver of any of the
         terms, covenants or conditions of any of the Loan Documents. If the
         Transaction is not consummated on the terms set forth in the Offer or
         with the Person providing the Offer or during the ninety (90) calendar
         day period following the expiration of the

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         Option Period, Borrower shall not be permitted to consummate the
         Transaction without again complying with this Section 6.13. The
         provisions of this Section 6.13 shall survive the payment in full of
         the Obligations and termination of this Agreement for a period of six
         months. For purposes of this Section 6.13, "Lender" shall include
         CapitalSource Finance LLC and any of its parents, subsidiaries or
         affiliates. Notwithstanding anything to the contrary contained in this
         Section 6.13, the provisions of this Section 6.13 shall not include the
         offer of 1818 Mezzanine Fund, and acceptance by PSI, of the 1818
         Mezzanine Fund Subordinated Indebtedness."

         2.07     AMENDMENT TO SECTION 7.1. Effective as of the date of this
Amendment, Section 7.1 shall be amended and restated as follows:

                  "7.1     INDEBTEDNESS

                  Borrower shall not create, incur, assume or suffer to exist
         any Indebtedness, except the following (collectively, "PERMITTED
         INDEBTEDNESS"): (a) Indebtedness under the Loan Documents, (b) any
         Indebtedness set forth on Schedule 7.1; provided, that any refinancing
         of the Indebtedness set forth on Schedule 7.1 shall have the following
         terms: (i) the stated applicable pre-default or post-default interest
         rate (or the margin thereon if based on a variable rate) on such
         Indebtedness shall not be greater than the stated applicable
         pre-default or post-default interest rate (or the margin thereon if
         based on a variable rate) as in effect on the date hereof; (ii) the
         maximum principal amount outstanding under such Indebtedness as so
         refinanced does not exceed the maximum principal amount permitted to be
         outstanding on the date hereof; and (iii) no advances under such
         Indebtedness may be made on or after the date hereof, (c) Capitalized
         Lease Obligations incurred after the Closing Date and Indebtedness
         incurred pursuant to purchase money Liens permitted by Section 7.3(e);
         provided, that the aggregate amount thereof outstanding at any time
         shall not exceed $75,000, (d) Indebtedness in connection with advances
         made by a stockholder in order to cure any default of the financial
         covenants set forth on Annex I; provided, however, that such
         Indebtedness shall be on an unsecured basis, subordinated in right of
         repayment and remedies to all of the Obligations and to all of Agent's
         and Lenders' rights and in form and substance satisfactory to Agent;
         (e) accounts payable to trade creditors and current operating expenses
         (other than for borrowed money) which are not aged more than 120
         calendar days from the billing date or more than 30 days from the due
         date, in each case incurred in the ordinary course of business and paid
         within such time period, unless the same are being contested in good
         faith and by appropriate and lawful proceedings and such reserves, if
         any, with respect thereto as are required by GAAP and deemed adequate
         by Borrower's independent accountants shall have been reserved; (f)
         Indebtedness owing by any Borrower to another Borrower; provided, that
         such Indebtedness shall be (i) evidenced by a note, (ii) on an
         unsecured basis, subordinated in right of repayment and remedies to all
         of the Obligations and to all of Agent's and Lenders' rights

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         and in form and substance satisfactory to Agent, and (iii) pledged to
         Agent, for the benefit of itself and Lenders, (g) borrowings incurred
         in the ordinary course of business and not exceeding $10,000
         individually or in the aggregate outstanding at any one time and (h)
         the 1818 Mezzanine Fund Subordinated Indebtedness; provided, however,
         that such Indebtedness shall be on an unsecured basis, subordinated in
         right of repayment and remedies to all of the Obligations and to all of
         Agent's and Lenders' rights and in form and substance satisfactory to
         Agent. Borrower shall not make prepayments on any existing or future
         Indebtedness to any Person other than to Agent, for the benefit of
         Lenders, or to the extent specifically permitted by this Agreement or
         any subsequent agreement between Borrower, Agent and Lenders.

         2.08     AMENDMENT TO SECTION 7.4. Effective as of the date of this
Amendment, Section 7.4 shall be amended and restated as follows:

         "7.4     INVESTMENTS; NEW FACILITIES OR COLLATERAL; SUBSIDIARIES

                  Borrower, directly or indirectly, shall not (a) purchase, own,
         hold, invest in or otherwise acquire obligations or stock or securities
         of, or any other interest in, or all or substantially all of the assets
         of, any Person or any joint venture; provided, however, Borrower may
         consummate the Aeries Acquisition, or (b) make or permit to exist any
         loans, advances or guarantees to or for the benefit of any Person or
         assume, guarantee, endorse, contingently agree to purchase or otherwise
         become liable for or upon or incur any obligation of any Person (other
         than those created by the Loan Documents and Permitted Indebtedness set
         forth on Schedule 7.1 and other than (i) trade credit extended in the
         ordinary course of business, (ii) advances for business travel and
         similar temporary advances made in the ordinary course of business to
         officers, directors and employees, and (iii) the endorsement of
         negotiable instruments for deposit or collection or similar
         transactions in the ordinary course of business. Borrower, directly or
         indirectly, shall not purchase, own, operate, hold, invest in or
         otherwise acquire any facility, property or assets or any Collateral
         that is not located at the locations set forth on Schedule 5.18B,
         unless Borrower shall provide to Agent at least thirty (30) Business
         Days prior written notice. Borrower shall have no Subsidiaries other
         than Borrowers hereunder."

         2.09     AMENDMENT TO SECTION 7.5. Effective as of the date of this
Amendment, Section 7.5 shall be amended and restated as follows:

         "7.5     DIVIDENDS; REDEMPTIONS

                  Borrower shall not (a) declare, pay or make any dividend or
         distribution on any shares of capital stock or other securities or
         interests (other than dividends or distributions payable in its stock,
         or split-ups or reclassifications of its stock), (b) apply any of its
         funds, property or assets to the acquisition,

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         redemption or other retirement of any capital stock or other securities
         or interests or of any options to purchase or acquire any of the
         foregoing (provided, however, that Borrower may redeem its capital
         stock from terminated employees pursuant to, but only to the extent
         required under, the terms of the related employment agreements as long
         as no Default or Event of Default has occurred and is continuing or
         would be caused by or result therefrom), (c) otherwise make any
         payments or Distributions to any stockholder, member, partner or other
         equity owner in such Person's capacity as such, or (d) make any payment
         of any management, service or related or similar fee to any Person or
         with respect to any facility owned, operated or leased by Borrower;
         provided, that nothing contained in this Section 7.5 shall prevent
         Borrower from making any payments and/or consummating any transactions
         permitted pursuant to the Intercreditor Agreement."

         2.10     AMENDMENT TO SECTION 7.6. Effective as of the date of this
Amendment, Section 7.6 shall be amended and restated as follows:

          "7.6    TRANSACTIONS WITH AFFILIATES

                  Borrower shall not enter into or consummate any transaction of
         any kind with any of its affiliates or any Guarantor or any of their
         respective affiliates other than: (a) salary, bonus, employee stock
         option and other compensation and employment arrangements with
         directors or officers in the ordinary course of business; provided,
         that no payment of any bonus shall be permitted if a Default or Event
         of Default has occurred and remains in effect or would be caused by or
         result from such payment, (b) distributions and dividends permitted
         pursuant to Section 7.5, (c) transactions on overall terms at least as
         favorable to Borrower as would be the case in an arm's-length
         transaction between unrelated parties of equal bargaining power, (d)
         transactions with Agent or Lenders or any affiliate of Agent or
         Lenders, (e) payments permitted under and pursuant to written
         agreements entered into by and between Borrower and one or more of its
         affiliates that both (i) reflect and constitute transactions on overall
         terms at least as favorable to Borrower as would be the case in an
         arm's-length transaction between unrelated parties of equal bargaining
         power, and (ii) are subject to such terms and conditions as determined
         by Agent in its sole discretion; provided, that notwithstanding the
         foregoing Borrower shall not (A) enter into or consummate any
         transaction or agreement pursuant to which it becomes a party to any
         mortgage, note, indenture or guarantee evidencing any Indebtedness of
         any of its affiliates or otherwise to become responsible or liable, as
         a guarantor, surety or otherwise, pursuant to agreement for any
         Indebtedness of any such affiliate, or (B) make any payment to any of
         its affiliates in excess of $10,000 without the prior written consent
         of Agent or (f) payments and/or transactions permitted pursuant to the
         Intercreditor Agreement."

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         2.11     AMENDMENT TO SECTION 7.9. Effective as of the date of this
Amendment, Section 7.9 shall be amended and restated as follows:

         "7.9     PAYMENT ON SUBORDINATED DEBT.

                  Borrower shall not (a) make any prepayment of any part or all
         of any Subordinated Debt, (b) repurchase, redeem or retire any
         instrument evidencing any such Subordinated Debt prior to maturity, or
         (c) enter into any agreement (oral or written) which could in any way
         be construed to amend, modify, alter or terminate any one or more
         instruments or agreements evidencing or relating to any Subordinated
         Debt; provided, however, that Borrower may make payments on any
         Subordinated Debt in accordance with the provisions of the note
         evidencing such Subordinated Debt, or if more restrictive, the
         provisions of any Subordination Agreement or the Intercreditor
         Agreement, each as in effect on the date hereof. Notwithstanding the
         foregoing, Borrower shall not make any payments on any Subordinated
         Debt if a Default or Event of Default shall have occurred and be
         continuing or would occur as a result of any payment on such
         Subordinated Debt (unless, with respect to the 1818 Mezzanine Fund
         Subordinated Indebtedness, such payment is permitted pursuant to the
         Intercreditor Agreement)."

         2.12     ADDITION OF SECTION 7.10. Effective as of the date of this
Amendment, the Loan Agreement shall be amended by adding a new Section 7.10
which shall read in its entirety as follows:

         "7.10    AMENDMENT OF THE 1818 MEZZANINE FUND SUBORDINATED DEBT
         DOCUMENTS.

                  Borrower shall not, without the prior written consent of
         Agent, agree to any amendment, modification or supplement to the 1818
         Mezzanine Fund Subordinated Debt Documents the effect of which is to
         (a) increase the maximum principal amount of the 1818 Mezzanine Fund
         Subordinated Indebtedness or rate of interest on any of the 1818
         Mezzanine Fund Subordinated Indebtedness, (b) change the dates upon
         which payments of principal or interest on the 1818 Mezzanine Fund
         Subordinated Indebtedness are due, (c) change or add any event of
         default or any covenant with respect to the 1818 Mezzanine Fund
         Subordinated Indebtedness, (d) change any redemption or prepayment
         provisions of the 1818 Mezzanine Fund Subordinated Indebtedness, (e)
         alter the subordination provisions with respect to the 1818 Mezzanine
         Fund Subordinated Indebtedness, including, without limitation,
         subordinating the 1818 Mezzanine Fund Subordinated Indebtedness to any
         other indebtedness, (f) take any liens or security interests in any
         assets of Borrower or any guarantor of the 1818 Mezzanine Fund
         Subordinated Indebtedness or (g) change or amend any other term of the
         1818 Mezzanine Fund Subordinated Debt Documents if such change or
         amendment would result in an Event of Default, increase the obligations
         of Borrower or any guarantor of the 1818 Mezzanine Fund Subordinated
         Indebtedness or confer

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         additional material rights on 1818 Mezzanine Fund or any other holder
         of the 1818 Mezzanine Fund Subordinated Indebtedness in a manner
         adverse to Borrower, any such guarantor or Agent."

         2.13     ADDITION OF DEFINITIONS TO APPENDIX A. Effective as of the
date of this Amendment, Appendix A shall be amended by adding the following
definitions thereto in alphabetical order:

                  "1818 Mezzanine Fund" shall mean The 1818 Mezzanine Fund II,
         L.P., a Delaware limited partnership.

                  "1818 Mezzanine Fund Subordinated Indebtedness" shall mean the
         subordinated indebtedness owing by PSI (and any other Borrower who is a
         party or obligor thereunder) to 1818 Mezzanine Fund pursuant to the
         Securities Purchase Agreement.

                  "1818 Mezzanine Fund Subordinated Debt Documents" shall mean
         the Securities Purchase Agreement and all other documents, agreements
         and instruments now existing or hereinafter entered into evidencing or
         pertaining to all or any portion of the 1818 Mezzanine Fund
         Subordinated Indebtedness.

                  "Aeries Acquisition" shall mean the acquisition contemplated
         by the Stock Purchase Agreement.

                  "HUD Financing" shall mean any type of financing to or for
         Borrower from the U.S. Department of Housing and Urban Development.

                  "Intercreditor Agreement" shall mean that certain
         Subordination and Intercreditor Agreement, dated as June 28, 2002, by
         and among Agent, 1818 Mezzanine Fund and Borrower, as amended,
         supplemented, restated or otherwise modified from time to time as
         permitted thereunder.

                  "PMR Acquisition" shall mean PMR Acquisition Corporation, a
         Delaware corporation.

                  "PMR Corporation" shall mean PMR Corporation, a Delaware
         corporation.

                  "PMR Merger" shall mean the merger contemplated by the PMR
         Merger Agreement.

                  "PMR Merger Agreement" shall mean the Agreement and Plan of
         Merger, dated as of May 6, 2002, by and between PMR Corporation, PMR
         Acquisition and PSI, as amended by Amendment No. 1 to Agreement and
         Plan of Merger, dated as of June 28, 2002, and as further amended or
         modified in accordance with its terms.

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<PAGE>

                  "PMR Merger Date" shall mean the date the PMR Merger is
         consummated.

                  "Riveredge Hospital Facility" shall mean that certain
         property located at 8311 West Roosevelt Road, Forest Park,
         Illinois 60130.

                  "Second Amendment" shall mean that certain Second
         Amendment to Revolving Credit and Term Loan Agreement, dated as of
         June 28, 2002, by and among Agent, Lenders and Borrower.

                  "Securities Purchase Agreement" shall mean that certain
         Securities Purchase Agreement, dated as of June 28, 2002 by and
         between PSI and 1818 Mezzanine Fund, as amended, supplemented,
         restated or otherwise modified from time to time as permitted
         hereunder.

                  "Seller Notes" shall mean the indebtedness owing to the
         Shareholders of Aeries Corporation pursuant to the Aeries Stock
         Purchase Agreement and the Indebtedness identified in each
         Subordination Agreement.

                  "Stock Purchase Agreement" shall mean that certain Stock
         Purchase Agreement, dated as of June 20, 2002 by and between PSI
         and the Shareholders of Aeries Corporation (as identified
         therein), as amended, supplemented, restated or otherwise modified
         from time to time as permitted hereunder.

         2.14     AMENDMENT TO DEFINITIONS IN APPENDIX A. Effective as of the
date of this Amendment, the following definitions contained in Appendix A to the
Loan Agreement shall be amended and restated as follows:

                  "Facility Cap" shall mean the lesser of (i) $17,500,000,
         or (ii) $40,000,000 minus the aggregate outstanding amount of the
         Term Loan.

                  "Liability Event" shall mean any event, fact, condition
         or circumstance or series thereof (i) in or for which any Borrower
         becomes liable or otherwise responsible for any amount owed or
         owing to any Medicaid or Medicare program by a provider under
         common ownership with such Borrower or any provider owned by such
         Borrower pursuant to any applicable law, ordinance, rule, decree,
         order or regulation of any Governmental Authority after the
         failure of any such provider to pay any such amount when owed or
         owing, (ii) in which Medicaid or Medicare payments to any Borrower
         are lawfully set-off against payments to such or any other
         Borrower to satisfy any liability of or for any amounts owed or
         owing to any Medicaid or Medicare program by a provider under
         common ownership with such Borrower or any provider owned by such
         Borrower pursuant to any applicable law, ordinance, rule, decree,
         order or regulation of any Governmental Authority, excluding any
         cost report liability which has been appropriately recorded in
         Borrower's financial statements in accordance with GAAP and
         appropriately reserved with respect to any Borrowing Base
         calculation, or (iii) any

                                       11

<PAGE>

         of the foregoing under clauses (i) or (ii) in each case pursuant
         to statutory or regulatory provisions that are similar to any
         applicable law, ordinance, rule, decree, order or regulation of
         any Governmental Authority referenced in clauses (i) and (ii)
         above or successor provisions thereto.

                  "Loan Documents" shall mean, collectively and each
         individually, the Agreement, the Notes, the Security Documents,
         the Guarantees, the Stock Pledge Agreements, the Assignment of
         Liens, the General Assignment, the Modification of Notes and
         Liens, the Assignment of Representations, Warranties, Covenants
         and Indemnities, the Lockbox Agreements, the Participation
         Agreement, the Uniform Commercial Code Financing Statements, the
         Subordination Agreements, the Intercreditor Agreement, the
         Landlord Waiver and Consents, the Borrowing Certificates, the
         Warrant Agreement and the Warrant and all other agreements,
         documents, instruments and certificates heretofore or hereafter
         executed or delivered to Agent in connection with any of the
         foregoing or the Loans, as the same may be amended, modified or
         supplemented from time to time.

                  "Maximum Loan Amount" shall mean $23,606,305.

                  "Minimum Termination Fee" shall mean (for the time period
         indicated) the amount equal to (i) 4% of the Facility Cap, if the
         date of notice of such termination by Borrower is after the
         Closing Date but before the second anniversary of the Closing
         Date; and (ii) 3% of the Facility Cap, if the date of notice of
         such termination by Borrower is on or after the second anniversary
         of the Closing Date.

                  "Real Property" shall mean shall mean that certain
         property located at (a) 17750 Cali Drive, Houston, Texas 77090
         (Cypress Creek Hospital), (b) 6500 Hornwood Drive, Houston, Texas
         77074 (West Oaks Hospital), (c) 3019 Falstaff Road, Raleigh, North
         Carolina (Holly Hill Hospital), (d) 1106 W. Dittmar Road, Austin,
         Texas 78745 (Texas NeuroRehab Center) and (e) 8311 West Roosevelt
         Road, Forest Park, Illinois 60130 (Riveredge Hospital), each as
         more particularly described in its respective Mortgage.

                  "Revolving Facility" shall mean a revolving credit
         facility provided by Lenders to Borrower pursuant to Section 2.1.

                  "Stock Pledge Agreement" shall mean, collectively and
         each individually, (i) that certain Stock Pledge Agreement, as
         amended by that certain First Amendment to Stock Pledge Agreement,
         executed by PSI in favor of Agent, for the benefit of itself and
         Lenders, (ii) that certain Stock Pledge Agreement executed by PS
         Tennessee in favor of Agent, for the benefit of itself and
         Lenders, (iii) that certain Stock Pledge Agreement executed by PSI
         Hospitals in favor of Agent, for the benefit of itself and
         Lenders, (iv) that certain Stock Pledge Agreement executed by
         Texas Hospitals in favor of Agent, for the benefit of itself and
         Lenders, (v) that certain Stock Pledge Agreement executed by
         Aeries

                                        12

<PAGE>

         Corporation in favor of Agent, for the benefit of itself and
         Lenders, and (vi) any additional stock pledge agreements executed
         by a Borrower or Guarantor in favor of Agent, for the benefit of
         itself and Lenders, as the same may be modified, amended or
         supplemented from time to time.

                  "Subordinated Debt" shall mean any Indebtedness of
         Borrower that is expressly subordinated to the Obligations,
         including, without limitation, (i) the Indebtedness identified in
         each Subordination Agreement, (ii) the 1818 Mezzanine Fund
         Subordinated Indebtedness and (iii) the Seller Notes.

                  "Term Loan" shall mean a term loan facility provided by
         Lenders to Borrower pursuant to Section 2.6.

                   "Term Note(s)" shall mean, collectively and each
         individually, Term Note A, Term Note B, Term Note C, Term Note D, Term
         Note E and any additional promissory note(s) payable to the order of
         each Lender executed by Borrower evidencing the Term Loan, as the same
         may be modified, amended or supplemented from time to time.

         2.15     AMENDMENT TO ANNEX I. Effective as of the date of this
Amendment, Annex I shall be amended and restated to read as set forth on Annex I
attached hereto.

         2.16     AMENDMENT TO SCHEDULE 5.3. Effective as of the date of this
Amendment, Schedule 5.3 shall be amended and restated to read as set forth on
Schedule 5.3 attached hereto.

         2.17     AMENDMENT TO SCHEDULE 5.4. Effective as of the date of this
Amendment, Schedule 5.4 shall be amended and restated to read as set forth on
Schedule 5.4 attached hereto.

         2.18     AMENDMENT TO SCHEDULE 5.15. Effective as of the date of this
Amendment, Schedule 5.15 shall be amended and restated to read as set forth on
Schedule 5.15 attached hereto.

         2.19     AMENDMENT TO SCHEDULE 5.16. Effective as of the date of this
Amendment, Schedule 5.16 shall be amended and restated to read as set forth on
Schedule 5.16 attached hereto.

         2.20     AMENDMENT TO SCHEDULE 5.17. Effective as of the date of this
Amendment, Schedule 5.17 shall be amended and restated to read as set forth on
Schedule 5.17 attached hereto.

         2.21     AMENDMENT TO SCHEDULE 5.18A. Effective as of the date of this
Amendment, Schedule 5.18A shall be amended and restated to read as set forth on
Schedule 5.18A attached hereto.

         2.22     AMENDMENT TO SCHEDULE 5.18B. Effective as of the date of this
Amendment, Schedule 5.18B shall be amended and restated to read as set forth on
Schedule 5.18B attached hereto.

                                       13

<PAGE>

         2.23     AMENDMENT TO SCHEDULE 7.1. Effective as of the date of this
Amendment, Schedule 7.1 shall be amended and restated to read as set forth on
Schedule 7.1 attached hereto.

         2.24     AMENDMENT TO SCHEDULE A-1. Effective as of the date of this
Amendment, Schedule A-1 shall be amended and restated to read as set forth on
Schedule A-1 attached hereto.

                                  ARTICLE III
                              CONDITIONS PRECEDENT

         3.01     CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment is subject to the satisfaction of the following conditions precedent
in a manner satisfactory to Agent, unless specifically waived in writing by
Lender:

                  (a)      Agent shall have received each of the following, each
         in form and substance satisfactory to Agent, in its sole discretion,
         and, where applicable, each duly executed by each party thereto:

                           (i)      this Amendment, duly executed by Borrower;

                           (ii)     Term Note E, duly executed by Borrower;

                           (iii)    that certain First Amendment to Stock Pledge
                  Agreement, duly executed by PSI in favor of Agent, for the
                  benefit of itself and Lenders, together with all appropriate
                  stock powers and stock certificates;

                           (iv)     that certain Stock Pledge Agreement duly
                  executed by Aeries Corporation in favor of Agent, for the
                  benefit of itself and Lenders, together with all appropriate
                  stock powers and stock certificates;

                           (v)      the Joinder Agreement, duly executed by
                  Aeries Corporation and Aeries Acquisition;

                           (vi)     a Borrowing Certificate for the June 28,
                  2002 requested Advance;

                           (vii)    a Secretary's Incumbency Certificate from
                  each Borrower (except Aeries Corporation and Aeries
                  Acquisition) certified by the secretary of each Borrower with
                  specimen signatures of the officers of such Borrower who are
                  authorized to sign such documents attaching (A) copies of
                  amendments, if any, to such Borrower's constituent
                  organizational documents, (B) certified copies of the
                  resolutions of the Board of Directors of Borrower authorizing
                  the execution, delivery and performance of this Amendment and
                  any and all other Loan Documents executed by Borrower in
                  connection herewith, and (C) true and correct copies of
                  applicable certificates of existence, good standing and/or
                  authority to transact business issued by the appropriate
                  governmental official in the state in which such Borrower is
                  incorporated or organized, as applicable, and in each other
                  state in which such Borrower is required to be qualified;

                                       14

<PAGE>

                           (viii)   a Secretary's Incumbency Certificate from
                  each of Aeries Corporation and Aeries Acquisition certified by
                  the secretary of each Borrower with specimen signatures of the
                  officers of such Borrower who are authorized to sign such
                  documents attaching (A) a copy of such Borrower's constituent
                  organizational documents, (B) certified copies of the
                  resolutions of the Board of Directors of Borrower authorizing
                  the execution, delivery and performance of this Amendment and
                  any and all other Loan Documents executed by Borrower in
                  connection herewith, and (C) true and correct copies of
                  applicable certificates of existence, good standing and/or
                  authority to transact business issued by the appropriate
                  governmental official in the state in which such Borrower is
                  incorporated or organized, as applicable, and in each other
                  state in which such Borrower is required to be qualified;

                           (ix)     the written legal opinion of counsel for
                  Borrower and Guarantors, including local Chicago, Illinois
                  counsel, in form and substance satisfactory to Agent and its
                  counsel;

                           (x)      the Subordination Agreements, duly executed
                  by each such holder of Subordinated Debt, each in form and
                  substance satisfactory to Agent;

                           (xi)     the Intercreditor Agreement, duly executed
                  by 1818 Mezzanine Fund and Borrower, in form and substance
                  satisfactory to Agent;

                           (xii)    each other applicable Loan Document, each
                  duly executed, each in form and substance satisfactory to
                  Agent in its sole discretion;

                           (xiii)   (A) a report of Uniform Commercial Code
                  financing statement, tax and judgment lien searches performed
                  with respect to each Borrower and Guarantor in each
                  jurisdiction determined by Agent in its sole discretion, and
                  such report shall show no Liens on the Collateral (other than
                  Permitted Liens), (B) each document (including, without
                  limitation, any Uniform Commercial Code financing statement)
                  required by any Loan Document or under law or requested by
                  Agent to be filed, registered or recorded to create, in favor
                  of Agent, for the benefit of Lenders, a perfected first
                  priority security interest upon the Collateral, and (C)
                  evidence of each such filing, registration or recordation and
                  of the payment by Borrower of any necessary fee, tax or
                  expense relating thereto;

                           (xiv)    all in form and substance satisfactory to
                  Agent in its sole discretion, such consents, approvals and
                  agreements, including, without limitation, any applicable
                  Landlord Waivers and Consents with respect to any and all
                  leases pertaining to the Riveredge Hospital Facility, from
                  such third parties as Agent and its counsel shall determine
                  are necessary or desirable with respect to (A) the Loan
                  Documents and/or the transactions contemplated thereby, and/or
                  (B) claims against any Borrower or Guarantor or the
                  Collateral;

                                       15

<PAGE>

                           (xv)     a mortgagee title insurance policy on the
                  Riveredge Hospital Facility (or binding commitment therefor)
                  in form and substance and from Chicago Title Insurance Company
                  or such other title insurer reasonably acceptable to Agent, on
                  an A.L.T.A. 1970 form designated by Agent, which title
                  insurance policy shall (A) specifically contain no exception
                  as to survey matters or creditors rights, (B) contain
                  affirmative coverage against mechanics', contractors',
                  suppliers' and/or materialmen's liens, which may be filed or
                  unfiled, (C) must affirmatively insure that the mortgage or
                  deed of trust is a valid first lien against the fee simple,
                  marketable estate, insuring Agent and Lenders for a sum not
                  less than the maximum principal amount of the Term Loan, (D)
                  insure any easements or leases necessary to access the
                  Riveredge Hospital Facility and such easements or leases shall
                  not be subject to any prior liens, encumbrances, covenants or
                  restrictions and (E) contain such endorsements as may be
                  reasonably required by Agent; provided, however, that such
                  mortgagee title insurance policy may contain the usual
                  "pending disbursements" clause, if applicable;

                           (xvi)    evidence that Borrower has a fee simple
                  title to the Riveredge Hospital Facility and to the material
                  fixtures, equipment, furniture and personal property
                  encumbered by the Loan Documents, and such title shall be
                  marketable, and free and clear of all defects, liens,
                  encumbrances, security interests, assessments, restrictions
                  and easements, unless otherwise approved in writing by Agent;

                           (xvii)   in form and substance reasonably
                  satisfactory to Agent, evidence that the Riveredge Hospital
                  Facility and all improvements (to the extent required) (i)
                  comply with applicable codes, regulations and ordinances, (ii)
                  are zoned for their current use, (iii) are adequately served
                  by public utilities, (iv) are completed free of mechanics and
                  materialmens liens, (v) are not the subject to any pending or
                  threatened litigation, (vi) are not the subject of any pending
                  or threatened condemnation proceeding, (vii) have not been
                  damaged by fire or other casualty and (viii) are not within a
                  special flood hazard area and are not eligible for flood
                  insurance under the U.S. Flood Disaster Protection Act of
                  1973, as amended, or such other flood insurance which in
                  Agent's reasonable opinion adequately protects against the
                  risk of damage by flood;

                           (xviii)  in form and substance reasonably
                  satisfactory to Agent, evidence that all taxes and assessments
                  on all Real Property owned by Borrower and Guarantors have
                  currently been paid, settlement copies of all recent real
                  estate tax bills, with proof of payment, together with
                  evidence that the mortgaged premises is a separately
                  identifiable tax lot;

                           (xix)    in form and substance reasonably
                  satisfactory to Agent, a report of a search of the public
                  records performed against the Riveredge Hospital Facility,
                  Borrower and Guarantor in each state and local jurisdiction,
                  and such report shall show no conditional sales contracts,
                  chattel mortgages, leases of personalty, financing statements
                  or title retention agreements filed and/or recorded against
                  the

                                       16

<PAGE>

                  Riveredge Hospital Facility, Borrower and Guarantor, other
                  than liens which are specifically permitted under this
                  Agreement;

                           (xx)     each in form and substance satisfactory to
                  Agent, any and all property as-built A.L.T.A. surveys,
                  environmental reports and other third party reports as Agent
                  shall deem necessary or appropriate; provided, that the
                  environmental report must address such matters as Agent shall
                  request in its sole and absolute discretion, including,
                  without limitation, confirmation of the absence of asbestos in
                  any form that is or could become friable and confirmation of
                  the absence of underground storage tanks;

                           (xxi)    copies of all licenses and permits required
                  for Borrower to conduct the business in which it is currently
                  engaged or is contemplated pursuant to the Loan Documents or
                  shall have received an opinion from licensure counsel
                  verifying that all approvals for licensure have been granted;

                           (xxii)   copies of all material agreements between
                  Borrower and any healthcare management consultants and/or
                  agents, including documents relating to borrowed money,
                  capital leases and occupancy leases;

                           (xxiii)  copies of all participation agreements
                  relating to medical plans of Borrower;

                           (xxiv)   the 1818 Mezzanine Fund Subordinated Debt
                  Documents, duly executed by PSI and 1818 Mezzanine Fund and in
                  form and substance satisfactory to Agent;

                           (xxv)    that certain Stock Purchase Agreement, duly
                  executed by PSI and the Shareholders of Aeries Corporation and
                  in form and substance satisfactory to Agent; and

                           (xxvi)   all other documents Agent may request with
                  respect to any matter relevant to this Amendment or the
                  transactions contemplated hereby.

                  (b)      If access to the Riveredge Hospital Facility is by
         means of easements or leases, said easements or leases shall be
         satisfactory in form and substance to Agent, shall be covered by the
         mortgagee title insurance policy.

                  (c)      All streets necessary to serve the Riveredge Hospital
         Facility for the use represented by Borrower shall have been completed
         and shall be serviceable and all streets to be dedicated shall have
         been dedicated and accepted for public use and maintenance.

                  (d)      The representations and warranties contained herein
         and in the Loan Agreement and the other documents executed in
         connection with the Loan Agreement (herein referred to as "LOAN
         DOCUMENTS"), as each is amended hereby, shall be true and

                                       17

<PAGE>

         correct as of the date hereof, as if made on the date hereof, except
         for such representations and warranties as are by their express terms
         limited to a specific date.

                  (e)      Agent shall have completed its due diligence
         examinations of Borrower, each Subsidiary and each Guarantor, the
         results of which shall be satisfactory in form and substance to Agent.

                  (f)      No Default or Event of Default shall have occurred
         and be continuing, unless such Default or Event of Default has been
         otherwise specifically waived in writing by Lender.

                  (g)      On or before the Closing Date, Borrower shall pay to
         Agent, for the ratable benefit of Lenders, $39,750, as a nonrefundable
         commitment fee. Borrower shall pay Agent a structuring fee as provided
         in the letter agreement between Agent and Borrower dated as of the date
         of the Second Amendment.

                  (h)      The 1818 Mezzanine Fund Subordinated Debt Documents
         shall have been duly executed and delivered by the parties thereto and
         shall be on terms and conditions satisfactory to Agent in its sole
         discretion, and all conditions precedent contemplated by those
         agreements shall have been satisfied or waived.

                  (i)      The Stock Purchase Agreement and all documents
         related thereto shall have been duly executed and delivered by the
         parties thereto and shall be on terms and conditions satisfactory to
         Agent in its sole discretion, and all conditions precedent contemplated
         by those agreements shall have been satisfied or waived.

                  (j)      All corporate proceedings taken in connection with
         the transactions contemplated by this Amendment and all documents,
         instruments and other legal matters incident thereto shall be
         satisfactory to Lender.

                                   ARTICLE IV
                                 LIMITED WAIVER

         By execution of this Amendment, Agent and Lenders hereby waive any
Event of Default that would otherwise occur or exist under Section 7.4 of the
Loan Agreement solely as a result of Borrower's creation of Holly Hill Real
Estate, Cypress Creek Real Estate, West Oaks Real Estate and Neuro Rehab Real
Estate. Except as specifically provided in this Article IV, nothing contained
herein shall be construed as a consent or waiver by Agent or Lenders of any
covenant or provision of the Loan Agreement (including, but not limited to, the
consummation of the PMR Merger), the other Loan Documents, this Amendment or any
other contract or instrument among the Borrower, Agent and Lenders, and the
failure of Agent or Lenders at any time or times hereafter to require strict
performance by the Borrower of any provision thereof shall not waive, affect or
diminish any right of Agent or Lenders to thereafter demand strict compliance
therewith.

                                       18

<PAGE>

                                   ARTICLE V
                  RATIFICATIONS, REPRESENTATIONS AND WARRANTIES

         5.01     RATIFICATIONS. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Loan Agreement and the other Loan Documents, and, except as
expressly modified and superseded by this Amendment, the terms and provisions of
the Loan Agreement and the other Loan Documents are ratified and confirmed and
shall continue in full force and effect. The Borrower, the Agent and Lenders
agree that the Loan Agreement and the other Loan Documents, as amended hereby,
shall continue to be legal, valid, binding and enforceable in accordance with
their respective terms.

         5.02     REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to Lenders that (a) the execution, delivery and performance of this
Amendment and any and all other Loan Documents executed and/or delivered in
connection herewith have been authorized by all requisite corporate or limited
partnership or limited liability company action (as applicable) on the part of
the Borrower and will not violate the Articles (or Certificates) of
Incorporation or Bylaws of the Borrower that are corporations or the limited
partnership agreements or certificates of limited partnership of the Borrower
that are limited partnerships or the articles of formation/organization,
regulations or limited liability company agreements of the Borrower that are
limited liability companies; (b) each of the Borrower's Board of Directors (or
the general partner of the applicable limited partnership) or the members or the
Board of Managers of the applicable limited liability company has authorized the
execution, delivery and performance of this Amendment and any and all other Loan
Documents executed and/or delivered in connection herewith; (c) the
representations and warranties contained in the Loan Agreement, as amended
hereby, and any other Loan Document are true and correct on and as of the date
hereof and on and as of the date of execution hereof as though made on and as of
each such date; (d) no Default or Event of Default under the Loan Agreement, as
amended hereby, has occurred and is continuing, unless such Default or Event of
Default has been specifically waived in writing by Lenders; (e) the Borrower is
in full compliance with all covenants and agreements contained in the Loan
Agreement and the other Loan Documents, as amended hereby; and (f) the Borrower
has not amended their Articles (or Certificates) of Incorporation or their
Bylaws or similar organizational documents since the date of the Loan Agreement,
except as otherwise disclosed to Agent.

                                   ARTICLE VI
                            MISCELLANEOUS PROVISIONS

         6.01     SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in the Loan Agreement or any other Loan
Document, including, without limitation, any document furnished in connection
with this Amendment, shall survive the execution and delivery of this Amendment
and the other Loan Documents, and no investigation by Agent and Lenders or any
closing shall affect the representations and warranties or the right of Agent
and Lenders to rely upon them.

         6.02     REFERENCE TO LOAN AGREEMENT. Each of the Loan Agreement and
the other Loan Documents, and any and all other Loan Documents, documents or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Loan Agreement, as amended hereby, are hereby
amended so that any reference in the Loan Agreement

                                       19

<PAGE>

and such other Loan Documents to the Loan Agreement shall mean a reference to
the Loan Agreement, as amended hereby.

         6.03     EXPENSES OF AGENT AND LENDERS. As provided in the Loan
Agreement, Borrower agrees to pay on demand all costs and expenses incurred by
Agent and Lenders, or their Affiliates, in connection with the preparation,
negotiation, and execution of this Amendment and the other Loan Documents
executed pursuant hereto and any and all amendments, modifications, and
supplements thereto, including, without limitation, the costs and fees of legal
counsel, and all costs and expenses incurred by Agent and Lenders in connection
with the enforcement or preservation of any rights under the Loan Agreement, as
amended hereby, or any other Loan Documents, including, without, limitation, the
costs and fees of legal counsel.

         6.04     SEVERABILITY. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.

         6.05     SUCCESSORS AND ASSIGNS. This Amendment is binding upon and
shall inure to the benefit of Agent, Lenders and Borrower and their respective
successors and assigns, except that Borrower may not assign or transfer any of
their rights or obligations hereunder without the prior written consent of Agent
and Lenders.

         6.06     COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument. This Amendment may be executed by facsimile transmission, which
facsimile signatures shall be considered original executed counterparts for
purposes of this Section 6.06, and each party to this Amendment agrees that it
will be bound by its own facsimile signature and that it accepts the facsimile
signature of each other party to this Amendment.

         6.07     EFFECT OF WAIVER. No consent or waiver, express or implied, by
Agent or Lenders to or for any breach of or deviation from any covenant or
condition by Borrower shall be deemed a consent to or waiver of any other breach
of the same or any other covenant, condition or duty.

         6.08     HEADINGS. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.

         6.09     APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF MARYLAND.

         6.10     FINAL AGREEMENT. THE LOAN AGREEMENT AND THE OTHER LOAN
DOCUMENTS, EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE
PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS
EXECUTED. THE LOAN AGREEMENT AND THE OTHER LOAN

                                       20

<PAGE>

DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION,
WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE,
EXCEPT BY A WRITTEN AGREEMENT SIGNED BY BORROWER AND LENDER.

         6.11     RELEASE BY THE BORROWER. THE BORROWER HEREBY ACKNOWLEDGES THAT
THEY HAVE NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF
ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR
ANY PART OF ITS LIABILITY TO REPAY THE "OBLIGATIONS" OR TO SEEK AFFIRMATIVE
RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM AGENT OR LENDERS. THE BORROWER
HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES AGENT AND
LENDERS AND THEIR PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS
(COLLECTIVELY, THE "RELEASED PARTIES"), FROM ALL POSSIBLE CLAIMS, DEMANDS,
ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER,
KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED,
CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART
ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR
HEREAFTER HAVE AGAINST THE RELEASED PARTIES, IF ANY, AND IRRESPECTIVE OF WHETHER
ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR
OTHERWISE, AND ARISING FROM ANY "LOANS", INCLUDING, WITHOUT LIMITATION, ANY
CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST
IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND
REMEDIES UNDER THE LOAN AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR
AND EXECUTION OF THIS AMENDMENT.

             [The Remainder of this Page Intentionally Left Blank]

                                       21

<PAGE>

         IN WITNESS WHEREOF, this Amendment has been executed and is effective
as of the date first above-written.

                             BORROWER:

                             PSYCHIATRIC SOLUTIONS, INC.
                             PSYCHIATRIC SOLUTIONS OF ALABAMA, INC.
                             PSYCHIATRIC SOLUTIONS OF FLORIDA, INC.
                             PSYCHIATRIC SOLUTIONS OF TENNESSEE, INC.
                             SOLUTIONS CENTER OF LITTLE ROCK, INC.
                             PSYCHIATRIC SOLUTIONS OF NORTH CAROLINA, INC.
                             PSI COMMUNITY MENTAL HEALTH AGENCY MANAGEMENT, INC.
                             PSI-EAP, INC.
                             SUNSTONE BEHAVIORAL HEALTH, INC.
                             THE COUNSELING CENTER OF MIDDLE TENNESSEE, INC.
                             PSI HOSPITALS, INC.
                             PSI TEXAS HOSPITALS, LLC
                             PSYCHIATRIC PRACTICE MANAGEMENT OF ARKANSAS, INC.
                             AERIES HEALTHCARE CORPORATION
                             AERIES HEALTHCARE OF ILLINOIS
                             HOLLY HILL REAL ESTATE, LLC

                             By:      /s/ Steven T. Davidson
                                 ---------------------------------------------
                             Name:       Steven T. Davidson
                                  --------------------------------------------
                             Title:      Vice President
                                    ------------------------------------------

<PAGE>

                         TEXAS CYPRESS CREEK HOSPITAL, L.P.
                         TEXAS WEST OAKS HOSPITAL, L.P.
                         NEURO INSTITUTE OF AUSTIN, L.P.
                         CYPRESS CREEK REAL ESTATE, L.P.
                         WEST OAKS REAL ESTATE, L.P.
                         NEURO REHAB REAL ESTATE, L.P.

                         By: PSI Texas Hospitals, LLC, general partner for each

                                  By:  /s/ Steven T. Davidson
                                     -----------------------------------------
                                  Name: Steven T. Davidson
                                       ---------------------------------------
                                  Title: Vice President
                                        --------------------------------------

                         AGENT AND LENDER:

                         CAPITALSOURCE FINANCE LLC

                         By: /s/ Kathleen M. Miko
                            --------------------------------------------------
                         Name: Kathleen M. Miko
                              ------------------------------------------------
                         Title: Vice President & Deputy General Counsel
                                ----------------------------------------------

<PAGE>

                                     ANNEX I

                               FINANCIAL COVENANTS

         1)       MINIMUM CENSUS

                  As of the last day of each Monthly Test Period, (a) the
aggregate combined census levels at the facilities owned, operated or leased by
Borrower and (b) the census level at each facility, shall be not less than 85%
of the census levels for such applicable calendar months for the facilities
listed on Schedule A-1.

         2)       NET LEVERAGE RATIO (TERM LOAN/EBITDA)

                  As of the last day of each Leverage Test Period, the Net
Leverage Ratio shall not exceed 3.00:1.00.

         3)       TOTAL LEVERAGE RATIO (TOTAL DEBT/EBITDA)

                  As of the last day of each Leverage Test Period beginning on
June 30, 2002 through and including December 31, 2002, the Total Leverage Ratio
shall not exceed 3.94:1.00. As of the last day of each Leverage Test Period
beginning on January 1, 2003 through and including March 31, 2003, the Total
Leverage Ratio shall not exceed 3.72:1.00. As of the last day of each Leverage
Test Period beginning on April 1, 2003 through and including December 31, 2003,
the Total Leverage Ratio shall not exceed 3.50:1.00. As of the last day of each
Leverage Test Period beginning on January 1, 2004 through and including December
31, 2004, the Total Leverage Ratio shall not exceed 3.28:1.00. As of the last
day of each Leverage Test Period beginning on January 1, 2005 through and
including December 31, 2005, the Total Leverage Ratio shall not exceed
3.06:1.00. As of the last day of each Leverage Test Period after January 1,
2006, the Total Leverage Ratio shall not exceed 2.84:1.00.

         4)       SENIOR LEVERAGE RATIO

                  As of the last day of each Leverage Test Period beginning on
June 30, 2002 through and including March 31, 2003, the Senior Leverage shall
not exceed 3.06:1.00. As of the last day of each Leverage Test Period beginning
on April 1, 2003 through and including December 31, 2003, the Senior Leverage
shall not exceed 2.84:1.00. As of the last day of each Leverage Test Period
beginning on January 1, 2004 through and including December 31, 2004, the Senior
Leverage shall not exceed 2.63:1.00. As of the last day of each Leverage Test
Period after January 1, 2005, the Senior Leverage shall not exceed 2.41:1.00.

         5)       INTEREST COVERAGE RATIO (EBITDA/INTEREST EXPENSE)

                  As of the last day of each Monthly Test Period beginning on
June 30, 2002 through and including March 31, 2003, the Interest Coverage Ratio
shall not be less than 2.25:1.00. As of the last day of each Monthly Test Period
beginning on April 1, 2003 through

<PAGE>

and including March 31, 2004, the Interest Coverage Ratio shall not be less than
2.53:1.00. As of the last day of each Monthly Test Period after April 1, 2004,
the Interest Coverage Ratio shall not be less than 2.81:1.00.

         6)       FIXED CHARGE RATIO (EBITDA/FIXED CHARGES)

                  As of the last day of each Monthly Test Period beginning June
30, 2002 through and including July 31, 2002, the Fixed Charge Ratio shall be a
minimum of 1.50:1.00. As of the last day of each Monthly Test Period beginning
August 1, 2002 through and including March 31, 2003, the Fixed Charge Ratio
shall be a minimum of 1.35:1.00. As of the last day of each Monthly Test Period
after April 1, 2003, the Fixed Charge Ratio shall not be less than 1.50:1.00.
For purposes of this financial covenant only, the following shall be excluded
from calculation of the Fixed Charge Ratio: (a) the aggregate amount of all
principal payments made in an aggregate amount not to exceed $2,500,000 by
Borrower to The Brown Schools, Inc. in accordance with the provisions of the
note evidencing such Subordinated Debt, (b) all non-cash interest expenses
related to such Seller Notes and (c) such other non-occurring charges as Agent
may consent to in its sole discretion (e.g., computer conversions).

         7)       MINIMUM DEBT SERVICE COVERAGE RATIO

                  As of the last day of each Monthly Test Period, the Debt
Service Coverage Ratio shall not exceed 1.90:1.00.

         8)       MINIMUM UNIT MANAGEMENT DIVISION EBITDA

                  As of the last day of each Monthly Test Period after June 30,
2002, Borrower shall not permit its EBITDA for each Monthly Test Period, to be
less than an annualized amount equal to $3,500,000; provided, however, that
beginning June 30, 2002 through and including the earlier to occur of the PMR
Merger and (b) August 31, 2002, Borrower shall not permit its EBITDA for each
Monthly Test Period to be less than an annualized amount equal to $5,500,000.
For purposes of this financial covenant, the term "EBITDA" of any Person shall
relate solely to the Unit Management Division and shall be calculated giving
effect to overhead allocated to the Unit Management Division.

         For purposes of the covenants set forth in this Annex I, the terms
listed below shall have the following meanings:

                  "Capital Expenditures" shall mean, for any Test Period, the
sum (without duplication) of all expenditures (whether paid in cash or accrued
as liabilities) during the Test Period that are or should be treated as capital
expenditures under GAAP.

                  "Cash Equivalents" shall mean (a) securities issued, or
directly and fully guaranteed or insured, by the United States or any agency or
instrumentality thereof (provided, that the full faith and credit of the United
States is pledged in support thereof) having maturities of not more than six
months from the date of acquisition, (b) U.S. dollar denominated time

<PAGE>

deposits, certificates of deposit and bankers' acceptances of (i) any domestic
commercial bank of recognized standing having capital and surplus in excess of
$500,000,000, or (ii) any bank (or the parent company of such bank) whose
short-term commercial paper rating from Standard & Poor's Ratings Services
("S&P") is at least A-2 or the equivalent thereof or from Moody's Investors
Service, Inc. ("MOODY'S") is at least P-2 or the equivalent thereof in each case
with maturities of not more than six months from the date of acquisition (any
bank meeting the qualifications specified in clauses (b)(i) or (ii), an
"Approved Bank"), (c) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (a), above,
entered into with any Approved Bank, (d) commercial paper issued by any Approved
Bank or by the parent company of any Approved Bank and commercial paper issued
by, or guaranteed by, any industrial or financial company with a short-term
commercial paper rating of at least A-2 or the equivalent thereof by S&P or at
least P-2 or the equivalent thereof by Moody's, or guaranteed by any industrial
company with a long term unsecured debt rating of at least A or A2, or the
equivalent of each thereof, from S&P or Moody's, as the case may be, and in each
case maturing within six months after the date of acquisition and (e)
investments in money market funds substantially all of whose assets are
comprised of securities of the type described in clauses (a) through (d) above.

                  "Debt Service Coverage Ratio" shall mean, at any date of
determination, for Borrower individually and on a consolidated and consolidating
basis, without duplication, the ratio of (a) EBITDA for the Monthly Test Period
most recently ended before such date (taken as one accounting period), to (b)
Total Debt Service for the Monthly Test Period most recently ended before such
date (taken as one accounting period).

                  "EBITDA" shall mean, for any Test Period, the sum, without
duplication, of the following for Borrower, on a consolidated and consolidating
basis: Net Income determined in accordance with GAAP, plus, (a) Interest
Expense, (b) taxes on income, whether paid, payable or accrued, (c) depreciation
expense, (d) amortization expense, (e) all other non-cash, non-recurring charges
and expenses, excluding accruals for cash expenses made in the ordinary course
of business, and (f) gain or loss from any sale of assets, other than sales in
the ordinary course of business, all of the foregoing determined in accordance
with GAAP.

                  "Fixed Charge Ratio" shall mean, at any date of determination,
for Borrower individually and collectively on a consolidated and consolidating
basis, the ratio of (a) EBITDA for the Monthly Test Period most recently ended
before such date, to (b) Fixed Charges for the Monthly Test Period most recently
ended before such date, in each case taken as one accounting period.

                  "Fixed Charges" shall mean, on any calculation date, for any
Monthly Test Period, the sum of the following for Borrower, individually and
collectively, on a consolidated and consolidating basis: (a) Total Debt Service
for such period, (b) Capital Expenditures and management and services fees
during such period, (c) income taxes paid in cash or accrued during such period,
(d) dividends paid or accrued or declared during such period and (e) and
principal payments made by Borrower pursuant to a HUD Financing. Any principal
payments by Borrower made pursuant to the Revolving Facility shall be excluded
from this definition.

<PAGE>

                  "Interest Coverage Ratio" shall mean, at any date of
determination, for Borrower individually and on a consolidated and consolidating
basis, without duplication, the ratio of (a) EBITDA for the Monthly Test Period
most recently ended before such date (taken as one accounting period), to (b)
Interest Expense for the Monthly Test Period most recently ended before such
date (taken as one accounting period).

                  "Interest Expense" shall mean, for any Test Period, total
interest expense (including attributable to Capital Leases in accordance with
GAAP) of Borrower individually and collectively, on a consolidated and
consolidating basis with respect to all outstanding Indebtedness, including,
without limitation, (i) the Interest Expense on the aggregate outstanding amount
of the Term Loan on such date, (ii) the Interest Expense on the aggregate amount
of all Advances outstanding under the Revolving Facility on such date, (iii) the
Interest Expense on the aggregate amount of all Capitalized Lease Obligations on
such date, (iv) the Interest Expense on the aggregate outstanding amount of all
1818 Mezzanine Fund Subordinated Indebtedness on such date, (v) the Interest
Expense on the aggregate outstanding amount of the Seller Notes, excluding all
non-cash interest expenses related to such Seller Notes, (vi) Interest Expense
on any other Indebtedness on such date, (vii) the Interest Expense on the
aggregate outstanding amount of any HUD Financing and (vii) capitalized
interest, but excluding commissions, discounts and other fees owed with respect
to letters of credit and bankers' acceptance financing and net costs under
Interest Rate Agreements.

                  "Interest Rate Agreement" shall mean any interest rate swap,
cap or collar agreement or other similar agreement or arrangement designed to
hedge the position with respect to interest rates.

                  "Leverage Test Period" shall mean a period ending on the last
calendar day of each month, including the twelve most recent calendar months
then ended (taken as one accounting period), or such other period as specified
in the Agreement or any Annex thereto.

                  "Monthly Test Period" shall mean a period ending on the last
calendar day of each month, including the three most recent calendar months then
ended (taken as one accounting period), or such other period as specified in the
Agreement or any Annex thereto.

                  "Net Income" shall mean, for any Test Period, the net income
(or loss) of Borrower individually and collectively on a consolidated and
consolidating basis for such period taken as a single accounting period
determined in conformity with GAAP; provided, that there shall be excluded (i)
the income (or loss) of any Person in which any other Person (other than
Borrower) has a joint interest, except to the extent of the amount of dividends
or other distributions actually paid to a Borrower by such Person during such
period, (ii) the income (or loss) of any Person accrued prior to the date it
becomes a Borrower or is merged into or consolidated with a Borrower or that
Person's assets are acquired by a Borrower, (iii) the income of any Subsidiary
of Borrower to the extent that the declaration or payment of dividends or
similar distributions of that income by that Subsidiary is not at the time
permitted by operation of the terms of the charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary, (iv) compensation expense resulting from the issuance of
capital stock, stock options or stock appreciation rights issued to former or

<PAGE>

current employees, including officers, of a Borrower, or the exercise of such
options or rights, in each case to the extent the obligation (if any) associated
therewith is not expected to be settled by the payment of cash by a Borrower or
any affiliate thereof, and (v) compensation expense resulting from the
repurchase of capital stock, options and rights described in clause (iv) of this
definition of Net Income.

                  "Net Leverage Ratio" shall mean, at any date of determination,
for Borrower individually and collectively on a consolidated and consolidating
basis, the ratio of (i) the Term Loan balance on such date, to (ii) EBITDA
(including overhead without duplication to overhead allocated to the Unit
Management Division) generated from the operation of Borrower owned Real
Property.

                  "Senior Leverage Ratio" shall mean, at any date of
determination, for Borrower individually and collectively on a consolidated and
consolidating basis, the ratio of (i) the aggregate outstanding amount of (A)
the aggregate outstanding amount of the Term Loan on such date, (B) the
aggregate amount of all Advances outstanding under the Revolving Facility on
such date, (C) the aggregate amount of all Capitalized Lease Obligations on such
date, and (D) the aggregate outstanding amount of all HUD Financings to (ii)
EBITDA (including overhead without duplication to overhead allocated to the Unit
Management Division).

                  "Test Period" means, individually and/or collectively, Monthly
Test Period and Leverage Test Period.

                  "Total Debt" shall mean, at any date of determination, for
Borrower individually and collectively on a consolidated and consolidating
basis, the sum of (i) the aggregate outstanding amount of the Term Loan on such
date, (ii) the aggregate amount of all Advances outstanding under the Revolving
Facility on such date, (iii) the aggregate amount of all Capitalized Lease
Obligations on such date, (iv) the aggregate outstanding amount of all
Subordinated Debt on such date, (v) the aggregate outstanding amount of all
Seller Notes, and (vi) any other Indebtedness on such date, (vii) the aggregate
outstanding amount of all HUD Financings, less (viii) cash held on such date and
(ix) Cash Equivalents held on such date.

                  "Total Debt Service" shall mean for any period, for Borrower
individually and collectively on a consolidated and consolidating basis, the sum
of (i) scheduled or other required payments of principal on Indebtedness, and
(ii) Interest Expense, in each case for such period.

                  "Total Leverage Ratio" shall mean, at any date of
determination, for Borrower individually and collectively on a consolidated and
consolidating basis, the ratio of (i) Total Debt on such date, to (ii) EBITDA
(including overhead without duplication to overhead allocated to the Unit
Management Division).

                  "Unit Management Division" shall mean Borrower's business unit
(which operates under Sunstone Behavioral Health, Inc. and its Subsidiaries)
which provides management services to the psychiatric units of medical/surgical
hospitals pursuant to management contracts.<PAGE>
                                                                   EXHIBIT 10.21

                                   TERM NOTE E

U.S. $7,950,000                                           Dated:  June 28, 2002

         FOR VALUE RECEIVED, the undersigned, PSYCHIATRIC SOLUTIONS, INC., a
Delaware corporation, PSYCHIATRIC SOLUTIONS OF ALABAMA, INC., a Tennessee
corporation, PSYCHIATRIC SOLUTIONS OF FLORIDA, INC., a Tennessee corporation,
PSYCHIATRIC SOLUTIONS OF TENNESSEE, INC., a Tennessee corporation, SOLUTIONS
CENTER OF LITTLE ROCK, INC., a Tennessee corporation, PSYCHIATRIC SOLUTIONS OF
NORTH CAROLINA, INC., a Tennessee corporation, PSI COMMUNITY MENTAL HEALTH
AGENCY MANAGEMENT, INC., a Tennessee corporation, PSI-EAP, INC., a Delaware
corporation, SUNSTONE BEHAVIORAL HEALTH, INC., a Tennessee corporation, THE
COUNSELING CENTER OF MIDDLE TENNESSEE, INC., a Tennessee corporation, PSI
HOSPITALS, INC., a Delaware corporation, PSI TEXAS HOSPITALS, LLC, a Texas
limited liability company, PSYCHIATRIC PRACTICE MANAGEMENT OF ARKANSAS, INC., a
Tennessee corporation, TEXAS CYPRESS CREEK HOSPITAL, L.P., a Texas limited
partnership, TEXAS WEST OAKS HOSPITAL, L.P., a Texas limited partnership, NEURO
INSTITUTE OF AUSTIN, L.P., a Texas limited partnership, AERIES HEALTHCARE
CORPORATION, a Delaware corporation, AERIES HEALTHCARE OF ILLINOIS, INC., an
Illinois corporation, HOLLY HILL REAL ESTATE, LLC, a North Carolina limited
liability company, CYPRESS CREEK REAL ESTATE, L.P., a Texas limited partnership,
WEST OAKS REAL ESTATE, L.P., a Texas limited partnership, and NEURO REHAB REAL
ESTATE, L.P., a Texas limited partnership (individually and collectively,
"BORROWER"), hereby promises to pay to CAPITALSOURCE FINANCE LLC ("LENDER") the
unpaid principal amount at any time outstanding, which shall not exceed SEVEN
MILLION NINE HUNDRED FIFTY THOUSAND DOLLARS ($7,950,000) (the "TERM LOAN"), with
interest thereon and all other Obligations under the Revolving Credit and Term
Loan Agreement dated as of November 30, 2001, between Borrower, Agent and
Lenders (as those terms are defined therein) (as heretofore and may hereafter be
amended, supplemented or otherwise modified from time to time, the "LOAN
AGREEMENT"), on the Term Loan Maturity Date (as defined below) or otherwise at
the times and in the manner set forth in the Loan Agreement. Capitalized terms
used but not defined herein shall have the meanings given them in the Loan
Agreement.

         1.       INTEREST PAYMENTS. (a) Borrower promises to pay interest on
the outstanding principal amount of the Term Loan from the date of funding of
the Term Loan until such principal amount is irrevocably paid in full in cash.
Interest on the outstanding principal amount of the Term Loan under this Term
Note E (the "TERM NOTE") shall be due and payable monthly in arrears on the
first calendar day of each calendar month, commencing July 1, 2002, at an annual
rate of the Prime Rate, plus 4.75%; provided, however, that, notwithstanding any
other provision of this Agreement or any other Loan Document, the interest on
the outstanding principal balance of the Term Loan under this Term Note E shall
be not less than 10.0%, in each case calculated on the basis of a 360-day year
and for the actual number of calendar days elapsed in each interest calculation
period.

                  (b)      Advances under the Revolving Facility shall be made
automatically for the payment of interest on the Term Loan and other Obligations
on the date when due to the extent available and as provided for in the Loan
Agreement. Any payments of principal or interest or other amounts on or payments
under this Term Note not paid automatically through Advances under the Revolving
Facility as provided in the Loan Agreement shall be paid to

<PAGE>

Lender only by wire transfer on the date when due, without offset or
counterclaim, in dollars in immediately available funds as required in the Loan
Agreement. Notwithstanding and without limiting or being limited by any other
provision of this Term Note, any payments or prepayments received upon
termination or otherwise under this Term Note shall be credited and applied in
such manner and order as Lender shall decide in its sole discretion.

         2.       PRINCIPAL PAYMENT AND MATURITY. Unless earlier due and payable
or accelerated under the Loan Agreement, this Term Note shall mature, and the
outstanding principal balance hereunder and other Obligations under the Term
Loan, together with all other outstanding amounts due hereunder and under the
Loan Agreement, shall be made monthly pursuant to the Loan Agreement beginning
July 1, 2002 and continuing on the 1st day of each month thereafter through the
last month of the Term Loan Term; and (b) the unpaid principal of the Term Loan
and all other Obligations under the Term Loan shall be due and payable in full,
and this Term Note shall mature, if not earlier in accordance with the Loan
Agreement, on the earlier of (i) the occurrence of an Event of Default if
required pursuant to the Loan Agreement or Lender's demand upon an Event of
Default, and (ii) the last day of the Term Loan Term (such earlier date being
the "TERM LOAN MATURITY DATE"). Until such time as the Obligations relating to
the Term Loan are indefeasibly paid in full in cash and fully performed, fifty
percent (50%) of Borrower's Excess Cash Flow for each fiscal year shall be paid
by Borrower to Lender and shall be applied by Lender to reduce the outstanding
balance of the Obligations relating to the Term Loan all in accordance with the
Loan Agreement.

         3.       LATE FEE; DEFAULT RATE. (a) Notwithstanding any other
provision of this Term Note or the Loan Agreement or any Loan Document, if any
payment, interest, Obligation, fee, charge or other amount due hereunder or
under any other Loan Document is not received by Lender within three (3)
Business Days of the day such payment is due and payable, then Borrower shall
pay to Lender a late charge equal to fifteen percent (15.0%) of the amount of
such interest or other payment not timely made.

                  (b)      Upon the occurrence of an Event of Default and during
the continuation thereof, the Applicable Rate of interest in effect at such time
with respect to the Obligations shall be increased by five percent (5.0%) per
annum.

         4.       LOAN AGREEMENT AND SECURITY AGREEMENT. (a) This Term Note is
referred to in, made pursuant to, and entitled to the benefits of, the Loan
Agreement. The Loan Agreement, among other things, (i) provides for the making
of the Term Loan by Lender to Borrower in the dollar amount first mentioned
above, (ii) contains provisions for acceleration of the maturity hereof upon the
happening of certain stated events upon the terms and conditions therein
specified, and (iii) contains provisions defining an Event of Default and the
rights and remedies of Lender upon the occurrence of an Event of Default.

                  (b)      This Term Note is a secured note, entitled to the
benefits of and security interests granted in, among other things, that certain
Security Agreement dated as of even date herewith, between Borrower and Agent,
and the other Security Documents (as such Security Agreement and other Security
Documents have been heretofore and may hereafter be amended, supplemented or
otherwise modified from time to time).

         5.       PREPAYMENTS. This Term Note may be prepaid in whole or in part
upon notice to Lender and shall be prepaid in whole, in each case as provided or
required in the Loan Agreement and upon payment of all fees and other
Obligations set forth therein. No payment or

                                       2

<PAGE>

prepayment of any amount shall entitle any Person to be subrogated to the rights
of Lender hereunder or under the Loan Agreement unless and until the Obligations
have been performed in full and paid irrevocably in full in cash and the Loan
Agreement has been terminated.

         6.       PAYMENTS DUE ON A DAY OTHER THAN A BUSINESS DAY. If any
payment to be made on or under this Term Note is stated to be due or becomes due
and payable on a day other than a Business Day, the due date thereof shall be
extended to, and such payment shall be made on, the next succeeding Business
Day, and such extension of time in such case shall be included in the
computation of payment of any interest (at the interest rate then in effect
during such extension) and/or fees, as the case may be.

         7.       WAIVERS. The Borrower hereby waives demand, presentment,
protest, notice of dishonor or non-payment, as well as all defenses with respect
to this Term Note, the Loan Agreement and/or any Obligation, notice of
acceptance hereof, notice of loans or Advances made, credit extended, collateral
received or delivered, or any other action taken in reliance hereon, and all
other demands and notices of any description, except such as are expressly
provided for herein. The pleading of any statute of limitations as a defense to
any demand against Borrower hereunder is expressly waived by Borrower. No cause
of action or dealing, renewal or extension of this Term Note or any Loan
Document or any rights hereunder or thereunder, release of Borrower or any
Guarantor, or delay, failure or omission on Lender's part in enforcing this Term
Note or any other Loan Document or in exercising or enforcing any right, remedy,
option or power hereunder or under any other Loan Document shall affect the
liability of Borrower or any Guarantor or operate as a waiver of such or any
other right, remedy, power or option or of any default, nor shall any single or
partial exercise of any right, remedy, option or power hereunder or under any
other Loan Document affect the liability of Borrower or any Guarantor or
preclude any other or further exercise of such or any other right, remedy, power
or option. No waiver of any one or more defaults in the performance of any of
the provisions of this Term Note shall operate or be construed as a waiver of
any future default or defaults, whether of a like or different nature.

         8.       EXERCISE OF RIGHTS. (a) Lender shall have the right in its
sole discretion to determine which rights, powers, Liens, security interests or
remedies Lender may at any time pursue, relinquish, subordinate or modify or to
take any other action with respect thereto, and such determination will not in
any way modify or affect any of Lender's rights, powers, Liens, security
interests or remedies hereunder or under any of the Loan Documents, under
applicable law or at equity.

                  (b)      The enumeration of the foregoing rights and remedies
is not intended to be exhaustive. The rights and remedies of Lender described
herein are cumulative and are not alternative to or exclusive of any other
rights or remedies which Lender otherwise may have by contract or at law or in
equity, and the partial or complete exercise of any right or remedy shall not
preclude any other further exercise of such or any other right or remedy.

         9.       LAWFUL LIMITS. This Term Note is expressly limited so that in
no contingency or event whatsoever, whether by reason of acceleration or
otherwise, shall the interest and other charges paid or agreed to be paid to
Lender for the use, forbearance or detention of money hereunder exceed the
maximum rate permissible under applicable law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. If, due to
any circumstance whatsoever, fulfillment of any provision hereof, at the time
performance of such provision shall be due, shall exceed any such limit, then
the obligation to be so fulfilled shall be reduced to such lawful limit, and, if
Lender shall have received interest or any other charges of any kind which

                                       3

<PAGE>

might be deemed to be interest under applicable law in excess of the maximum
lawful rate, then such excess shall be applied first to any unpaid fees and
charges hereunder, then to unpaid principal balance owed by Borrower hereunder,
and if the then remaining excess interest is greater than the previously unpaid
principal balance hereunder, Lender shall promptly refund such excess amount to
Borrower and the provisions hereof shall be deemed amended to provide for such
permissible rate. The terms and provisions of this Section 9 shall control to
the extent any other provision of this Term Note or any Loan Document is
inconsistent herewith.

         10.      GOVERNING LAW. This Term Note shall be governed by and
construed in accordance with the internal laws of the State of Maryland without
giving effect to its choice of laws provisions.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       4

<PAGE>

Executed as of the date first written above.

                            PSYCHIATRIC SOLUTIONS, INC.
                            PSYCHIATRIC SOLUTIONS OF ALABAMA, INC.
                            PSYCHIATRIC SOLUTIONS OF FLORIDA, INC.
                            PSYCHIATRIC SOLUTIONS OF TENNESSEE, INC.
                            SOLUTIONS CENTER OF LITTLE ROCK, INC.
                            PSYCHIATRIC SOLUTIONS OF NORTH CAROLINA, INC.
                            PSI COMMUNITY MENTAL HEALTH AGENCY MANAGEMENT, INC.
                            PSI-EAP, INC.
                            SUNSTONE BEHAVIORAL HEALTH, INC.
                            THE COUNSELING CENTER OF MIDDLE TENNESSEE, INC.
                            PSI HOSPITALS, INC.
                            PSI TEXAS HOSPITALS, LLC
                            PSYCHIATRIC PRACTICE MANAGEMENT OF ARKANSAS, INC.
                            AERIES HEALTHCARE CORPORATION
                            AERIES HEALTHCARE OF ILLINOIS, INC.
                            HOLLY HILL REAL ESTATE, LLC

                            By:      /s/ Steven T. Davidson
                                     -------------------------------------------
                            Name:    Steven T. Davidson
                                     -------------------------------------------
                            Title:   Vice President
                                     -------------------------------------------

                            TEXAS CYPRESS CREEK HOSPITAL, L.P.

                            By:   PSI Texas Hospitals, LLC,
                                  its general partner

                                  By:    /s/ Steven T. Davidson
                                        ---------------------------------------
                                  Name:  Steven T. Davidson
                                        ---------------------------------------
                                  Title: Vice President
                                        ---------------------------------------

                             TEXAS WEST OAKS HOSPITAL, L.P.

                             By:  PSI Texas Hospitals, LLC,
                                  its general partner

                                  By:     /s/ Steven T. Davidson
                                         --------------------------------------
                                  Name:   Steven T. Davidson
                                         --------------------------------------
                                  Title:  Vice President
                                         --------------------------------------
<PAGE>

                        NEURO INSTITUTE OF AUSTIN, L.P.

                        By:  PSI Texas Hospitals, LLC,
                             its general partner

                             By:     /s/ Steven T. Davidson
                                -----------------------------------------
                             Name:   Steven T. Davidson
                                    -------------------------------------
                             Title:  Vice President
                                       ----------------------------------

                        CYPRESS CREEK REAL ESTATE, L.P.

                        By:  PSI Texas Hospitals, LLC,
                             its general partner

                             By:    /s/  Steven T. Davidson
                                -----------------------------------------
                             Name:  Steven T. Davidson
                                  ---------------------------------------
                             Title:  Vice President
                                   --------------------------------------

                        WEST OAKS REAL ESTATE, L.P.

                        By:  PSI Texas Hospitals, LLC,
                             its general partner

                             By:  /s/ Steven T. Davidson
                                -----------------------------------------
                             Name: Steven T. Davidson
                                  ---------------------------------------
                             Title:  Vice President
                                   --------------------------------------

                        NEURO REHAB REAL ESTATE, L.P.

                        By:  PSI Texas Hospitals, LLC,
                             its general partner

                             By:     /s/ Steven T. Davidson
                                ----------------------------------------
                             Name:   Steven T. Davidson
                                  --------------------------------------
                             Title:  Vice President
                                   -------------------------------------

                                       2

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