SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

Amended Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 16, 2003 (April 1, 2003)

Psychiatric Solutions, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	0-20488	23-2491707
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification Number)

113 Seaboard Lane, Suite C-100, Franklin, Tennessee 37067
(Address of Principal Executive Offices)

(615) 312-5700
(Registrant’s Telephone Number, including Area Code)

Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

TABLE OF CONTENTS

	Item 7. Financial Statements and Exhibits.
SIGNATURES

Item 7. Financial Statements and Exhibits.

     On April 1, 2003, Psychiatric Solutions, Inc. (the “Company”) completed the acquisition of five freestanding psychiatric facilities from The Brown Schools, Inc. and completed the acquisition of The Brown Schools of Oklahoma, Inc. on April 9, 2003. The Company filed a Current Report on Form 8-K on April 9, 2003 in connection with the above referenced transactions. Item 7 of that Current Report is hereby amended and restated in its entirety as set forth below to include the financial statements and pro forma information required by Item 7 of Form 8-K:

(a)	The Combined Financial Statements of The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and The Oaks Psychiatric Hospital, Inc. (collectively “The Brown Schools”) and Consolidated Financial Statements of The Brown Schools of Oklahoma, Inc. and subsidiary.
(b)	Unaudited Pro Forma Condensed Combined Financial Statements for Psychiatric Solutions, Inc., The Brown Schools and The Brown Schools of Oklahoma, Inc.
(c)	Exhibits.

2.1	Asset Purchase Agreement, dated February 13, 2003, by and between The Brown Schools, Inc. and Psychiatric Solutions, Inc., as amended by Amendment No. 1 to Asset Purchase Agreement, dated March 31, 2003, by and between The Brown Schools, Inc. and Psychiatric Solutions, Inc. (previously filed as an exhibit to the Company’s Current Report on Form 8-K filed April 9, 2003).
99.1	Press Release: Psychiatric Solutions Consummates Acquisition of Five Psychiatric Facilities from The Brown Schools (previously filed as an exhibit to the Company’s Current Report on Form 8-K filed April 9, 2003).

SIGNATURES

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

	PSYCHIATRIC SOLUTIONS, INC.
	By:	/s/ Steven T. Davidson
		Steven T. Davidson Chief Development Officer
Date: June 16, 2003

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc.,
Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and
The Oaks Psychiatric Hospital, Inc.

     We have audited the accompanying combined balance sheets of The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and The Oaks Psychiatric Hospital, Inc. (collectively the “Company”) as of December 31, 2002 and 2001 and the related combined statements of operations, changes in equity of parent, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and The Oaks Psychiatric Hospital, Inc. at December 31, 2002 and the combined results of their operations and their cash flows for each of the three years in the period ending December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States.

ERNST & YOUNG LLP

Nashville, Tennessee
May 2, 2003

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

COMBINED BALANCE SHEETS

			DECEMBER 31,
							MARCH 31,
			2001		2002		2003
							(UNAUDITED)
			(IN THOUSANDS)
ASSETS
Current assets:
	Accounts receivable, less allowance for doubtful accounts of $4,505, $3,602, and $3,194 at December 31, 2001, 2002 and March 31, 2003, respectively		$	10,336	$	10,169	$	8,913
	Prepaid expenses and other			336		360		345
		Total current assets		10,672		10,529		9,258
Property, plant and equipment, net				15,187		14,277		13,321
Other				68		39		39
		Total assets	$	25,927	$	24,845	$	22,618
LIABILITIES AND EQUITY OF PARENT
Current liabilities:
	Bank overdraft		$	739	$	834	$	450
	Accounts payable			5,186		5,145		5,722
	Accrued salaries and benefits			2,147		2,007		1,661
	Due to third party payors			718		584		514
	Other current liabilities			330		302		210
		Total current liabilities		9,120		8,872		8,557
Equity of parent				16,807		15,973		14,061
		Total liabilities and equity of parent	$	25,927	$	24,845	$	22,618

See accompanying notes.

2

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

COMBINED STATEMENTS OF OPERATIONS

											THREE MONTHS ENDED
		YEARS ENDED DECEMBER 31,									MARCH 31,
		2000			2001			2002			2002			2003
											(UNAUDITED)
		(IN THOUSANDS)
Revenue		$	50,955		$	60,074		$	60,174		$	14,860		$	13,851
Expenses:
	Salaries, wages and employee benefits		28,623			34,568			33,931			8,920			8,319
	Supplies		3,801			4,393			4,390			1,080			1,124
	Rentals and leases		442			709			708			173			188
	Professional fees		3,353			3,801			4,309			1,066			995
	Provision for doubtful accounts		1,047			1,694			1,728			400			388
	Other operating expenses		9,320			8,107			7,108			1,744			1,616
	Depreciation		1,485			1,317			1,557			300			279
	Management fee		2,556			3,034			2,903			743			694
	Interest		2,572			3,375			5,629			843			1,414
	Loss on sale of land		—			—			—			—			458
	Loss before income taxes		(2,244	)		(924	)		(2,089	)		(409	)		(1,624	)
	Provision for income taxes		—			—			—			—			—
	Net loss	$	(2,244	)	$	(924	)	$	(2,089	)	$	(409	)	$	(1,624	)

See accompanying notes.

3

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

COMBINED STATEMENTS OF CHANGES IN EQUITY OF PARENT

		TOTAL
		(IN THOUSANDS)
Equity of Parent at January 1, 2000		$	17,625
	Net loss		(2,244	)
	Contribution from Parent		1,502
Equity of Parent at December 31, 2000			16,883
	Net loss		(924	)
	Contribution from Parent		848
Equity of Parent at December 31, 2001			16,807
	Net loss		(2,089	)
	Contribution from Parent		1,255
Equity of Parent at December 31, 2002			15,973
	Net loss		(1,624	)
	Distribution to Parent		(288	)
Equity of Parent at March 31, 2003 (unaudited)		$	14,061

See accompanying notes.

4

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

COMBINED STATEMENTS OF CASH FLOWS

													THREE MONTHS
				YEARS ENDED DECEMBER 31,									ENDED MARCH 31,
				2000			2001			2002			2002			2003
													(UNAUDITED)
				(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss				$	(2,244	)	$	(924	)	$	(2,089	)	$	(409	)	$	(1,624	)
Adjustments to reconcile net loss to net cash provided by in operating activities:
	Depreciation				1,485			1,317			1,557			300			279
	Provision for doubtful accounts				1,047			1,694			1,728			400			388
	Provision for professional liability risk				3,146			750			970			287			264
	Loss on land				—			—			—			—			458
	Changes in operating assets and liabilities:
		Accounts receivable			(3,874	)		(3,939	)		(1,561	)		157			868
		Prepaid and other current assets			(12	)		37			(24	)		7			15
		Accounts payable			1,220			760			(41	)		(328	)		577
		Bank overdraft			500			98			95			133			(384	)
		Accrued salaries and benefits			481			268			(140	)		(248	)		(346	)
		Due to third party payors			175			976			(134	)		(212	)		(70	)
		Other Liabilities			111			41			(28	)		(176	)		(93	)
			Net cash provided by (used in) operating activities		2,035			1,078			333			(89	)		332
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment					(385	)		(1,196	)		(645	)		(119	)		(569	)
Proceeds from sale of land					—			—			—			—			789
Other assets					(5	)		19			29			25			—
			Net cash (used in) provided by investing activities		(390	)		(1,177	)		(616	)		(94	)		220
CASH FLOWS FROM FINANCING ACTIVITIES
Transfers to and advances from Parent, net					(1,645	)		99			283			183			(552	)
			Net cash (used in) provided by financing activities		(1,645	)		99			283			183			(552	)
Increase (decrease) in cash					—			—			—			—			—
Cash at beginning of year					—			—			—			—			—
Cash at end of year				$	—		$	—		$	—		$	—		$	—
SUPPLEMENTAL INFORMATION:
Interest payments				$	2,572		$	3,375		$	5,629		$	843		$	1,414

See accompanying notes.

5

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)

1. ORGANIZATION

     The accompanying combined financial statements include the accounts of the following entities (collectively, the Company) which are each subsidiaries of The Brown Schools, Inc. (the Parent) which provides behavioral and psychiatric services to children, adolescents, and adults.

• The Brown Schools of Virginia, Inc. owns and operates a 64-bed hospital located in Charlottesville, Virginia.

• Cedar Springs Behavioral Health System, Inc. owns and operates a 110-bed hospital located in Colorado Springs, Colorado.

• Healthcare San Antonio, Inc. owns and operates a 196-bed hospital located in San Antonio, Texas.

• The Oaks Psychiatric Hospital, Inc. owns and operates a 118-bed hospital in Austin, Texas.

• The Brown Schools of San Marcos, Inc. owns and operates a 186-bed hospital in San Marcos, Texas.

     Substantially all of the net assets of the Company were purchased by Psychiatric Solutions, Inc. for approximately $48 million during April 2003.

     The accompanying unaudited consolidated condensed financial statements as of March 31, 2003 and for the three months ended March 31, 2002 and 2003, were prepared in accordance with accounting principles generally accepted in the United States of America and all applicable financial statement rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. The interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements have been included. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Net Patient Service Revenue

     The Company receives payment for patient services from federal and various state governments primarily under the Medicare and Medicaid programs, health maintenance organizations, preferred provider organizations and other private insurers and directly from patients. Patient service revenue is reported on the accrual basis in the period in which services are provided, at established rates, regardless of whether collection in full is expected.

     Net patient service revenue is based on established billing rates less allowances and discounts for patients covered by Medicare, Medicaid and various other discount arrangements. Payments received under these programs and arrangements, which are based on either predetermined rates or the cost of services, are generally less than the Company’s customary charges, and the differences are recorded as contractual adjustments or policy discounts at the time service is rendered.

     Settlements under cost reimbursement agreements with third party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. Final determination of amounts earned under the Medicare and Medicaid programs often

6

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

occur in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions.

   Intercompany Allocations

     Related Party Transactions

     The Company is allocated interest expense based upon a percentage of the Company’s fixed assets and working capital as compared to the Parent. Interest expense totaled approximately $2,572, $3,375 and $5,629 for the years ended December 31, 2000, 2001 and 2002, respectively.

     The Company is charged a management fee equal to 5% of its unaudited revenues. Management fees were $2,556, $3,034 and $2,903 for the years ended December 31, 2000, 2001 and 2002, respectively.

     The Parent carries employee health and dental insurance from an unrelated commercial carrier. Premiums are allocated based on the number of enrolled employees and dependents at the individual facilities. Health and dental expenses were approximately $740, $829 and $1,270 for the years ended December 31, 2000, 2001 and 2002, respectively.

     Although management considers its allocation methods to be reasonable, due to the relationship between the Company and its Parent, the terms of the allocation may not necessarily be indicative of that which would have resulted had the Company been a separate entity.

   Inventories

     Inventories, consisting principally of supplies, are stated at the lower of cost (first-in, first-out) or market.

   Property, Plant and Equipment

     Property and equipment are stated at cost and depreciated using the straight-line method over the useful lives of the assets, which are assigned by the Company as follows:

ASSET CATEGORY	DEPRECIABLE LIFE
Land improvements	15 years
Buildings	30 years
Building improvements	10 years
Leasehold improvements	Remaining life of lease
Furniture, fixtures and equipment	7 years
Computers, vehicles, and office equipment	5 years
Software	3 years

Depreciation expense was approximately $1,485, $1,317 and $1,557 for the years ended December 31, 2000, 2001 and 2002, respectively.

     When events, circumstances and operating results indicate the carrying values of certain long-lived assets might be impaired, the Company prepares projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts

7

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

are not expected to be recoverable, such amounts are reduced to estimated fair value. Fair value is estimated based upon projections of discounted cash flows.

   Income Taxes

     The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based upon differences between the financial statement carrying amounts and tax bases of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse.

   General and Professional Liability Risks

     The Parent, on behalf of the Company, carries general and professional liability insurance from an unrelated commercial insurance carrier, on a claims-made basis, for per occurrence losses up to $1 million in 2001 and 2002 with policy limits of $3 million in the aggregate in 2001 and 2002. The Parent also carries workers’ compensation insurance from an unrelated commercial insurance carrier. The cost of general and professional liability and workers’ compensation coverage is allocated by the Parent based upon the percentage of the number of the Company’s full time employees as compared to the consolidated total of the Parent. The cost for the years ended December 31, 2000, 2001 and 2002 was approximately $3,734, $1,384 and $1,680, respectively.

   Capital Transactions with Parent

     The Company maintains certain intercompany accounts with its Parent whereby the Parent funds certain operating expenses and costs, such as insurance, payroll, and employee benefits. Such costs are offset in the intercompany accounts by transfers of cash collected by the Company to the Parent. Such amounts were reflected as amounts due to Parent in the Company’s internal financial statements. As a result of the sale of the Company to an unrelated party subsequent to December 31, 2002, these amounts due to the Parent at December 31, 2001 and 2002 were not paid by the Company. Accordingly, the amounts due to Parent are reflected in the accompanying financial statements within equity of Parent. All changes in the amounts due to Parent have been reflected as contributions from or distributions to Parent.

   Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

   Advertising Costs

     Advertising costs are expensed as incurred. Advertising costs were $225, $273 and $188 for the years ended December 31, 2000, 2001 and 2002, respectively.

   Fair Values of Financial Instruments

     Bank Overdraft — The carrying amounts reported in the balance sheet for bank overdraft approximate fair value.

8

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

     Accounts Receivable and Accounts Payable — The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate fair value.

   Recently Issued Accounting Pronouncements

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, (“SFAS No. 121”), and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 removes goodwill from its scope and clarifies other implementation issues related to SFAS No. 121. SFAS No. 144 also provides a single framework for evaluating long-lived assets to be disposed of by sale. The provisions of this statement were adopted effective January 1, 2002 and had no material effect on the Company’s results of operations or financial position.

     In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). SFAS 145 prohibits the classification of gains or losses from debt extinguishments as extraordinary items unless the criteria outlined in APB Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, are met. SFAS 145 also eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. The Company intends to adopt the provisions of SFAS 145 effective January 1, 2003 and does not expect this pronouncement to have a material effect on its financial position or results of operations.

3. CONCENTRATIONS OF CREDIT RISK

     The Company’s primary concentration of credit risk is patient accounts receivable, which consists of amounts owed by governmental agencies, insurance companies, and private patients. The Company manages the receivables by regularly reviewing its accounts and contracts and by providing appropriate allowances for uncollectible accounts. Various state Medicaid programs comprised approximately 70% and 59% of patient receivables at December 31, 2002 and 2001, respectively. Remaining receivables relate primarily to various commercial insurance carriers and HMO/PPO programs. Concentration of credit risk from other payers is limited by the number of patients and payors. Three of the five facilities are located in the state of Texas, making the Company somewhat reliant on various laws and economic conditions in Texas.

4. RETIREMENT PLAN

     The Company participates in the Parent’s defined contribution retirement plan, The Brown Schools, Inc. 401(k) Plan (the “Plan”). The Plan covers substantially all employees. Retirement expense was approximately $76, $98 and $32 for the years ended December 31, 2000, 2001 and 2002, respectively. The Company makes discretionary contributions to the Plan through the Parent each year.

9

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES

   Current Operations

     Final determination of amounts earned under prospective payment and cost-reimbursement activities is subject to review by appropriate governmental authorities or their agents. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews.

   DODIG Investigation

     Healthcare San Antonio, Inc. is currently under investigation by the Department of Defense Inspector General (DODIG). On or about August 21, 2002, the Company received a subpoena from the DODIG requesting certain medical records related to Champus-Tricare reimbursement issues. The Company has complied with the subpoena and provided the requested documents. The Company is now awaiting further instruction from the government. While management believes that it has complied with all laws and regulations, it is unable to predict the outcome of the investigation. If the Company were to be subject to an unfavorable outcome to this investigation, the ultimate resolution of the investigation could have a material adverse effect on the Company’s financial position and results of operations.

   Other

     Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing, except for the Champus-Tricare issue referred to above. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.

     The Company is subject to claims and suits arising in the ordinary course of business. Even though management is unable to predict such claims and their potential outcomes, it is management’s opinion, that the ultimate resolution of such other pending legal proceedings will not have a material effect on the Company’s financial position or results of operations.

   Leases

     The Company leases the facility comprising The Brown Schools of Virginia, Inc. as well as office space and certain equipment under operating agreements.

     Total rent expense under operating leases was approximately $442, $709 and $708 for the years ended December 31, 2000, 2001 and 2002, respectively.

10

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

     Future minimum rental commitments under noncancelable operating leases (with an initial or remaining term in excess of one year) at December 31, 2002, are as follows (in thousands):

	OPERATING LEASES
2003	$	631
2004		603
2005		330
2006		3
2007		1
Thereafter		—
Total minimum rental commitments	$	1,568

6. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following (in thousands):

	DECEMBER 31,
	2001			2002
Land and improvements	$	6,246		$	6,285
Buildings and improvements		16,209			17,533
Equipment		8,404			7,848
Leasehold improvements		185			58
Construction in progress		64			—
		31,108			31,724
Less accumulated depreciation		(15,921	)		(17,447	)
Net property, plant and equipment	$	15,187		$	14,277

11

THE BROWN SCHOOLS OF VIRGINIA, INC.,
CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
HEALTHCARE SAN ANTONIO, INC.,
THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
THE OAKS PSYCHIATRIC HOSPITAL, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets (liabilities) are as follows (in thousands):

	DECEMBER 31,
	2001			2002
Deferred tax assets:
Net operating loss carryforwards	$	1,167		$	2,630
Allowance for bad debts		1,341			679
Total gross deferred tax assets		2,508			3,309
Less: Valuation allowance		(2,276	)		(3,069	)
Net deferred tax assets		232			240
Deferred tax liabilities:
Depreciation		(232	)		(240	)
Total gross deferred tax liabilities		(232	)		(240	)
Net deferred tax asset (liability)	$	—		$	—

     SFAS 109 requires the Company to record a valuation allowance when it is “more likely than not that some portion or all of the deferred tax assets will not be realized.” It further states that “forming a conclusion that a valuation allowance is not needed is difficult when there is a negative evidence such as cumulative losses in recent years.” A 100% valuation allowance has been recorded equal to the deferred tax assets after considering deferred tax assets that can be realized through offset to existing taxable temporary differences. Assuming the Company achieves sufficient profitability in future years to realize the deferred income tax assets, the valuation allowance will be reduced in future years through a credit to income tax expense. As of December 31, 2002, the valuation allowance is approximately $3,069 which represents an increase of approximately $794 from December 31, 2001.

     At December 31, 2002, the Company has federal and state net operating loss carryforwards of approximately $6,820, which expire at various dates through 2022.

     A reconciliation of the federal statutory tax rate to the effective tax rate is as follows (in thousands):

	YEAR ENDED DECEMBER 31,
	2000			2001			2002
Tax at U.S. statutory rate	$	(762	)	$	(314	)	$	(710	)
State income tax, net of federal benefit		(90	)		(37	)		(84	)
Change in valuation allowance		852			351			794
Total income tax expense	$	—		$	—		$	—

8. SUBSEQUENT EVENTS (UNAUDITED)

     On April 1, 2003, Psychiatric Solutions, Inc., which manages behavioral health units and owns psychiatric facilities, purchased substantially all of the assets of the Company for $48 million.

12

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors
The Brown Schools of Oklahoma, Inc. and Subsidiary

     We have audited the accompanying consolidated balance sheets of The Brown Schools of Oklahoma, Inc. and subsidiary (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     As discussed in Note 5 to the consolidated financial statements, the Company is economically dependent upon certain government programs under which it derived approximately 93%, 95% and 94% of its total revenues in 2002, 2001 and 2000, respectively. Additionally, the Company was dependent on its Parent for operating and financial support during the three years ended December 31, 2002. Effective April 9, 2003, the Parent sold the Company to an unrelated entity that manages behavioral health units and owns psychiatric facilities.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill upon adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets.”

BDO SEIDMAN, LLP

Houston, Texas
May 22, 2003

13

THE BROWN SCHOOLS OF OKLAHOMA, INC.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

		DECEMBER 31,
								MARCH 31,
		2001			2002			2003
								(UNAUDITED)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents	$	3,630		$	1,950		$	1,950
	Patient accounts receivable, net of allowance for doubtful accounts of $485,442, $493,020 and $249,563 (unaudited), respectively		1,929,475			2,243,487			2,212,995
	Prepaid expenses and other current assets		94,715			124,707			114,408
Total current assets			2,027,820			2,370,144			2,329,353
PROPERTY AND EQUIPMENT, at cost
	Land		969,828			969,828			969,828
	Building and improvements		1,468,703			1,775,176			1,841,675
	Equipment		1,226,088			1,203,514			1,203,514
			3,664,619			3,948,518			4,015,017
	Less accumulated depreciation		(1,546,488	)		(1,730,067	)		(1,789,389	)
Property and equipment, net			2,118,131			2,218,451			2,225,628
GOODWILL, net of accumulated amortization of $421,325			3,004,339			3,004,339			3,004,339
DEFERRED INCOME TAXES, net			432,788			38,129			—
OTHER ASSETS			16,135			14,912			23,500
TOTAL ASSETS		$	7,599,213		$	7,645,975		$	7,582,820
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES
	Accounts payable and accrued expenses	$	1,002,143		$	1,234,346		$	1,054,490
	Accrued salaries and benefits		495,504			563,439			603,867
	Due to third-party payers		253,982			99,215			57,748
Total current liabilities			1,751,629			1,897,000			1,716,105
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDER’S EQUITY
	Common stock, par value $.01; 1,000 shares authorized; 100 shares issued and outstanding		1			1			1
	Additional paid-in capital		11,870,186			10,731,907			10,749,202
	Accumulated deficit		(6,022,603	)		(4,982,933	)		(4,882,488	)
Total Stockholder’s Equity			5,847,584			5,748,975			5,866,715
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY		$	7,599,213		$	7,645,975		$	7,582,820

The accompanying notes are an integral part of these consolidated financial
statements.

14

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

		YEAR ENDED DECEMBER 31,							QUARTER ENDED MARCH 31,
		2000			2001		2002		2002		2003
									(UNAUDITED)
REVENUES:
	Net patient revenue	$	15,434,506		$	17,092,904	$	17,180,341	$	4,194,657	$	4,268,061
	Other revenue		674,734			911,673		639,991		215,935		126,969
Total revenues			16,109,240			18,004,577		17,820,332		4,410,592		4,395,030
OPERATING EXPENSES:
	Salaries and benefits		8,336,902			8,191,457		8,507,256		2,045,959		2,146,513
	Purchased services		3,823,935			3,593,229		3,027,749		790,340		717,285
	Supplies		677,662			920,937		974,574		206,943		233,907
	Rent expense		275,798			253,428		296,557		62,853		77,213
	Medical professional fees		416,778			528,599		666,831		164,156		184,696
	Other operating expenses		1,394,879			1,392,589		1,262,560		296,388		378,317
	Management fees and interest allocated by Parent		1,193,474			1,351,392		1,740,880		435,194		477,092
	Provision for bad debts		249,563			384,929		60,828		180		20,240
	Loss on sale of assets		50,558			67,544		—		—		—
	Depreciation and amortization		368,236			355,079		243,427		62,597		59,322
Total operating expenses			16,787,785			17,039,183		16,780,662		4,064,610		4,294,585
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES			(678,545	)		965,394		1,039,670		345,982		100,445
Provision (benefit) for income taxes (Note 3)			—			—		—		—		—
NET INCOME (LOSS)		$	(678,545	)	$	965,394	$	1,039,670	$	345,982	$	100,445

The accompanying notes are an integral part of these consolidated financial
statements.

15

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

	COMMON STOCK				ADDITIONAL						TOTAL
					PAID-IN			ACCUMULATED			STOCKHOLDER'S
	SHARES		AMOUNT		CAPITAL			DEFICIT			EQUITY
BALANCE, December 31, 1999		100	$	1	$	12,406,950		$	(6,309,452	)	$	6,097,499
Net loss		—		—		—			(678,545	)		(678,545	)
BALANCE, December 31, 2000		100		1		12,406,950			(6,987,997	)		5,418,954
Conversion of amounts due from Parent as reduction of paid-in capital		—		—		(536,764	)		—			(536,764	)
Net income		—		—		—			965,394			965,394
BALANCE, December 31, 2001		100		1		11,870,186			(6,022,603	)		5,847,584
Conversion of amounts due from Parent as reduction of paid-in capital		—		—		(1,138,279	)		—			(1,138,279	)
Net income		—		—		—			1,039,670			1,039,670
BALANCE, December 31, 2002		100	$	1	$	10,731,907		$	(4,982,933	)	$	5,748,975

The accompanying notes are an integral part of these consolidated financial
statements.

16

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

				YEAR ENDED DECEMBER 31,									QUARTER ENDED MARCH 31,
				2000			2001			2002			2002			2003
													(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income (loss)			$	(678,545	)	$	965,394		$	1,039,670		$	345,982		$	100,445
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Depreciation and amortization			368,236			355,079			243,427			62,597			59,322
		Provision for bad debts			249,563			384,929			60,828			180			20,240
		Loss on disposal of asset			50,558			67,544			—			—			—
		Effect of changes in operating assets and liabilities:
			Patient accounts receivable		(824,196	)		503,979			(374,840	)		(383,925	)		10,252
			Prepaid expenses and other assets		(39,873	)		4,834			(29,992	)		(1,277	)		10,299
			Accounts payable and accrued expenses		(426,404	)		138,584			232,203			(22,542	)		(179,856	)
			Accrued salaries and benefits		(166,662	)		(5,273	)		67,935			82,843			40,428
			Due to third party payees		16,852			(81,360	)		(154,767	)		19,903			(41,467	)
Net cash provided by (used in) operating activities					(1,450,471	)		2,333,710			1,084,464			103,761			19,663
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment				(175,697	)		(371,616	)		(342,524	)		(126,847	)		(75,087	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Transfers to and advances from parent, net				1,521,205			(1,967,469	)		(743,620	)		22,086			55,424
Net decrease in cash and cash equivalents					(104,963	)		(5,375	)		(1,680	)		(1,000	)		—
CASH AND CASH EQUIVALENTS, beginning of period					113,968			9,005			3,630			3,630			1,950
CASH AND CASH EQUIVALENTS, end of period				$	9,005		$	3,630		$	1,950		$	2,630		$	1,950
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Cash paid to Parent for interest			$	377,743		$	439,451		$	853,375		$	215,556		$	257,341
NON-CASH TRANSACTIONS:
Conversion of amounts due from Parent as reduction to paid-in capital				$	—		$	536,764		$	1,138,279		$	—		$	17,295

The accompanying notes are an integral part of these consolidated financial
statements.

17

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Description of Organization and Basis of Presentation — The Brown Schools of Oklahoma, Inc. a Delaware corporation (“BSO” or “the Company”), was organized in 1993 as Shadow Mountain Hospital, Inc. In 1998, through amendment to its Articles of Incorporation, the Company was renamed to The Brown Schools of Oklahoma, Inc. The Company was a wholly-owned subsidiary of The Brown Schools, Inc. (the Parent) until April 9, 2003 at which date BSO, along with other healthcare facilities owned by the Parent, was sold to an unrelated entity (see Note 2). The Company provides psychiatric and other behavioral health services principally to at-risk and troubled youth in Oklahoma. Services are provided from multiple locations in Oklahoma, including the Company’s main campus in Tulsa, Oklahoma. The Parent conducts similar operations through other subsidiaries throughout the United States and Puerto Rico.

     Basis of Consolidation — The accompanying consolidated financial statements include the accounts of Brown Schools of Oklahoma, Inc. and its subsidiary, Therapeutic School Services, LLC. Significant intercompany balances and transactions have been eliminated in consolidation.

     Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates.

     Cash and Cash Equivalents — The Company considers cash and highly liquid investments with original maturities of less than three months to be cash and cash equivalents.

     Net Patient Service Receivables and Revenues — The Company receives payment for services rendered to patients from (1) federal and state governments under Medicaid and other similar programs; (2) privately sponsored managed care and commercial insurance plans for which payment is made based on terms defined under contracts; and (3) other payers. Net patient service revenue consists of net charges for services, which are based on the Company’s established billing rates less allowances and discounts for patients covered by third-party programs, including estimated retroactive adjustments where applicable. Payments under third-party programs are based on either costs of services or predetermined rates and formulas that are generally less than the Company’s established billing rates. Patient service revenues, net of allowances and discounts, are recorded in the period in which the related services are rendered and are adjusted, as necessary, in future periods as final settlements are determined. Final determination of amounts earned under third party programs often occur in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions. Receivables from, or payables to, third-party payers reflect estimated settlements resulting from intermediary reviews. In the opinion of management, the allowances, discounts and liabilities to third-party payers recognized in the accompanying consolidated financial statements are adequate.

     Regulations regarding reimbursements from government agencies are subject to periodic change based upon administrative, legislative and judicial actions, some of which may be retroactive. The Company currently does not anticipate any material adverse effect from such matters. Management believes its estimates of discounts, allowances and other adjustments are reasonable based on currently available information. However, due to uncertainties inherent in the estimation process and actions of government agencies regarding reimbursement, it is reasonably possible that net patient service revenues, the allowance for doubtful accounts, or estimated amounts due to third-party payers could be adjusted by a material amount in the near term.

     Other Revenue — Other revenue consists primarily of school counseling and administrative fee revenue. Such other revenues are recognized in the period the services are provided.

18

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

     Property and Equipment — Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:

	YEARS
Buildings and improvements		5-30
Equipment		3-10

     The Company records impairments to property and equipment when it becomes probable that the carrying values of the assets will not be fully recovered over their estimated lives. Impairments are recorded to reduce the carrying value of the assets to their estimated fair values determined by the Company based on facts and circumstances in existence at the time of the determination, estimates of probable future economic conditions and other information. No impairment adjustments were required for the three years ended December 31, 2002.

     Goodwill — Goodwill is the result of acquisition costs for a business purchased in 1998 that exceeded the fair value of acquired net tangible assets by $3,247,544. Prior to 2002, goodwill was amortized on a straight-line basis over 30 years. A similar intangible asset of $128,120 was, prior to 2002, amortized by the Company’s subsidiary over 15 years. The recoverability of goodwill was, prior to 2002, reviewed based primarily upon an analysis of undiscounted cash flows from the acquired businesses. Other than amortization, there were no changes in goodwill during 2000, 2001 and 2002.

     Effective January 1, 2002, BSO was required to adopt SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 required that the Company’s recorded goodwill no longer be amortized, but instead be periodically reviewed for impairment. SFAS No. 142 required the Company to complete a transitional goodwill impairment test within six months from the date of adoption, and any resulting impairment loss recognized as a cumulative effect of a change in accounting principle. Management’s assessment, which was based primarily on the proceeds from sale of the Company (see Note 2), did not indicate any material impairment losses associated with the adoption of SFAS No. 142 at January 1, 2002. SFAS No. 142 requires a pro forma presentation of net income after the add-back of goodwill amortization. Such pro forma analysis for 2000, 2001 and 2002 is as follows:

	2000			2001		2002
Net income (loss), as reported	$	(678,545	)	$	965,394	$	1,039,670
Add back goodwill amortization		116,793			116,793		—
Pro forma adjusted net income (loss)	$	(561,752	)	$	1,082,187	$	1,039,670

     The Company had no acquisitions or dispositions of businesses during 2000, 2001 and 2002.

     Income Taxes — The Company is included in the consolidated tax return of its Parent and through an informal agreement with the Parent accounts for its share of consolidated tax obligations (benefits) using an “as if separate return” methodology. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to temporary differences between the tax bases and financial carrying values of the Company’s assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets for amounts that management determines are more likely than not to be realized.

     Fair Value of Financial Instruments — The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate their fair value given the short-term maturity of these instruments.

     Recent Accounting Pronouncements — In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the

19

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

Impairment of Long-Lived Assets.” This statement superceded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, (“APB No. 30”) for the disposal of a segment of a business. The Statement was required to be adopted by the Company during 2002. The adoption of SFAS No. 144 did not have a material effect on the Company’s financial statements.

     In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 prohibits the classification of gains or losses from debt extinguishments as extraordinary items unless the criteria outlined in APB No. 30, are met. SFAS 145 also eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. The Company intends to adopt the provisions of SFAS 145 effective January 1, 2003 and does not expect this pronouncement to have a material effect on its financial position or results of operations.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”. This standard requires recognition of costs associated with exit or disposal activities as they are incurred, rather than at the date of commitment to an exit or disposal plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. As described in Note 7, the Company was sold subsequent to year-end. This transaction may result in a material effect on the Company’s financial statements.

     In November 2002, the FASB issued FIN No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. The interpretation requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN No. 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, during the first quarter of fiscal 2003. The adoption of FIN No. 45 did not have a material effect on the accompanying financial statements. The following is a summary of the Company’s agreements that have been determined to be within the scope of FIN No. 45.

     The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of December 31, 2002 and March 31, 2003.

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The adoption of this Interpretation did not have a material effect on the Company’s financial statements.

20

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

     Interim Financial Statements — The accompanying unaudited consolidated condensed financial statements as of March 31, 2003 and for the three months ended March 31, 2002 and 2003, were prepared in accordance with accounting principles generally accepted in the United States of America and all applicable financial statement rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. The interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements have been included. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.

2. RELATED PARTY TRANSACTIONS

   Financing Arrangements with Parent

     Through April 9, 2003, the Company was dependent upon its Parent for financing and operating support. The Company had access to funds through credit arrangements obtained by its Parent. The Parent has a credit facility with multiple banks (the Bank Facility). The Bank facility bears interest at LIBOR plus 3.5% and expires on June 30, 2003. At December 31, 2002, the Parent had $46.2 million outstanding under the Bank Facility.

     From December 2000 through December 2002, the Parent was not in compliance with the financial covenants under the Bank Facility. The Parent negotiated limited waivers for these violations and agreed to complete certain asset sales, the proceeds from which were used to reduce its outstanding debt. In April 2003, the Parent sold six of its healthcare facilities, including the Company, for aggregate proceeds of approximately $63 million (see Note 7). Proceeds from the sale were used by the Parent to retire all amounts outstanding under the Bank Facility.

     In addition, as of December 31, 2002, the Parent had $16.1 million senior subordinated notes outstanding with a non-bank creditor (the Subordinated Notes) and $16.7 million of paid-in-kind notes (the PIK Notes) with its primary investor. The Subordinated Notes and the PIK Notes bear interest at 18% and 12% per annum, respectively.

     Effectively all of the assets of the Parent and its subsidiaries are pledged as collateral under these debt agreements.

   Capital Transactions with Parent

     As of December 31, 1999, the Company’s additional paid-in capital of $12,406,950 represented amounts contributed by the Parent through the forgiveness and permanent investment of certain intercompany balances due from the Company. As a result of the sale of the Company to an unrelated party subsequent to December 31, 2002, certain amounts due from the Parent at December 31, 2001 and 2002 were not collected by the Company. The reduction of amounts due from Parent are reported in the accompanying financial statements as a return of capital to the Parent in the amount of $536,764 and $1,138,279 for the years ended December 31, 2001 and 2002, respectively.

   Intercompany Allocations

     During the three years ended December 31, 2002, the Parent maintained financing arrangements to provide working capital and other advances to its subsidiaries, including the Company. Interest costs were allocated to the subsidiaries based upon the relation of total assets of each subsidiary to the Parent’s consolidated total assets, rather than on the specific borrowings attributed to each subsidiary. Interest charges allocated to the Company for fiscal years 2000, 2001 and 2002 were $377,743, $439,451, and $853,375,

21

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

respectively. The terms of the allocation may not necessarily be indicative of that which would have resulted had the Company been a separate entity.

     The Parent provides accounting, data processing, and other management and administrative services to its subsidiaries, including the Company. A management fee of approximately 5% of net revenues is charged to each subsidiary to cover the costs of such services. Management fees allocated to the Company for fiscal years 2000, 2001 and 2002 were $815,731, $911,941, and $887,505, respectively. Although management considers the allocation method to be reasonable, due to the relationship between the Company and its Parent, the terms of the allocation may not necessarily be indicative of that which would have resulted had the Company been a separate entity.

     The Parent purchases professional and general liability insurance coverage and charged the Company $107,959, $118,210, and $185,486 for its share of such insurance cost during the years ended December 31, 2000, 2001 and 2002, respectively.

3. INCOME TAXES

     The Company is included in the consolidated tax return of its Parent and through an informal agreement with the Parent, accounts for its share of consolidated tax obligations (benefits) using an “as if separate return” methodology.

     A reconciliation of income taxes computed by applying the U.S. federal statutory rate to the actual income tax expense attributable to income before provisions (benefit) for income taxes is as follows:

	YEAR ENDED DECEMBER 31,
	2000			2001			2002
Income tax provision (benefit) at U.S. federal statutory rate	$	(230,705	)	$	328,234		$	353,488
State income taxes, net of federal tax benefit		(26,870	)		38,230			41,171
Utilization of net operating loss carryforwards		—			(366,464	)		(394,659	)
Change in valuation allowance		257,575			—			—
Provision (benefit) for income taxes	$	—		$	—		$	—

     Deferred tax assets of the Company are primarily attributable to: (1) built-in losses that resulted from declines in depreciable property values in years prior to recapitalization and ownership change for the Parent in 1997; (2) amortization of intangible assets; and (3) available net operating loss carryforwards. The Internal Revenue code significantly limits the amount of pre-acquisition net operating losses that are available to offset future taxable income when a change of ownership occurs (see Note 7). As a result of limitations on deductibility of the built-in losses and the uncertainty surrounding the tax benefit to be realized from the operating loss carryforwards, management has established a valuation allowance against the related deferred tax assets. As of December 31, 2001 and 2002, the Company had recorded net deferred tax assets of $432,788 and $38,129, respectively. The recognition of these deferred taxes was based on management’s assessment that the realization of these deferred tax assets is more likely than not on an “as if separate return” basis.

4. COMMITMENTS AND CONTINGENCIES

     As is typical in the at-risk youth treatment industry, the Company, the Parent and other affiliated subsidiaries are subject to claims and lawsuits arising in the ordinary course of business, including malpractice claims. In the opinion of management, the ultimate resolution of the claims will not have a material adverse effect on the business, results of operations or financial condition of the Company, the Parent or other subsidiaries as sufficient insurance coverage to mitigate risks of loss is maintained.

22

THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

     Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.

     Final determination of amounts earned under certain government programs and privately sponsored plans is subject to review by the appropriate payor or its agents. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews.

     BSO has incentive arrangements with certain of its employees. These provide for incentive bonuses of 5% to 25% of annual salary amounts if specified goals are attained. The incentive bonuses for 2000, 2001 and 2002 were approximately $25,000, $30,000 and $101,000, respectively.

     As a result of the sale of the Company subsequent to December 31, 2002, bonuses payable to certain executives totaling approximately $50,000 were accrued at March 31, 2003.

     The Company has various operating leases for office equipment and clinic space. At December 31, 2002, future minimum payments under noncancellable operating leases are approximately: 2003 — $199,256; 2004 — $117,224; 2005 — $52,081; 2006 — $5,566; and 2007 — $-0-.

5. CONCENTRATION OF CREDIT RISK

     The Company is particularly sensitive to regulatory and economic changes in the state of Oklahoma. During the three years ended December 31, 2002, substantially all of the Company’s revenues were derived from services provided and facilities operated in Oklahoma.

     Approximately 94%, 95% and 93% of the Company’s net revenues for the years ended December 31, 2000, 2001 and 2002, respectively, were derived from Medicaid and other government programs. As of December 31, 2002 and 2001, substantially all of the Company’s patient accounts receivable related to services provided under these programs.

6. RETIREMENT PLAN

     The Company participates in the Parent’s defined contribution retirement plan, The Brown Schools, Inc. 401(k) Plan (the “Plan”). The Company made discretionary contributions to the Plan of $31,941, $42,843, and $19,594 for the years ended December 31, 2000, 2001 and 2002, respectively.

7. SUBSEQUENT EVENTS (UNAUDITED)

     On April 9, 2003, Psychiatric Solutions, Inc., a company that manages behavioral health units and owns psychiatric facilities, purchased substantially all of the assets of the Company for approximately $15,000,000.

23

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     The following table sets forth the unaudited pro forma condensed combined financial data for Psychiatric Solutions, The Brown Schools, Riveredge and our merger with PMR as a combined company, giving effect to the acquisitions as if they had occurred on the dates indicated and after giving effect to the pro forma adjustments discussed herein. The unaudited pro forma condensed combined balance sheet as of March 31, 2003 has been derived from Psychiatric Solutions’ and The Brown Schools’ historical balance sheets, adjusted to give effect to this acquisition as if it occurred on March 31, 2003. The pro forma condensed combined income statement for the three months ended March 31, 2003 give effect to the acquisition of the The Brown Schools as if it has occurred on January 1, 2003. The pro forma condensed combined income statement for the year ended December 31, 2002 give effect to the acquisitions of The Brown Schools and Riveredge Hospital and our merger with PMR Corporation as if they occurred on January 1, 2002.

     The adjustments necessary to fairly present the unaudited pro forma condensed combined financial information have been made based on available information and in the opinion of management are reasonable. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with this unaudited pro forma condensed combined financial information. The pro forma adjustments are preliminary and revisions to the preliminary purchase price allocations may have a significant impact on the pro forma adjustments.

     The unaudited pro forma condensed financial information is for comparative purposes only and does not purport to represent what our financial position or results of operations would actually have been had the events noted above in fact occurred on the assumed dates or to project our financial position or results of operations for any future date or future period.

PF-1

Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet
March 31, 2003
(dollars in thousands)

				Historical
							The		The Brown			Pro Forma
				Psychiatric			Brown		Schools of			Purchase			Pro Forma
				Solutions			Schools(1)		Oklahoma, Inc.			Adjustments			Combined
Assets
	Current assets:
		Cash and cash equivalents		$	4,045		$	—	$	2		$	(2	)(2)	$	4,045
		Accounts receivable, net			22,137			8,913		2,213			—			33,263
		Other current assets			2,832			345		114			—			3,291
			Total current assets		29,014			9,258		2,329			(2	)		40,599
	Property, plant and equipment, net				33,764			13,321		2,226			30,625	(3)		79,936
	Costs in excess of net assets acquired, net				26,846			—		3,004			11,268	(4)		41,118
	Amortizable intangible asset, net				3,558			—		—			—			3,558
	Other assets				3,438			39		24			682	(5)		4,183
	Total assets			$	96,620		$	22,618	$	7,583		$	42,573		$	169,394
Liabilities and stockholders’ equity
	Current liabilities:
		Short-term borrowings		$	9,529		$	—	$	—		$	15,171	(6)	$	24,700
		Accounts payable			3,486			6,172		1,054			(597	)(2)		10,115
		Accrued liabilities			12,610			2,385		661			(572	)(2)		15,084
			Total current liabilities		25,625			8,557		1,715			14,002			49,899
	Long-term debt				36,657			—		—			36,000	(6)		72,657
	Other liabilities				3,447			—		—			—			3,447
	Total liabilities				65,729			8,557		1,715			50,002			126,003
	Preferred Stock				—			—		—			12,500	(6)		12,500
	Common stock				77			—		1			(1	)(7)		77
	Additional paid-in capital				35,013			14,061		10,749			(24,810	)(7)		35,013
	Notes receivable from employees and officers				(711	)		—		—			—			(711	)
	Accumulated deficit				(3,488	)		—		(4,882	)		4,882	(7)		(3,488	)
	Total stockholders’ equity				30,891			14,061		5,868			(19,929	)		30,891
	Total liabilities and stockholders’ equity			$	96,620		$	22,618	$	7,583		$	42,573		$	169,394

PF-2

Notes to Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet As
of March 31, 2003
(dollars in thousands)

(1)	This column presents condensed combined balance sheet data for five of the six facilities acquired from The Brown Schools in April 2003, including The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc. and The Oaks Psychiatric Hospital, Inc. This group of five facilities was audited separately from The Brown Schools of Oklahoma, Inc.
(2)	Represents the elimination of cash and cash equivalents ($2), Medicare liabilities ($572) and bank overdrafts ($597) not acquired in connection with the acquisition.
(3)	Represents the adjustment of the property, plant and equipment of The Brown Schools to reflect their appraised value.
(4)	Represents adjustment to goodwill, calculated as follows:

Total required financing	$	63,671
Less: Estimated capitalized financing costs		(682	)
Less: Net assets acquired		(51,721	)
Adjustments to goodwill	$	11,268

(5)	Represents estimated capitalized financing costs incurred in connection with the acquisition.
(6)	Represents the incurrence of $15,171 of short-term borrowings and $36,000 of long-term debt and the issuance of $12,500 of our series A convertible preferred stock to finance the acquisition.
(7)	Reflects the elimination of the acquisition’s equity accounts and existing accumulated deficit.

PF-3

Unaudited Pro Forma Condensed Combined Consolidated Income Statement
For the three months ended March 31, 2003
(dollars in thousands)

			Historical
						The			The Brown
			Psychiatric			Brown			Schools of			Pro Forma			Combined
			Solutions			Schools(1)			Oklahoma, Inc.			Adjustments			Proforma
Revenue			$	37,104		$	13,851		$	4,395		$	—		$	55,350
Expenses:
	Salaries, wages and employees benefits			17,785			8,319			2,146			—			28,250
	Professional fees			4,451			995			185			—			5,631
	Rentals and leases			248			188			77			—			513
	Other operating expenses(7)			8,850			3,434			1,551			(814	)(2)		13,021
	Provision for doubtful accounts			1,322			388			20			—			1,730
	Depreciation and amortization			667			279			59			65	(3)		1,070
	Other expenses(8)			499			458			—						957
		Total expenses		33,822			14,061			4,038			(749	)		51,172
Interest expenses				(1,420	)		(1,414	)		(257	)		389	(4)		(2,702	)
Earnings from containing operations before taxes				1,862			(1,624	)		100			1,138			1,476
Provision for taxes				1,073			—						(147	)(5)		926
Net earnings from continuing operations			$	789		$	(1,624	)	$	100		$	1,285		$	550
Accrued dividends on series A convertible preferred stock				—			—			—			156	(6)		156
Net earnings from continuing operations applicable to common shareholders			$	789		$	(1,624	)	$	100		$	1,129		$	394

PF-4

Unaudited Pro Forma Condensed Combined Consolidated Income Statement
For the year ended December 31, 2002
(dollars in thousands)

			Historical															Historical
												Pro Forma						The			The Brown
			Psychiatric			Riveredge						Purchase			Combined			Brown			Schools of			Pro Forma			Combined
			Solutions			Hospital(9)			PMR(9)			Adjustments			Proforma			Schools(1)			Oklahoma, Inc.			Adjustments			Pro Forma
Revenue			$	113,912		$	14,152		$	13,011		$	—		$	141,075		$	60,174		$	17,820		$	—		$	219,069
Expenses:
	Salaries, wages and employees benefits			62,326			8,907			1,513			(1,267	)(10)		71,479			33,931			8,507			—			113,917
	Professional fees			14,373			1,271			1,814			—			17,458			4,309			667			—			22,434
	Rentals and leases			870			52			264			—			1,186			708			297			—			2,191
	Other operating expenses(7)			20,651			2,576			9,532			—			32,759			14,401			6,152			(3,391	)(2)		49,921
	Provision for (recovery of) doubtful accounts			3,681			211			(1,964	)		—			1,928			1,728			61			—			3,717
	Depreciation and amortization			1,770			140			181			348	(11)		2,439			1,557			243			(187	)(3)		4,052
	Other expenses(8)			—			—			1,425			—			1,425			—			—			—			1,425
		Total expenses		103,671			13,157			12,765			(919	)		128,674			56,634			15,927			(3,578	)		197,657
Interest expense				(5,564	)		(628	)		(4	)		(922	)(12)		(7,118	)		(5,629	)		(853	)		1,114	(4)		(12,486	)
Other income — interest				—			—			209			(209	)(13)		—			—			—			—			—
Earnings from continuing operations before taxes				4,677			367			451			(212	)		5,283			(2,089	)		1,040			4,692			8,926
Provision (benefit) for taxes				(1,007	)		190			(3,255	)					(4,072	)		—			—			1,384	(5)		(2,688	)
Net earnings from continuing operations			$	5,684		$	177		$	3,706		$	(212	)	$	9,355		$	(2,089	)	$	1,040		$	3,308		$	11,614
Accrued dividends on series A convertible preferred stock				—			—			—			—			—			—			—			637	(6)		637
Net earnings from continuing operations to common shareholders applicable			$	5,684		$	177		$	3,706		$	(212	)	$	9,355		$	(2,089	)	$	1,040		$	2,671		$	10,977

PF-5

Notes to Unaudited Pro Forma Condensed Combined Income Statements
(dollars in thousands)

(1)	This column presents five of the six facilities acquired from The Brown Schools in April 2003, including The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc. and The Oaks Psychiatric Hospital, Inc. This group of five facilities was audited separately from The Brown Schools of Oklahoma, Inc.
(2)	Represents the elimination of overhead costs (salaries and expenses) historically allocated to the operation of The Brown Schools, plus Psychiatric Solutions’ expected incremental costs to manage the business.
(3)	Reflects adjustment to depreciation and amortization resulting from changes in the valuation of The Brown Schools’ fixed assets to reflect their appraised value.
(4)	Represents the elimination of historical interest expense and the recording of interest expense relating to the financing of the acquisition of The Brown Schools.
(5)	Reflects the expected provision (benefit) for income taxes resulting from the acquisition of The Brown Schools.
(6)	Reflects pay-in-kind dividends related to the issuance of $12,500 of Psychiatric Solutions’ series A convertible preferred stock concurrently with the acquisition of The Brown Schools.
(7)	Other operating expenses are comprised of (a) for Psychiatric Solutions, other operating expenses plus supplies expense, (b) for Riveredge Hospital, other operating expenses plus supplies, contract services, insurance, utilities, real estate taxes less rentals and leases, (c) for PMR, other operating expenses plus research and development expenses, (d) for The Brown Schools, other operating expenses plus supplies and management fees and (e) for The Brown Schools of Oklahoma, other operating expenses plus supplies, purchased services and management fees.
(8)	Other expenses include (a) for the three months ended March 31, 2003, expense of $960 to revalue put warrants, income of $461 to release reserves on stockholder notes and a loss of $458 related to a sale of land and (b) for the year ended December 31, 2002, $18 of recoveries from the sale of previously written down assets at PMR, $1,900 of employee severance and termination costs associated with the winding up of PMR and $457 of other various gains associated with PMR.
(9)	Includes the historical results of Aeries Healthcare Corporation and Subsidiary (d/b/a Riveredge Hospital), acquired effective July 1, 2002, and PMR, merger effective August 5, 2002, from the beginning of the period presented.

PF-6

Notes to Unaudited Pro Forma Condensed Combined Income Statements (Continued)
(dollars in thousands)

(10)	Reflects the reversal of accrued payouts to Riveredge Hospital option holders.
(11)	Reflects adjustment to depreciation and amortization resulting from changes in the valuation of Riveredge Hospital’s and PMR’s fixed assets to reflect their appraised value.
(12)	Represents the elimination of historical interest expense and the recording of interest expense relating to the financing of the acquisitions of Riveredge Hospital and PMR.
(13)	Reflects the lost interest income due to the reduction in cash, cash equivalents and short-term investments balances.

PF-7 -----END PRIVACY-ENHANCED MESSAGE-----