10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2006

or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                                          to                                         

Commission file number 0-20488

Psychiatric Solutions, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

840 Crescent Centre Drive, Suite 460
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)

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

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ  Accelerated filer o Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

     As of July 28, 2006, 53,127,090 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 (Unaudited)		1
Condensed Consolidated Statements of Income for the three and six month periods ended June 30, 2006 and 2005 (Unaudited)		2
Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2006 and 2005 (Unaudited)		3
Notes to Condensed Consolidated Financial Statements (Unaudited)		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		24
Item 1A. Risk Factors		24
Item 4. Submission of Matters to a Vote of Security Holders		24
Item 6. Exhibits		25
EX-2.1 STOCK PURCHASE AGREEMENT 05/26/06
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CAO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CAO

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

	June 30,		December 31,
	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	56,453	$	54,699
Accounts receivable, less allowance for doubtful accounts of $17,919 and $15,355, respectively		147,123		132,288
Prepaids and other		48,146		53,473
Total current assets		251,722		240,460
Property and equipment, net of accumulated depreciation		409,284		378,163
Cost in excess of net assets acquired		548,373		526,536
Other assets		27,494		29,872
Total assets	$	1,236,873	$	1,175,031
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,108	$	18,726
Salaries and benefits payable		46,131		46,872
Other accrued liabilities		37,026		34,363
Current portion of long-term debt		364		325
Total current liabilities		101,629		100,286
Long-term debt, less current portion		485,808		482,064
Deferred tax liability		42,537		32,151
Other liabilities		23,403		20,818
Total liabilities		653,377		635,319
Stockholders’ equity:
Common stock, $0.01 par value, 125,000 shares authorized; 53,054 and 52,430 issued and outstanding, respectively		531		524
Additional paid-in capital		511,992		495,768
Retained earnings		70,973		43,420
Total stockholders’ equity		583,496		539,712
Total liabilities and stockholders’ equity	$	1,236,873	$	1,175,031

See accompanying notes.

1

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands except for per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenue	$	248,404		$	139,490		$	490,716		$	273,758
Salaries, wages and employee benefits (including share-based compensation of $2,136 and $8,390 for the three and six months ended June 30, 2006, respectively)		138,133			74,739			277,932			148,019
Professional fees		24,286			14,582			47,001			28,615
Supplies		14,417			8,655			28,431			16,917
Rentals and leases		3,296			2,391			6,643			4,661
Other operating expenses		23,948			15,736			47,669			30,891
Provision for doubtful accounts		4,592			2,657			9,358			5,313
Depreciation and amortization		4,867			3,044			9,612			5,924
Interest expense		9,270			3,310			18,478			6,815
Loss on refinancing long-term debt		—			—			—			6,990
		222,809			125,114			445,124			254,145
Income from continuing operations before income taxes		25,595			14,376			45,592			19,613
Provision for income taxes		9,726			5,607			17,325			7,649
Income from continuing operations		15,869			8,769			28,267			11,964
(Loss) income from discontinued operations, net of income tax benefit (provision) of $311, $39, $437 and $(45) for the respective three and six month periods in 2006 and 2005		(508	)		(62	)		(714	)		71
Net income	$	15,361		$	8,707		$	27,553		$	12,035
Basic earnings per share:
Income from continuing operations	$	0.30		$	0.21		$	0.54		$	0.29
(Loss) income from discontinued operations, net of taxes		(0.01	)		—			(0.02	)		—
Net income	$	0.29		$	0.21		$	0.52		$	0.29
Diluted earnings per share:
Income from continuing operations	$	0.29		$	0.21		$	0.52		$	0.28
(Loss) income from discontinued operations, net of taxes		(0.01	)		—			(0.01	)		—
Net income	$	0.28		$	0.21		$	0.51		$	0.28
Shares used in computing per share amounts:
Basic		52,913			41,029			52,715			40,997
Diluted		54,070			42,457			53,981			42,402

See accompanying notes.

2

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Six Months Ended June 30,
	2006			2005
Operating activities:
Net income	$	27,553		$	12,035
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Depreciation and amortization		9,612			5,924
Share-based compensation		8,390			—
Amortization of loan costs		811			338
Loss on refinancing long-term debt		—			6,990
Loss (income) from discontinued operations, net of taxes		714			(71	)
Change in income tax assets and liabilities		16,283			1,446
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(9,267	)		(5,001	)
Prepaids and other current assets		(4,999	)		(2,551	)
Accounts payable		(1,339	)		434
Salaries and benefits payable		456			3,957
Accrued liabilities and other liabilities		2,115			3,378
Net cash provided by continuing operating activities		50,329			26,879
Net cash provided by discontinued operating activities		1,708			142
Net cash provided by operating activities		52,037			27,021
Investing activities:
Cash paid for acquisitions, net of cash acquired		(44,471	)		(5,793	)
Capital purchases of leasehold improvements, equipment and software		(13,123	)		(10,029	)
Cash paid for investments in equity method investees		—			(840	)
Other assets		(317	)		(883	)
Net cash used in investing activities		(57,911	)		(17,545	)
Financing activities:
Principal payments on long-term debt		(180	)		(50,427	)
Net increase in revolving credit facility		—			20,000
Payment of loan and issuance costs		(40	)		(487	)
Refinancing of long-term debt		—			(5,316	)
Excess tax benefits from share-based payment arrangements		4,248			—
Proceeds from issuance of common stock upon exercise of stock options		3,600			1,092
Net cash provided by (used in) financing activities		7,628			(35,138	)
Net increase (decrease) in cash		1,754			(25,662	)
Cash and cash equivalents at beginning of the period		54,699			33,451
Cash and cash equivalents at end of the period	$	56,453		$	7,789
Effect of Acquisitions:
Assets acquired, net of cash acquired	$	54,164		$	—
Cash paid for prior year acquisitions		—			5,793
Liabilities assumed		(5,730	)		—
Long-term debt assumed		(3,963	)		—
Cash paid for acquisitions, net of cash acquired	$	44,471		$	5,793

See accompanying notes.

3

PSYCHIATRIC SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

1. Recent Developments

On January 9, 2006, we distributed 26,214,764 new shares of common stock as a result of a 2-for-1 stock split that was effected in the form of a 100 percent stock dividend to our stockholders of record at the close of business on December 27, 2005. All shares and per share amounts for periods prior to January 9, 2006 have been adjusted to reflect the 2-for-1 stock split.

We completed the acquisitions of three inpatient behavioral health care facilities in January 2006 and one inpatient behavioral health care facility in May 2006 with an aggregate of 286 beds. These facilities are located in Jeffersonville, Indiana; Fort Lauderdale, Florida; Midland, Texas and Louisville, Mississippi. In July 2006, we also completed the acquisitions of two inpatient behavioral health care facilities located in Mt. Dora, Florida and Desoto, Texas with an aggregate of 160 beds.

On May 26, 2006, we entered into a Stock Purchase Agreement to purchase Alternative Behavioral Services, Inc. (“ABS”) for a cash purchase price of $250 million. ABS owns and operates nine inpatient facilities with approximately 1,050 beds. The transaction, which is subject to customary closing conditions, including regulatory approvals and the absence of a material adverse change in the business or results of operations of ABS, is expected to close in the fourth quarter of 2006. Accordingly, there can be no assurances that the transaction will close in the fourth quarter or at all.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for audited financial statements. The condensed consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain reclassifications have been made to the prior year to conform to current year presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position have been included. The majority of our expenses are “cost of revenue” items. General and administrative expenses, excluding stock compensation expense, were approximately 3% of net revenue for the six months ended June 30, 2006. Operating results for the six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 2, 2006.

3. Earnings Per Share

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

4

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Numerator:
Income from continuing operations	$	15,869		$	8,769		$	28,267		$	11,964
(Loss) income from discontinued operations, net of taxes		(508	)		(62	)		(714	)		71
Net income	$	15,361		$	8,707		$	27,553		$	12,035
Denominator:
Weighted average shares outstanding for basic earnings per share		52,913			41,029			52,715			40,997
Effects of dilutive stock options and warrants outstanding		1,157			1,428			1,266			1,405
Shares used in computing diluted earnings per common share		54,070			42,457			53,981			42,402
Basic earnings per share:
Income from continuing operations	$	0.30		$	0.21		$	0.54		$	0.29
(Loss) income from discontinued operations, net of taxes		(0.01	)		—			(0.02	)		—
	$	0.29		$	0.21		$	0.52		$	0.29
Diluted earnings per share:
Income from continuing operations	$	0.29		$	0.21		$	0.52		$	0.28
(Loss) income from discontinued operations, net of taxes		(0.01	)		—			(0.01	)		—
	$	0.28		$	0.21		$	0.51		$	0.28

4. Share-Based Compensation

We adopted SFAS No. 123 (Revised 2004), Share Based Payment (“SFAS No. 123R”), under the modified-prospective transition method on January 1, 2006. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all share-based payments granted prior to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and allowed under the original provisions of SFAS No. 123. Prior to the adoption of SFAS No. 123R, we accounted for our stock option plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations.

We recognized approximately $2.1 million and $8.4 million in share-based compensation expense and approximately $0.8 million and $3.2 million of related income tax benefit for the three and six months ended June 30, 2006, respectively. Share-based compensation expense for the six months ended June 30, 2006 includes $2.2 million recorded in the quarter ended March 31, 2006 resulting from reversing the cancellation and accelerating the vesting of 89,014 stock options previously granted to our former Chief Operating Officer. Remaining share-based compensation expense was recorded as a result of adopting SFAS No. 123R. The impact of share-based compensation expense, net of tax, on our basic and diluted earnings per share was approximately $0.02 and $0.10 per share for the three and six months ended June 30, 2006, respectively. Also as a result of adopting SFAS No. 123R, we classified $4.2 million in income tax benefits in excess of share-based compensation expense on stock options exercised in 2006 as cash flow from financing activities in our Condensed Consolidated Statement of Cash Flow for the six months ended June 30, 2006. Prior to adoption of SFAS No. 123R, income tax benefits in excess of share-based compensation expense recognized on stock options exercised were classified as cash flows from operations. The fair value of our stock options was estimated using the Black-Scholes option pricing model.

For periods presented prior to the adoption of SFAS No. 123R, pro forma information regarding net income and earnings per share as required by SFAS No. 123R has been determined as if we had accounted for our employee stock options under the original provisions of SFAS No. 123. The fair value of these options was estimated using the Black-Scholes option pricing model. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option’s vesting period. Our pro forma information follows (in thousands, except per share amounts):

5

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

	Three Months		Six Months
	Ended June 30,		Ended June 30,
	2005		2005
Net income	$	8,707	$	12,035
Pro forma compensation expense from stock options, net of taxes		881		2,705
Pro forma net income	$	7,826	$	9,330
Basic earnings per share, as reported	$	0.21	$	0.29
Diluted earnings per share, as reported	$	0.21	$	0.28
Basic pro forma earnings per share	$	0.19	$	0.23
Diluted pro forma earnings per share	$	0.18	$	0.22

At our Annual Meeting of Stockholders held May 16, 2006, our stockholders approved an amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan, as amended (the “Equity Incentive Plan”) that increased shares of our common stock available for issuance under the Equity Incentive Plan by 1,250,000 shares. As a result, a maximum of 11,116,666 shares of our common stock are authorized for grant as stock options or restricted stock under the Equity Incentive Plan. Under the Equity Incentive Plan, stock options may be granted for terms of up to ten years. Initial grants to employees are generally exercisable in annual increments of 25% each year, commencing one year after the date of grant. Stock options granted subsequent to an employee’s initial grant are generally exercisable in increments of 25% each year, commencing on the date of grant. Generally, the exercise prices of incentive stock options and nonqualified stock options shall not be less than 100% of the fair market value of the common shares on the trading day immediately preceding the date of grant.

A maximum of 683,334 shares of our common stock are authorized for grant as stock options under the Psychiatric Solutions, Inc. Outside Directors’ Stock Option Plan (the “Directors’ Plan”). The Directors’ Plan provides for a grant of 8,000 stock options at each annual meeting of stockholders to each outside director at the fair market value of our common shares on the trading day immediately preceding the date of grant. The Directors’ Plan also provides for an initial grant of 12,000 stock options to each new outside director on the date of the director’s initial election or appointment to the board of directors. The options vest 25% on the grant date and 25% on the succeeding three anniversaries of the grant date and generally have terms of ten years.

Stock option activity during 2006 is as follows (number of options and intrinsic value in thousands):

						Weighted
				Weighted		Average
	Number			Average		Remaining		Aggregate
	of			Exercise		Contractual		Intrinsic
	Options			Price		Term (in years)		Value
Outstanding at December 31, 2005		4,472		$	13.01		n/a		n/a
Granted		1,932		$	32.81		n/a		n/a
Canceled		(45	)	$	15.02		n/a		n/a
Exercised		(570	)	$	6.32		n/a		n/a
Outstanding at June 30, 2006		5,789		$	20.01		8	$	59,123
Exercisable at June 30, 2006		2,093		$	14.69		8	$	31,391

The following table summarizes the weighted average grant-date fair values of options and the weighted average assumptions we used to develop the fair value estimates under each of the option valuation models for options granted in the six month periods ended June 30, 2006 and 2005:

	Six Months Ended June 30,
	2006			2005
Weighted average grant-date fair value of options	$	9.75		$	7.50
Risk-free interest rate		5	%		4	%
Expected volatility		30	%		33	%
Expected term (in years)		4			5
Dividend yield		0	%		0	%

6

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

Our estimate of expected volatility for stock options granted in 2006 is based upon the historical volatility of our common stock. Our estimate of expected volatility for stock options granted prior to 2006 is based upon the historical volatility of comparable companies. Our estimate of expected term is based upon our historical stock option exercise experience.

Based on our stock option and restricted stock grants outstanding at June 30, 2006, we estimate remaining unrecognized share-based compensation expense to be approximately $20 million with a weighted average remaining life of 3.7 years.

The total intrinsic value, which represents the difference between the underlying stock’s market price and the option’s exercise price, of options exercised during the six months ended June 30, 2006 and 2005 was $14.5 million and $1.4 million, respectively.

Prior to 2006, we had not granted any shares of restricted stock. During February and March 2006, we granted 55,000 shares of restricted stock to certain executive officers. These shares of restricted stock vest 25% on each anniversary of the grant date and had a weighted-average grant-date fair value of $33.11 per share.

5. Mergers and Acquisitions

Acquiring free-standing psychiatric facilities is a key part of our business strategy. Our financial statements for the periods presented are not comparable because of the acquisition growth we have experienced.

We completed the acquisitions of three inpatient behavioral health care facilities in January 2006 and one inpatient behavioral health care facility in May 2006 with an aggregate of 286 beds. These facilities are located in Jeffersonville, Indiana; Fort Lauderdale, Florida; Midland, Texas and Louisville, Mississippi. In July 2006, we also completed the acquisitions of two inpatient behavioral health care facilities located in Mt. Dora, Florida and Desoto, Texas with an aggregate of 160 beds.

On July 1, 2005, we completed the acquisition of the capital stock of Ardent Health Services, Inc. (“Ardent Behavioral”), owner and operator of 20 inpatient psychiatric facilities with approximately 2,000 inpatient beds.

6. Long-term debt

Long-term debt consists of the following (in thousands):

	June 30,		December 31,
	2006		2005
Senior credit facility:
Senior Secured Term Loan Facility, expiring on July 1, 2012 and bearing interest of 6.9% and 6.2% at June 30, 2006 and December 31, 2005, respectively	$	200,000	$	200,000
7 3/4% Senior Subordinated Notes due July 15, 2015		220,000		220,000
10 5/8% Senior Subordinated Notes due June 15, 2013		38,681		38,681
Mortgage loans on facilities, maturing in 2036, 2037 and 2038 and bearing fixed interest rates of 5.65% to 7.6%		27,206		23,377
Other		285		331
		486,172		482,389
Less current portion		364		325
Long-term debt	$	485,808	$	482,064

Senior Credit Facility

On July 1, 2005, we amended and restated our credit agreement (the “Credit Agreement”) with Bank of America, N.A. to include a $325 million senior secured term loan facility with Citicorp North America, Inc. We borrowed $325 million on the senior secured term loan facility on July 1, 2005 to finance a portion of the purchase price of Ardent Behavioral. During the quarter ended September 30, 2005, we repaid $125 million of the senior secured term loan facility with a portion of the proceeds received from the sale of 8,050,000 shares of our common stock. The remaining $200 million balance on our senior secured term loan facility is due on July 1, 2012.

Our Credit Agreement is secured by substantially all of the personal property owned by us or our subsidiaries, substantially all real property owned by us or our subsidiaries that has a value in excess of $2.5 million and the stock of our operating subsidiaries. In addition, the Credit Agreement is fully and unconditionally guaranteed by substantially all of our operating subsidiaries. The revolving

7

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

credit facility and senior secured term loan facility accrue interest at our choice of the “Base Rate” or the “Eurodollar Rate” (as defined in the Credit Agreement) and are due December 21, 2009 and July 1, 2012, respectively. The “Base Rate” and “Eurodollar Rate” fluctuate based upon market rates and certain leverage ratios, as defined in the Credit Agreement. At June 30, 2006, we had no borrowings outstanding and $149.4 million available for future borrowings under the revolving credit facility. Until the maturity date, we may borrow, repay and re-borrow an amount not to exceed $150 million on our revolving credit facility. All repayments made under the senior secured term loan facility are permanent. We pay a quarterly commitment fee of 0.5% per annum on the unused portion of our revolving credit facility. Commitment fees were approximately $375,000 for the six months ended June 30, 2006.

Our Credit Agreement contains customary covenants that include: (1) a limitation on capital expenditures and investments, sales of assets, mergers, changes of ownership, new principal lines of business, indebtedness, transactions with affiliates, dividends and redemptions; (2) various financial covenants; and (3) cross-default covenants triggered by a default of any other indebtedness of at least $5.0 million. As of June 30, 2006, we were in compliance with all debt covenant requirements. If we violate one or more of these covenants, amounts outstanding under the revolving credit facility, senior secured term loan facility and the majority of our other debt arrangements could become immediately payable and additional borrowings could be restricted.

7³/₄% Notes

On July 6, 2005, we issued $220 million in 7³/₄% Notes, which are fully and unconditionally guaranteed on a senior subordinated basis by substantially all of our existing operating subsidiaries. Proceeds from the issuance of these notes were used to repay indebtedness on a $150 million bridge loan, which financed a portion of the purchase price of Ardent Behavioral and to repay approximately $61.3 million of our 10⁵/₈% Notes. Interest on these notes accrues at the rate of 7³/₄% per annum and is payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2006. The 7³/₄% Notes will mature on July 15, 2015.

10⁵/₈% Notes

On June 30, 2003, we issued $150 million in 10⁵/₈% Notes, which are fully and unconditionally guaranteed on a senior subordinated basis by substantially all of our existing operating subsidiaries. Interest on these notes accrues at the rate of 10⁵/₈% per annum and is payable semi-annually in arrears on June 15 and December 15. The 10⁵/₈% Notes will mature on June 15, 2013.

On January 14, 2005, we redeemed $50 million of our 10⁵/₈% Notes and paid a 10⁵/₈% penalty and related accrued interest on the amount redeemed. We borrowed $30 million under our revolving line of credit and used cash on hand for the remainder of the redemption. On July 6, 2005, we repurchased approximately $61.3 million of our 10⁵/₈% Notes and paid a premium of approximately $8.6 million on the notes repurchased using proceeds from the issuance of our 7³/₄% Notes.

Mortgage Loans

During 2002 and 2003, we borrowed approximately $23.8 million under mortgage loan agreements insured by the U.S. Department of Housing and Urban Development (“HUD”). In connection with the purchase of real estate at a formerly leased inpatient facility during 2006, we assumed a mortgage loan agreement insured by HUD of approximately $4.0 million. The mortgage loans insured by HUD are secured by real estate located at Holly Hill Hospital in Raleigh, North Carolina; West Oaks Hospital in Houston, Texas; Riveredge Hospital near Chicago, Illinois and Canyon Ridge Hospital in Chino, California. Interest accrues on the Holly Hill, West Oaks, Riveredge and Canyon Ridge HUD loans at 5.95%, 5.85%, 5.65% and 7.6%, respectively, and principal and interest are payable in 420 monthly installments through December 2037, September 2038, December 2038 and January 2036, respectively. The carrying amount of assets held as collateral approximated $29.5 million at June 30, 2006.

7. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2006 and 2005 reflects an effective tax rate of approximately 38% and 39%, respectively. The decrease in the effective tax rate is primarily due to a decrease in our overall effective state income tax rate.

Recently Issued Accounting Pronouncement

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will be effective beginning January 1, 2007. We have not completed our evaluation of the impact that adoption of FIN 48 will have on our consolidated financial statements.

8

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

8. Discontinued Operations

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that all components of an entity that have been disposed of (by sale, by abandonment or in a distribution to owners) or are held for sale and whose cash flows can be clearly distinguished from the rest of the entity be presented as discontinued operations. We terminated three of our contracts to manage state-owned facilities during 2006 and two of our contracts during 2005. The operations of these contracts were previously reported within our management contract segment. In the second quarter of 2006, we entered into an agreement to sell a therapeutic boarding school, previously reported within our owned and leased facilities segment. As a result, the net assets of this therapeutic boarding school were reclassified to assets held for sale at the net sales price. Accordingly, these operations, net of applicable income taxes, have been presented as discontinued operations and prior period consolidated financial statements have been reclassified.

The components of (loss) income from discontinued operations, net of taxes, are as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Revenue	$	261		$	4,090		$	2,107		$	8,552
Salaries, wages and employee benefits		183			2,976			1,586			6,065
Professional fees		—			306			83			532
Supplies		14			375			223			696
Rentals and leases		34			35			98			104
Other operating expenses		53			458			439			943
Provision for doubtful accounts		25			19			47			31
Depreciation and amortization		11			11			22			36
Interest expense		—			11			—			29
Loss on sale of discontinued operation		760			—			760			—
		1,080			4,191			3,258			8,436
(Loss) income from discontinued operations before income taxes		(819	)		(101	)		(1,151	)		116
(Benefit from) provision for income taxes		(311	)		(39	)		(437	)		45
(Loss) income from discontinued operations, net of taxes	$	(508	)	$	(62	)	$	(714	)	$	71

9. Disclosures About Reportable Segments

In accordance with the criteria of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, we operate two reportable segments: (1) owned and leased facilities and (2) management contracts. Each of our inpatient facilities and inpatient management contracts qualifies as an operating segment under SFAS No. 131; however, none is individually material. We have aggregated our operations into two reportable segments based on the characteristics of the services provided. As of June 30, 2006, the owned and leased facilities segment provides mental health and behavioral health services to patients in its 52 owned and 7 leased inpatient facilities in 27 states. The management contracts segment provides inpatient psychiatric management and development services to inpatient behavioral health units in hospitals and clinics. Activities classified as “Corporate and Other” in the following schedule relate primarily to unallocated home office items and discontinued operations.

Adjusted EBITDA is a non-GAAP financial measure and is defined as net income (loss) before discontinued operations, interest expense (net of interest income), income taxes, depreciation, amortization, share-based compensation and other items included in the caption labeled “Other expenses.” These other expenses may occur in future periods, but the amounts recognized can vary significantly from period to period and do not directly relate to the ongoing operations of our health care facilities. Our management relies on adjusted EBITDA as the primary measure to review and assess the operating performance of our inpatient facilities and their management teams. We believe it is useful to investors to provide disclosures of our operating results on the same basis as that used by management. Management and investors also review adjusted EBITDA to evaluate our overall performance and to compare our current operating results with corresponding periods and with other companies in the health care industry. You should not consider adjusted EBITDA in isolation or as a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with U. S. generally accepted accounting principles. Because adjusted EBITDA is not a measure of financial performance

9

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

under U. S. generally accepted accounting principles and is susceptible to varying calculations, it may not be comparable to similarly titled measures of other companies. The following is a financial summary by reportable segment for the periods indicated (dollars in thousands):

Three Months Ended June 30, 2006
	Owned and
	Leased		Management		Corporate
	Facilities		Contracts		and Other			Consolidated
Revenue	$	235,654	$	12,750	$	—		$	248,404
Adjusted EBITDA	$	46,305	$	2,225	$	(6,662	)	$	41,868
Interest expense		5,112		1		4,157			9,270
Depreciation and amortization		4,414		170		283			4,867
Provision for income taxes		—		—		9,726			9,726
Inter-segment expenses		9,378		533		(9,911	)		—
Share-based compensation		—		—		2,136			2,136
Income (loss) from continuing operations	$	27,401	$	1,521	$	(13,053	)	$	15,869
Segment assets	$	1,090,214	$	29,192	$	117,467		$	1,236,873

Six Months Ended June 30, 2006
	Owned and
	Leased		Management		Corporate
	Facilities		Contracts		and Other			Consolidated
Revenue	$	465,410	$	25,306	$	—		$	490,716
Adjusted EBITDA	$	91,071	$	4,369	$	(13,368	)	$	82,072
Interest expense		9,097		2		9,379			18,478
Depreciation and amortization		8,680		341		591			9,612
Provision for income taxes		—		—		17,325			17,325
Inter-segment expenses		18,752		1,068		(19,820	)		—
Share-based compensation		—		—		8,390			8,390
Income (loss) from continuing operations	$	54,542	$	2,958	$	(29,233	)	$	28,267
Segment assets	$	1,090,214	$	29,192	$	117,467		$	1,236,873

10

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

Three Months Ended June 30, 2005

	Owned and
	Leased		Management		Corporate
	Facilities		Contracts		and Other			Consolidated
Revenue	$	126,617	$	12,873	$	—		$	139,490
Adjusted EBITDA	$	23,242	$	2,488	$	(5,000	)	$	20,730
Interest expense		8,362		—		(5,052	)		3,310
Depreciation and amortization		2,718		169		157			3,044
Provision for income taxes		825		—		4,782			5,607
Inter-segment expenses		3,844		663		(4,507	)		—
Income (loss) from continuing operations	$	7,493	$	1,656	$	(380	)	$	8,769
Segment assets	$	418,564	$	28,193	$	38,274		$	485,031

Six Months Ended June 30, 2005

	Owned and
	Leased		Management		Corporate
	Facilities		Contracts		and Other			Consolidated
Revenue	$	247,950	$	25,808	$	—		$	273,758
Adjusted EBITDA	$	43,853	$	4,963	$	(9,474	)	$	39,342
Interest expense		16,661		1		(9,847	)		6,815
Depreciation and amortization		5,283		340		301			5,924
Provision for income taxes		1,224		—		6,425			7,649
Inter-segment expenses		7,381		1,123		(8,504	)		—
Other expenses:
Loss on refinancing long-term debt		—		—		6,990			6,990
Total other expenses		—		—		6,990			6,990
Income (loss) from continuing operations	$	13,304	$	3,499	$	(4,839	)	$	11,964
Segment assets	$	418,564	$	28,193	$	38,274		$	485,031

10. Financial Information for the Company and Its Subsidiaries

We conduct substantially all of our business through our subsidiaries. Presented below is consolidated financial information for us and our subsidiaries as of June 30, 2006 and December 31, 2005, and for the three and six months ended June 30, 2006 and 2005. The information segregates the parent company (Psychiatric Solutions, Inc.), the combined wholly-owned subsidiary guarantors, the combined non-guarantors, and eliminations. All of the subsidiary guarantees are both full and unconditional and joint and several.

11

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

Condensed Consolidating Balance Sheet
As of June 30, 2006
(Dollars in thousands)

				Combined							Total
				Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent			Guarantors		Guarantors		Adjustments			Amounts
Current Assets:
Cash and cash equivalents	$	—		$	44,511	$	11,942	$	—		$	56,453
Accounts receivable, net		—			147,123		—		—			147,123
Prepaids and other		—			41,306		6,840		—			48,146
Total current assets		—			232,940		18,782		—			251,722
Property and equipment, net of accumulated depreciation		—			380,360		36,635		(7,711	)		409,284
Cost in excess of net assets acquired		—			548,373		—		—			548,373
Investment in subsidiaries		433,825			—		—		(433,825	)		—
Other assets		11,686			12,314		3,494		—			27,494
Total assets	$	445,511		$	1,173,987	$	58,911	$	(441,536	)	$	1,236,873
Current Liabilities:
Accounts payable	$	—		$	18,108	$	—	$	—		$	18,108
Salaries and benefits payable		—			46,131		—		—			46,131
Other accrued liabilities		12,572			24,306		4,960		(4,812	)		37,026
Current portion of long-term debt		71			—		293		—			364
Total current liabilities		12,643			88,545		5,253		(4,812	)		101,629
Long-term debt, less current portion		458,895			—		26,913		—			485,808
Deferred tax liability		—			42,537		—		—			42,537
Other liabilities		2,720			9,373		11,310		—			23,403
Total liabilities		474,258			140,455		43,476		(4,812	)		653,377
Stockholders’ (deficit) equity		(28,747	)		1,033,532		15,435		(436,724	)		583,496
Total liabilities and stockholders’ (deficit) equity	$	445,511		$	1,173,987	$	58,911	$	(441,536	)	$	1,236,873

Condensed Consolidating Balance Sheet
As of December 31, 2005
(Dollars in thousands)

				Combined							Total
				Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent			Guarantors		Guarantors		Adjustments			Amounts
Current Assets:
Cash and cash equivalents	$	—		$	44,114	$	10,585	$	—		$	54,699
Accounts receivable, net		—			132,288		—		—			132,288
Prepaids and other		—			53,473		—		—			53,473
Total current assets		—			229,875		10,585		—			240,460
Property and equipment, net of accumulated depreciation		—			356,817		29,179		(7,833	)		378,163
Cost in excess of net assets acquired		—			526,536		—		—			526,536
Investment in subsidiaries		444,888			—		—		(444,888	)		—
Other assets		12,441			14,016		3,415		—			29,872
Total assets	$	457,329		$	1,127,244	$	43,179	$	(452,721	)	$	1,175,031
Current Liabilities:
Accounts payable	$	—		$	18,726	$	—	$	—		$	18,726
Salaries and benefits payable		—			46,872		—		—			46,872
Other accrued liabilities		12,994			21,056		313		—			34,363
Current portion of long-term debt		77			—		248		—			325
Total current liabilities		13,071			86,654		561		—			100,286
Long-term debt, less current portion		458,935			—		23,129		—			482,064
Deferred tax liability		—			32,151		—		—			32,151
Other liabilities		3,011			9,544		8,263		—			20,818
Total liabilities		475,017			128,349		31,953		—			635,319
Stockholders’ (deficit) equity		(17,688	)		998,895		11,226		(452,721	)		539,712
Total liabilities and stockholders’ (deficit) equity	$	457,329		$	1,127,244	$	43,179	$	(452,721	)	$	1,175,031

12

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2006
(Unaudited, dollars in thousands)

				Combined								Total
				Subsidiary			Combined Non-		Consolidating			Consolidated
	Parent			Guarantors			Guarantors		Adjustments			Amounts
Revenue	$	—		$	248,404		$	2,863	$	(2,863	)	$	248,404
Salaries, wages and employee benefits		—			138,133			—		—			138,133
Professional fees		—			24,260			26		—			24,286
Supplies		—			14,417			—		—			14,417
Rentals and leases		—			3,296			—		—			3,296
Other operating expenses		—			23,906			1,822		(1,780	)		23,948
Provision for doubtful accounts		—			4,592			—		—			4,592
Depreciation and amortization		—			4,653			275		(61	)		4,867
Interest expense		8,945			—			325		—			9,270
		8,945			213,257			2,448		(1,841	)		222,809
(Loss) income from continuing operations before income taxes		(8,945	)		35,147			415		(1,022	)		25,595
(Benefit from) provision for income taxes		(3,399	)		13,125			—		—			9,726
(Loss) income from continuing operations		(5,546	)		22,022			415		(1,022	)		15,869
Loss from discontinued operations, net of taxes		—			(508	)		—		—			(508	)
Net (loss) income	$	(5,546	)	$	21,514		$	415	$	(1,022	)	$	15,361

Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2006
(Unaudited, dollars in thousands)

				Combined								Total
				Subsidiary			Combined Non-		Consolidating			Consolidated
	Parent			Guarantors			Guarantors		Adjustments			Amounts
Revenue	$	—		$	490,716		$	5,684	$	(5,684	)	$	490,716
Salaries, wages and employee benefits		—			277,932			—		—			277,932
Professional fees		—			46,927			74		—			47,001
Supplies		—			28,431			—		—			28,431
Rentals and leases		—			6,643			—		—			6,643
Other operating expenses		—			47,076			4,165		(3,572	)		47,669
Provision for doubtful accounts		—			9,358			—		—			9,358
Depreciation and amortization		—			9,196			538		(122	)		9,612
Interest expense		17,837			—			641		—			18,478
		17,837			425,563			5,418		(3,694	)		445,124
(Loss) income from continuing operations before income taxes		(17,837	)		65,153			266		(1,990	)		45,592
(Benefit from) provision for income taxes		(6,778	)		23,986			117		—			17,325
(Loss) income from continuing operations		(11,059	)		41,167			149		(1,990	)		28,267
Loss from discontinued operations, net of taxes		—			(714	)		—		—			(714	)
Net (loss) income	$	(11,059	)	$	40,453		$	149	$	(1,990	)	$	27,553

13

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2005
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Revenue	$	—		$	139,490		$	2,542		$	(2,542	)	$	139,490
Salaries, wages and employee benefits		—			74,739			—			—			74,739
Professional fees		—			14,567			15			—			14,582
Supplies		—			8,655			—			—			8,655
Rentals and leases		—			2,391			—			—			2,391
Other operating expenses		—			15,052			2,488			(1,804	)		15,736
Provision for doubtful accounts		—			2,657			—			—			2,657
Depreciation and amortization		—			2,859			246			(61	)		3,044
Interest expense		2,975			—			335			—			3,310
		2,975			120,920			3,084			(1,865	)		125,114
(Loss) income before income taxes		(2,975	)		18,570			(542	)		(677	)		14,376
(Benefit from) provision for income taxes		(1,131	)		6,738			—			—			5,607
(Loss) income from continuing operations		(1,844	)		11,832			(542	)		(677	)		8,769
Loss from discontinued operations, net of taxes					(62	)		—			—			(62	)
Net (loss) income	$	(1,844	)	$	11,770		$	(542	)	$	(677	)	$	8,707

Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2005
(Dollars in thousands)

				Combined								Total
				Subsidiary		Combined Non-			Consolidating			Consolidated
	Parent			Guarantors		Guarantors			Adjustments			Amounts
Revenue	$	—		$	273,758	$	4,168		$	(4,168	)	$	273,758
Salaries, wages and employee benefits		—			148,019		—			—			148,019
Professional fees		—			28,560		55			—			28,615
Supplies		—			16,917		—			—			16,917
Rentals and leases		—			4,661		—			—			4,661
Other operating expenses		—			30,203		3,380			(2,692	)		30,891
Provision for doubtful accounts		—			5,313		—			—			5,313
Depreciation and amortization		—			5,555		491			(122	)		5,924
Interest expense		6,106			—		709			—			6,815
Loss on refinancing of long-term debt		6,990			—		—			—			6,990
		13,096			239,228		4,635			(2,814	)		254,145
(Loss) income before income taxes		(13,096	)		34,530		(467	)		(1,354	)		19,613
(Benefit from) provision for income taxes		(4,976	)		12,625		—			—			7,649
(Loss) income from continuing operations		(8,120	)		21,905		(467	)		(1,354	)		11,964
Income from discontinued operations, net of taxes					71		—			—			71
Net (loss) income	$	(8,120	)	$	21,976	$	(467	)	$	(1,354	)	$	12,035

14

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2006
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating activities:
Net (loss) income	$	(11,059	)	$	40,453		$	149		$	(1,990	)	$	27,553
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			9,196			538			(122	)		9,612
Share-based compensation		—			8,390			—			—			8,390
Amortization of loan costs		789			—			22			—			811
Loss from discontinued operations, net of taxes		—			714			—			—			714
Change in income tax assets and liabilities		—			16,283			—			—			16,283
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(9,267	)		—			—			(9,267	)
Prepaids and other current assets		—			1,841			(6,840	)		—			(4,999	)
Accounts payable		—			(1,339	)		—			—			(1,339	)
Salaries and benefits payable		—			456			—			—			456
Accrued liabilities and other liabilities		(1,047	)		(4,506	)		7,668			—			2,115
Net cash (used in) provided by continuing operating activities		(11,317	)		62,221			1,537			(2,112	)		50,329
Net cash provided by discontinued operating activities		—			1,708			—			—			1,708
Net cash (used in) provided by operating activities		(11,317	)		63,929			1,537			(2,112	)		52,037
Investing activities:
Cash paid for acquisitions, net of cash acquired		(44,471	)		—			—			—			(44,471	)
Capital purchases of leasehold improvements, equipment and software		—			(13,123	)		—			—			(13,123	)
Other assets		—			(511	)		194			—			(317	)
Net cash (used in) provided by investing activities		(44,471	)		(13,634	)		194			—			(57,911	)
Financing activities:
Principal payments on long-term debt		(46	)		—			(134	)		—			(180	)
Net transfers to and from members		48,026			(49,898	)		(240	)		2,112			—
Payment of loan and issuance costs		(40	)		—			—			—			(40	)
Excess tax benefits from share-based payment arrangements		4,248			—			—			—			4,248
Proceeds from issuance of common stock upon exercise of stock options		3,600			—			—			—			3,600
Net cash provided by (used in) financing activities		55,788			(49,898	)		(374	)		2,112			7,628
Net increase in cash		—			397			1,357			—			1,754
Cash and cash equivalents at beginning of year		—			44,114			10,585			—			54,699
Cash and cash equivalents at end of year	$	—		$	44,511		$	11,942		$	—		$	56,453

15

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2005
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating Activities:
Net (loss) income	$	(8,120	)	$	21,976		$	(467	)	$	(1,354	)	$	12,035
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			5,555			491			(122	)		5,924
Amortization of loan costs		316			—			22			—			338
Loss on refinancing long-term debt		6,990			—			—			—			6,990
Loss from discontinued operations, net of taxes					(71	)								(71	)
Change in income tax assets and liabilities		—			1,446			—			—			1,446
Changes in operating assets and liabilities:
Accounts receivable		—			(5,001	)		—			—			(5,001	)
Prepaids and other current assets		—			(692	)		(1,859	)		—			(2,551	)
Accounts payable		—			434			—			—			434
Salaries and benefits payable		—			3,957			—			—			3,957
Accrued liabilities and other liabilities		(1,855	)		(210	)		5,443			—			3,378
Net cash (used in) provided by continuing operating activities		(2,669	)		27,394			3,630			(1,476	)		26,879
Net cash provided by discontinued operating activities		—			142			—			—			142
Net cash (used in) provided by operating activities		(2,669	)		27,536			3,630			(1,476	)		27,021
Investing Activities:
Cash paid for acquisitions, net of cash acquired		(5,793	)		—			—			—			(5,793	)
Capital purchases of property and equipment		—			(10,029	)		—			—			(10,029	)
Investment in equity method investee		(840	)		—			—			—			(840	)
Other assets		4,068			—			(4,951	)		—			(883	)
Net cash used in investing activities		(2,565	)		(10,029	)		(4,951	)		—			(17,545	)
Financing Activities:
Net principal payments on long-term debt		(50,311	)		—			(116	)		—			(50,427	)
Net increase in revolving credit facility		20,000			—			—			—			20,000
Net transfers to and from members		40,256			(41,995	)		263			1,476			—
Payment of loan and issuance costs		(487	)		—			—			—			(487	)
Refinancing of long-term debt		(5,316	)		—			—			—			(5,316	)
Proceeds from issuance of common stock upon exercise of stock options		1,092			—			—			—			1,092
Net cash provided by (used in) financing activities		5,234			(41,995	)		147			1,476			(35,138	)
Net decrease in cash		—			(24,488	)		(1,174	)		—			(25,662	)
Cash and cash equivalents at beginning of period		—			30,988			2,463			—			33,451
Cash and cash equivalents at end of period	$	—		$	6,500		$	1,289		$	—		$	7,789

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include statements regarding the intent, belief or current expectations of Psychiatric Solutions and its management. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause our actual results to differ materially from the results discussed in the forward-looking statements. Risks and uncertainties that might cause such differences include but are not limited to: (1) potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional facilities on favorable terms; (2) our ability to integrate and improve the operations of acquired facilities; (3) our ability to maintain favorable and continuing relationships with physicians who use our facilities; (4) our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs; (5) risks inherent to the health care industry, including the impact of changes in regulation and exposure to claims and legal actions by patients and others; (6) reductions in reimbursement rates from federal and various state health care programs or managed care companies; (7) our ability to comply with applicable licensure and accreditation requirements; (8) our ability to retain key employees who are instrumental to our successful operations; (9) our ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act; (10) our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards; (11) our ability to comply with federal and state governmental regulation covering health care-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology; (12) our ability to obtain adequate levels of general and professional liability insurance; and (13) those risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements herein are qualified in their entirety by the risk factors set forth in our filings with the SEC. A copy of our filings may be obtained from the Public Reference Room of the SEC at 450 Fifth Street NW, Washington, D.C. at prescribed rates.

Overview

     Our business strategy is to acquire inpatient behavioral health care facilities and improve the operating results within new and existing inpatient facilities and our managed inpatient behavioral health care operations. We completed the acquisitions of three inpatient behavioral health care facilities in January 2006 and one inpatient behavioral health care facility in May 2006 with an aggregate of 286 beds. These facilities are located in Jeffersonville, Indiana; Fort Lauderdale, Florida; Midland, Texas and Louisville, Mississippi. In July 2006, we also completed the acquisitions of two inpatient behavioral health care facilities located in Mt. Dora, Florida and Desoto, Texas with an aggregate of 160 beds. On May 26, 2006, we entered into a Stock Purchase Agreement to purchase Alternative Behavioral Services, Inc. (“ABS”) for a cash purchase price of $250 million. ABS owns and operates nine inpatient facilities with approximately 1,050 beds. The transaction, which is subject to customary closing conditions, including regulatory approvals and the absence of a material adverse change in the business or results of operations of ABS, is expected to close in the fourth quarter of 2006. Accordingly, there can be no assurances that the transaction will close in the fourth quarter or at all.

     We strive to improve the operating results of our inpatient behavioral health care operations by providing the highest quality service, expanding referral networks and marketing initiatives and meeting increased demand for our services by expanding our services and developing new services. We also attempt to improve operating results by optimizing staffing ratios, controlling contract labor costs and reducing supply costs through group purchasing. During the quarter and six months ended June 30, 2006, our same-facility revenue from owned and leased inpatient facilities increased by 8.0% and 9.6%, respectively, compared to the quarter and six months ended June 30, 2005. Same-facility revenue was driven by increases in patient days and revenue per patient day. Patient days increased 2.1% and 3.5%, respectively, during the quarter and six months ended June 30, 2006 compared to the same period last year. Revenue per patient day increased 5.9% for both the quarter and six months ended June 30, 2006 compared to the same period last year. Same-facility growth refers to the comparison of each inpatient facility owned and leased during 2005 with the results for the comparable period in 2006.

Sources of Revenue

Patient Service Revenue

     Patient service revenue is generated by our inpatient facilities as a result of services provided to patients on an inpatient and outpatient basis within the inpatient behavioral health care facility setting. Patient service revenue is recorded at our established billing rates less contractual adjustments. Generally, collection in full is not expected at our established billing rates. Contractual adjustments are recorded to state our patient service revenue at the amount we expect to collect for the services provided based on amounts reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement formulas or amounts due from other third-party payors at contractually determined rates. Patient service revenue comprised approximately 94.8% and 90.6% of our total revenue for the six months ended June 30, 2006 and 2005, respectively.

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Management Contract Revenue

     Our inpatient management contract segment provides inpatient psychiatric management and development services to hospitals and clinics based on negotiated contracts. Services provided are recorded as management contract revenue in the period the services are provided at contractually determined rates, provided that collectibility of such amounts is reasonably assured. Management contract revenue comprised approximately 5.2% and 9.4% of our total revenue for the six months ended June 30, 2006 and 2005, respectively.

Results of Operations

     The following table illustrates our consolidated results of operations for the three months and six months ended June 30, 2006 and 2005 (dollars in thousands):

	For the Three Months Ended June 30,										For the Six Months Ended June 30,
	2006					2005					2006					2005
	Amount		%			Amount		%			Amount		%			Amount		%
Revenue	$	248,404		100.0	%	$	139,490		100.0	%	$	490,716		100.0	%	$	273,758		100.0	%
Salaries, wages, and employee benefits (including share-based compensation of $2,136 and $8,390 for the three months and six months ended June 30, 2006, respectively)		138,133		55.6	%		74,739		53.6	%		277,932		56.6	%		148,019		54.1	%
Professional fees		24,286		9.8	%		14,582		10.4	%		47,001		9.6	%		28,615		10.4	%
Supplies		14,417		5.8	%		8,655		6.2	%		28,431		5.8	%		16,917		6.2	%
Provision for doubtful accounts		4,592		1.8	%		2,657		1.9	%		9,358		1.9	%		5,313		1.9	%
Other operating expenses		27,244		11.0	%		18,127		13.0	%		54,312		11.1	%		35,552		13.0	%
Depreciation and amortization		4,867		2.0	%		3,044		2.2	%		9,612		1.9	%		5,924		2.2	%
Interest expense, net		9,270		3.7	%		3,310		2.4	%		18,478		3.8	%		6,815		2.5	%
Other expenses:
Loss on refinancing long-term debt		—		0.0	%		—		0.0	%		—		0.0	%		6,990		2.5	%
Income from continuing operations before income taxes		25,595		10.3	%		14,376		10.3	%		45,592		9.3	%		19,613		7.2	%
Provision for income taxes		9,726		3.9	%		5,607		4.0	%		17,325		3.5	%		7,649		2.8	%
Income from continuing operations	$	15,869		6.4	%	$	8,769		6.3	%	$	28,267		5.8	%	$	11,964		4.4	%

Three Months Ended June 30, 2006 Compared To Three Months Ended June 30, 2005

     The following table compares key operating statistics for owned and leased inpatient facilities for the quarters ended June 30, 2006 and 2005 (revenue in thousands). Same-facility statistics for the quarter ended June 30, 2006 are shown on a comparable basis with total facility statistics for the quarter ended June 30, 2005.

	Three Months Ended June 30,				%
	2006		2005		Change
Total facility results:
Revenue	$	235,654	$	126,617		86.1	%
Number of facilities at period end		59		34		73.5	%
Admissions		26,361		14,694		79.4	%
Patient days		456,202		286,241		59.4	%
Average length of stay		17.3		19.5		-11.3	%
Revenue per patient day	$	517	$	442		17.0	%
Same-facility results:
Revenue	$	136,775	$	126,617		8.0	%
Number of facilities at period end		34		34		0.0	%
Admissions		14,837		14,694		1.0	%
Patient days		292,173		286,241		2.1	%
Average length of stay		19.7		19.5		1.0	%
Revenue per patient day	$	468	$	442		5.9	%

     Revenue. Revenue from continuing operations was $248.4 million for the quarter ended June 30, 2006 compared to $139.5 million for the quarter ended June 30, 2005, an increase of $108.9 million, or 78.1%. Revenue from owned and leased inpatient facilities accounted for $235.7 million in 2006 compared to $126.6 million in 2005, an increase of $109.1 million, or 86.1%. The increase in revenue from owned and leased inpatient facilities relates primarily to acquisitions of behavioral health care facilities. The 2005

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acquisition of Ardent Health Services, Inc. (“Ardent Behavioral”) and other acquisitions during 2006 accounted for $98.9 million of the increase in revenue. The remainder of the increase in revenue from owned and leased inpatient facilities is primarily attributable to same-facility growth in patient days and revenue per patient day of 2.1% and 5.9%, respectively. Revenue from inpatient management contracts was $12.8 million in 2006 compared to $12.9 million in 2005.

     Salaries, wages and employee benefits. Salaries, wages and employee benefits (“SWB”) expense was $138.1 million for the quarter ended June 30, 2006. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), (“SFAS No. 12R”), Share Based Payment, using the modified-prospective transition method. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Prior to the adoption of SFAS No. 123R, we accounted for our stock option plans using the intrinsic value method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and, as a result, recognized no share-based compensation expense for those prior periods. SWB expense for the quarter ended June 30, 2006 includes $2.1 million of share-based compensation expense. Based on our stock option and restricted stock grants outstanding at June 30, 2006, we estimate remaining unrecognized share-based compensation expense to be approximately $20 million with a weighted average remaining life of 3.7 years, with approximately $2.0 million per quarter in share-based compensation expense to be recognized for the remainder of 2006. Excluding the $2.1 million of share-based compensation expense, SWB expense was $136.0 million, or 54.7% of total revenue, in the quarter ended June 30, 2006 compared to $74.7 million, or 53.6% of total revenue, for the quarter ended June 30, 2005. SWB expense for owned and leased inpatient facilities was $127.0 million, or 53.9% of revenue, in 2006. Same-facility SWB expense for owned and leased inpatient facilities was $72.6 million, or 53.1% of revenue, in 2006 compared to $67.3 million, or 53.1% of total revenue, in 2005. SWB expense for inpatient management contracts was $4.9 million in 2006 compared to $4.6 million in 2005. SWB expense for our corporate office was $6.2 million for 2006 compared to $2.8 million for 2005, increasing primarily as a result of recording the $2.1 million of share-based compensation expense during the second quarter of 2006.

     Professional fees. Professional fees were $24.3 million for the quarter ended June 30, 2006, or 9.8% of total revenue, compared to $14.6 million for the quarter ended June 30, 2005, or 10.4% of total revenue. Professional fees for owned and leased inpatient facilities were $22.4 million in 2006, or 9.5% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $13.4 million in 2006, or 9.8% of revenue, compared to $12.9 million in 2005, or 10.2% of revenue. Professional fees for inpatient management contracts and our corporate office were $1.9 million in 2006 compared to $1.7 million in 2005.

     Supplies. Supplies expense was $14.4 million for the quarter ended June 30, 2006, or 5.8% of total revenue, compared to $8.7 million for the quarter ended June 30, 2005, or 6.2% of total revenue. Supplies expense for owned and leased inpatient facilities was $14.2 million in 2006, or 6.0% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $8.9 million in 2006, or 6.5% of revenue, compared to $8.4 million in 2005, or 6.6% of revenue. Supplies expense for our inpatient management contract division and our corporate office consists primarily of office supplies and is negligible to supplies expense overall.

     Provision for doubtful accounts. The provision for doubtful accounts was $4.6 million for the quarter ended June 30, 2006, or 1.8% of total revenue, compared to $2.7 million for the quarter ended June 30, 2005, or 1.9% of total revenue. The provision for doubtful accounts at our owned and leased inpatient facilities comprises substantially all of our provision for doubtful accounts.

     Other operating expenses. Other operating expenses consist primarily of rent, utilities, insurance, travel, and repairs and maintenance expenses. Other operating expenses were approximately $27.2 million for the quarter ended June 30, 2006, or 11.0% of total revenue, compared to $18.1 million for the quarter ended June 30, 2005, or 13.0% of total revenue. Other operating expenses for owned and leased inpatient facilities were $21.2 million in 2006, or 9.0% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $13.1 million in 2006, or 9.6% of revenue, compared to $12.2 million in 2005, or 9.6% of revenue. Other operating expenses for inpatient management contracts were $4.6 million in 2006 and 2005. Other operating expenses at our corporate office increased to $1.4 million in 2006 from $1.3 million in 2005.

     Depreciation and amortization. Depreciation and amortization expense was $4.9 million for the quarter ended June 30, 2006 compared to $3.0 million for the quarter ended June 30, 2005. This increase in depreciation and amortization expense is primarily the result of the acquisitions of inpatient facilities during 2006 and 2005.

     Interest expense, net. Interest expense, net of interest income, was $9.3 million for the quarter ended June 30, 2006 compared to $3.3 million for the quarter ended June 30, 2005, an increase of $6.0 million. The increase in interest expense is primarily attributable to the increase in our long-term debt due to borrowings to finance the acquisition of inpatient behavioral health care facilities, primarily the facilities purchased from Ardent Health Services, LLC on July 1, 2005. At June 30, 2006, we had $486.2 million in long-term debt compared to $143.9 million at June 30, 2005.

     Loss from discontinued operations, net of taxes. The losses from discontinued operations (net of income tax effect) of approximately $508,000 and $62,000 for the quarters ended June 30, 2006 and 2005, respectively, resulted from the operating losses of five contracts to manage inpatient facilities for the Florida Department of Juvenile Justice and the pending sale of a therapeutic

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boarding school. The contracts to manage inpatient facilities for the Florida Department of Juvenile Justice were assumed in the Ramsay acquisition in 2003; three were terminated in 2006 and two were terminated in 2005.

Six Months Ended June 30, 2006 Compared To Six Months Ended June 30, 2005

     The following table compares key operating statistics for owned and leased inpatient facilities for the six months ended June 30, 2006 and 2005 (revenue in thousands). Same-facility statistics for the six months ended June 30, 2006 are shown on a comparable basis with total facility statistics for the six months ended June 30, 2005.

	Six Months Ended June 30,				%
	2006		2005		Change
Total facility results:
Revenue	$	465,410	$	247,950		87.7	%
Number of facilities at period end		59		34		73.5	%
Admissions		53,298		29,513		80.6	%
Patient days		902,256		561,324		60.7	%
Average length of stay		16.9		19.0		-11.1	%
Revenue per patient day	$	516	$	442		16.7	%
Same-facility results:
Revenue	$	271,713	$	247,950		9.6	%
Number of facilities at period end		34		34		0.0	%
Admissions		30,077		29,513		1.9	%
Patient days		580,720		561,324		3.5	%
Average length of stay		19.3		19.0		1.6	%
Revenue per patient day	$	468	$	442		5.9	%

     Revenue. Revenue from continuing operations was $490.7 million for the six months ended June 30, 2006 compared to $273.8 million for the six months ended June 30, 2005, an increase of $216.9 million, or 79.2%. Revenue from owned and leased inpatient facilities accounted for $465.4 million in 2006 compared to $248.0 million in 2005, an increase of $217.4 million, or 87.7%. The increase in revenue from owned and leased inpatient facilities relates primarily to acquisitions of behavioral health care facilities. The 2005 acquisition of Ardent Behavioral and other acquisitions during 2006 accounted for $193.7 million of this increase in revenue. The remainder of the increase in revenue from owned and leased inpatient facilities is primarily attributable to same-facility growth in patient days and revenue per patient day of 3.5% and 5.9%, respectively. Revenue from inpatient management contracts was $25.3 million in 2006 compared to $25.8 million in 2005.

     Salaries, wages and employee benefits. Salaries, wages and employee benefits (“SWB”) expense was $277.9 million for the six months ended June 30, 2006. SWB expense for the six months ended June 30, 2006 includes $8.4 million of share-based compensation expense. The $8.4 million of share-based compensation expense includes $3.7 million related to the 25% portion of 2006 grants which vested on the date of grant and $2.2 million related to options modified in the settlement of an employment contract with a former executive officer of the company. Excluding the $8.4 million of share-based compensation expense, SWB expense was $269.5 million, or 54.9% of total revenue, in the six months ended June 30, 2006 compared to $148.0 million, or 54.1% of total revenue, for the six months ended June 30, 2005. SWB expense for owned and leased inpatient facilities was $251.3 million, or 54.0% of revenue, in 2006. Same-facility SWB expense for owned and leased inpatient facilities was $144.1 million, or 53.0% of revenue, in 2006 compared to $133.0 million, or 53.6% of revenue, in 2005. SWB expense for inpatient management contracts was $9.9 million in 2006 compared to $9.4 million in 2005. SWB expense for our corporate office was $16.7 million for 2006 compared to $5.6 million for 2005, increasing primarily as a result of recording the $8.4 million of share-based compensation expense during 2006.

     Professional fees. Professional fees were $47.0 million for the six months ended June 30, 2006, or 9.6% of total revenue, compared to $28.6 million for the six months ended June 30, 2005, or 10.4% of total revenue. Professional fees for owned and leased inpatient facilities were $43.3 million in 2006, or 9.3% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $25.4 million in 2006, or 9.4% of revenue, compared to $25.2 million in 2005, or 10.1% of revenue. This decrease in professional fees as a percent of revenue is primarily the result of reducing our utilization of contracted services. Professional fees for inpatient management contracts and for our corporate office were $3.7 million in 2006 compared to $3.5 million in 2005.

     Supplies. Supplies expense was $28.4 million for the six months ended June 30, 2006, or 5.8% of total revenue, compared to $16.9 million for the six months ended June 30, 2005, or 6.2% of total revenue. Supplies expense for owned and leased inpatient facilities was $27.9 million in 2006, or 6.0% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $17.6 million in 2006, or 6.5% of revenue, compared to $16.4 million in 2005, or 6.6% of revenue. Supplies expense for our inpatient management contract division and our corporate office consists primarily of office supplies and is negligible to supplies expense

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overall.

     Provision for doubtful accounts. The provision for doubtful accounts was $9.4 million for the six months ended June 30, 2006, or 1.9% of total revenue, compared to $5.3 million for the six months ended June 30, 2005, or 1.9% of total revenue. The provision for doubtful accounts at our owned and leased inpatient facilities comprises substantially all of our provision for doubtful accounts.

     Other operating expenses. Other operating expenses were approximately $54.3 million for the six months ended June 30, 2006, or 11.1% of total revenue, compared to $35.6 million for the six months ended June 30, 2005, or 13.0% of total revenue. Other operating expenses for owned and leased inpatient facilities were $42.5 million in 2006, or 9.1% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $26.3 million in 2006, or 9.7% of revenue, compared to $24.2 million in 2005, or 9.8% of revenue. Other operating expenses for inpatient management contracts were $9.0 million in 2006 compared to $9.2 million in 2005. Other operating expenses at our corporate office increased to $2.9 million in 2006 from approximately $2.2 million in 2005.

     Depreciation and amortization. Depreciation and amortization expense was $9.6 million for the six months ended June 30, 2006 compared to $5.9 million for the six months ended June 30, 2005. This increase in depreciation and amortization expense is primarily the result of the acquisitions of inpatient facilities during 2006 and 2005.

     Interest expense, net. Interest expense, net of interest income, was $18.5 million for the six months ended June 30, 2006 compared to $6.8 million for the six months ended June 30, 2005, an increase of $11.7 million. The increase in interest expense is primarily attributable to the increase in our long-term debt due to borrowings to finance the acquisition of inpatient behavioral health care facilities, primarily the facilities purchased from Ardent Health Services, LLC on July 1, 2005. At June 30, 2006, we had $486.2 million in long-term debt as compared to $143.9 million at June 30, 2005.

     Other expenses. Other expenses in 2005 consisted of $7.0 million in loss on the refinancing of our long-term debt.

     Loss from discontinued operations, net of taxes. The loss from discontinued operations (net of income tax effect) of approximately $714,000 for the six months ended June 30, 2006 and the income from discontinued operations (net of income tax effect) of approximately $71,000 for the six months ended June 30, 2005 resulted from the operations of five contracts to manage inpatient facilities for the Florida Department of Juvenile Justice and the pending sale of a therapeutic boarding school. The contracts to manage inpatient facilities for the Florida Department of Juvenile Justice were assumed in the Ramsay acquisition in 2003; three were terminated in 2006 and two were terminated in 2005.

Liquidity and Capital Resources

     Working capital at June 30, 2006 was $150.1 million, including cash and cash equivalents of $56.5 million, compared to working capital of $140.2 million, including cash and cash equivalents of $54.7 million, at December 31, 2005.

     Cash provided by continuing operating activities was $50.3 million for the six months ended June 30, 2006 compared to $26.9 million for the six months ended June 30, 2005. This $23.4 million increase in cash flows from continuing operating activities was primarily due to cash flows from facilities acquired in 2006 and 2005 and an increase in net income tax liabilities of $16.3 million for the six months ended June 30, 2006. Income tax payments during the six months ended June 30, 2006 were reduced by our utilization of net operating loss carryforwards and tax deductions generated by stock option exercises. We expect our remaining net operating loss carryforwards to be substantially utilized in the second half of 2006 and as a result, quarterly income tax payments will increase in the fourth quarter of 2006.

     Cash used in investing activities was $57.9 million for the six months ended June 30, 2006 compared to $17.5 million for the six months ended June 30, 2005. Cash used in investing activities for the six months ended June 30, 2006 was primarily the result of $44.5 million paid for acquisitions and $13.1 million for purchases of fixed assets. Cash used for routine and expansion capital expenditures was approximately $7.0 million and $6.1 million, respectively, for the six months ended June 30, 2006. We define expansion capital expenditures as those which increase our capacity or otherwise enhance revenue. Routine or maintenance capital expenditures were 1.4% of our net revenue for the six months ended June 30, 2006. Cash used in investing activities for the six months ended June 30, 2005 was primarily the result of capital expenditures of approximately $10.0 million and cash payments paid for prior year acquisitions of $5.8 million.

     Cash provided by financing activities was $7.6 million for the six months ended June 30, 2006 compared to $35.1 million of cash used in financing activities for the six months ended June 30, 2005. As a result of adopting SFAS No. 123R, we classified $4.2 million in income tax benefits in excess of share-based compensation expense on stock options exercised in 2006 as cash flow from financing activities for the six months ended June 30, 2006. Prior to adoption of SFAS No. 123R, income tax benefits in excess of share-based compensation expense on stock options exercised were classified as cash flows from operations. During 2005, we repaid $50.0 million of our 10⁵/₈% Notes, offset by $20.0 million in net borrowings under our revolving line of credit. As a result of this repayment, we paid $5.3 million in refinancing costs. We received cash from stock option exercises of $3.6 million and $1.1 million during the six months ended June 30, 2006 and 2005, respectively.

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     We have a universal shelf registration statement on Form S-3 under which we may sell $47.8 million of our common stock, common stock warrants, preferred stock and debt securities. We may from time to time offer these securities, in one or more series, in amounts, at prices and on terms satisfactory to us.

     On January 26, 2004, we entered into an interest rate swap agreement to manage our exposure to fluctuations in interest rates. The swap agreement effectively converts $20 million of fixed-rate long-term debt to a LIBOR indexed variable rate instrument plus an agreed upon interest rate spread of 5.86%. On April 23, 2004, we entered into another interest rate swap agreement. This swap agreement effectively converts $30.0 million of fixed rate debt to a LIBOR indexed variable rate instrument plus an agreed upon interest rate spread of 5.51%. During July 2005, we exited approximately $11.3 million of our then-existing $50 million interest rate swap agreements without incurring a gain or loss on the transaction.

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

Contractual Obligations

	Payments Due by Period (in thousands)
			Less than						After
	Total		1 year		1-3 years		4-5 years		5 years
Long-term debt (1):
Senior Credit Facility:
Senior Secured Term Loan Facility, expiring on July 1, 2012 and bearing interest of 6.9% at June 30, 2006	$	200,000	$	—	$	—	$	—	$	200,000
7 3/4% Senior Subordinated Notes due July 15, 2015		220,000		—		—		—		220,000
10 5/8% Senior Subordinated Notes due June 15, 2013		38,681		—		—		—		38,681
Mortgage loans on facilities, maturing in 2036, 2037 and 2038 bearing fixed interest rates of 5.65% to 7.60%		27,206		293		641		722		25,550
		485,887		293		641		722		484,231
Lease and other obligations		44,867		8,339		13,220		6,977		16,331
Total contractual obligations	$	530,754	$	8,632	$	13,861	$	7,699	$	500,562

(1) Excludes capital lease obligations of $285,000, which are included in lease and other obligations.

     The fair values of our $220 million 7³/₄% Notes and $38.7 million 10⁵/₈% Notes were approximately $215.3 million and approximately $42.2 million, respectively, as of June 30, 2006. The fair values of our $220 million 7³/₄% Notes and $38.7 million 10⁵/₈% Notes were approximately $227.4 million and approximately $44.0 million, respectively, as of December 31, 2005. The carrying value of our other long-term debt, including current maturities, of $227.2 million and $223.7 million at June 30, 2006 and December 31, 2005, respectively, approximated fair value. We had $200.0 million of variable rate debt outstanding under our term loan facility as of June 30, 2006. In addition, interest rate swap agreements effectively convert $38.7 million of fixed rate debt into variable rate debt at June 30, 2006. At our June 30, 2006 borrowing level, a hypothetical 10% increase in interest rates would decrease our annual net income and cash flows by approximately $1.1 million.

Critical Accounting Policies

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

     Allowance for Doubtful Accounts

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

     The primary collection risk with regard to patient receivables lies with uninsured patient accounts or patient accounts for which primary insurance has paid, but the portion owed by the patient remains outstanding. We estimate the allowance for doubtful accounts

22

primarily based upon the age of the accounts since the patient discharge date. We continually monitor our accounts receivable balances and utilize cash collection data to support our estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows.

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

     Allowances for Contractual Discounts

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

     Professional and General Liability

     We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. At June 30, 2006, all of our operations have professional and general liability insurance in umbrella form for claims in excess of $3.0 million with an insured limit of $50.0 million. The self-insured reserves for professional and general liability risks are calculated based on historical claims, demographic factors, industry trends, severity factors and other actuarial assumptions calculated by an independent third-party actuary. This self-insurance reserve is discounted to its present value using a 5% discount rate. This estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations. We have utilized our captive insurance company to manage the self-insured retention. While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often hamper timely adjustments to the assumptions used in these estimates.

     Income Taxes

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

     Share-Based Compensation

     We adopted SFAS No. 123R under the modified-prospective transition method on January 1, 2006, which requires us to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of such awards. We utilize the Black-Scholes option pricing model to estimate the grant-date fair value of our stock options. The Black-Scholes model includes certain variables and assumptions that require judgment, such as the expected volatility or our stock price and the expected term of our stock options. Additionally, SFAS No. 123R requires us to use judgment in the estimation of forfeitures over the vesting period of share-based awards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     Information required by this item is provided in Part I, Item 2 of this Quarterly Report on Form 10-Q under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Contractual Obligations.”

23

Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

     We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (including our consolidated subsidiaries) in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported on a timely basis.

Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors

     There have been no material changes with regard to the risk factors previously disclosed in our most recent Annual Report on Form 10-K.

Item 4. Submission of Matters to a Vote of Security Holders

     On May 16, 2006, we held our annual meeting of shareholders. The following matters were submitted to a vote of shareholders:

(1) The stockholders elected Christopher Grant, Jr. and David M. Dill as Class I directors of the Company. The votes were as follows:

Christopher Grant, Jr.
Votes cast for	42,083,786
Votes withheld	3,288,600
David M. Dill
Votes cast for	43,578,441
Votes withheld	1,793,945

(2) The stockholders approved the Psychiatric Solutions, Inc. Executive Performance Incentive Plan. The votes were as follows:

Votes cast for	42,548,546
Votes cast against	2,704,150
Abstentions	119,688

(3) The stockholders approved an amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan. The votes were as follows:

Votes cast for	27,019,008
Votes cast against	10,700,490
Abstentions	66,130
Broker non-votes	7,586,758

(4) The stockholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006. The votes were as follows:

Votes cast for	45,290,605
Votes cast against	67,996
Abstentions	13,784

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Item 6. Exhibits

Exhibit
Number	Description
2.1*	Stock Purchase Agreement, dated May 26, 2006, by and between FHC Health Systems, Inc. and Psychiatric Solutions, Inc.
3.1	Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on March 9, 1998 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 1998).
3.2	Certificate of Amendment to Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on August 5, 2002 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2002).
3.3	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on March 21, 2003 (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement, filed on January 22, 2003).
3.4	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on December 15, 2005 (incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005).
3.5	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 1997).
4.1	Reference is made to Exhibits 3.1 through 3.5.
4.2	Common Stock Specimen Certificate (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
4.3	Indenture, dated as of June 30, 2003, among Psychiatric Solutions, Inc., the Guarantors named therein and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement on Form S-4, filed on July 30, 2003 (Registration No. 333-107453) (the “2003 S-4”)).
4.4	Form of Notes (included in Exhibit 4.3).
4.5	Purchase Agreement, dated as of June 19, 2003, among Psychiatric Solutions, Inc., the Guarantors named therein, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Jefferies & Company, Inc. (incorporated by reference to Exhibit 4.12 to the 2003 S-4).
4.6	Indenture, dated as of July 6, 2005, by and among Psychiatric Solutions, Inc., the Guarantors named therein and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed July 8, 2005).
4.7	Form of Notes (included in Exhibit 4.6).
4.8	Purchase Agreement, dated as of June 30, 2005, among Psychiatric Solutions, Inc., the Guarantors named therein, Citigroup Global Markets Inc. on behalf of Banc of America Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and Lehman Brothers Inc. (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on July 8, 2005).
4.9	Exchange and Registration Rights Agreement, dated as of July 6, 2005, among Psychiatric Solutions, Inc., the subsidiary guarantors from time to time party thereto, and Citigroup Global Markets Inc. on behalf of Banc of America Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and Lehman Brothers Inc. (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, filed on July 8, 2005).
10.1	Psychiatric Solutions, Inc. Executive Performance Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement filed April 21, 2006).

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Exhibit
Number	Description
10.2	Third Amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan (incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed April 21, 2006).
31.1*	Certification of the Chief Executive Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certifications of the Chief Executive Officer and Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

26

SIGNATURES

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

Psychiatric Solutions, Inc.
By:	/s/ Jack E. Polson
	Jack E. Polson
	Chief Accounting Officer

Dated: August 2, 2006

EX-2.1

Exhibit 2.1

STOCK PURCHASE AGREEMENT

by and between

FHC HEALTH SYSTEMS, INC.

and

PSYCHIATRIC SOLUTIONS, INC.

Dated as of May 26, 2006

TABLE OF CONTENTS

			Page
ARTICLE I DEFINITIONS				1
ARTICLE II PURCHASE AND SALE; CLOSING				7
	2.1	Sale of the ABS Shares		7
	2.2	Consideration		8
	2.3	Closing		8
	2.4	Deliveries of Seller at Closing		8
	2.5	Deliveries of Purchaser at Closing		8
	2.6	Additional Acts		9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER				9
	3.1	Organization of Seller		9
	3.2	Organization and Capitalization of ABS		9
	3.3	Organization and Capitalization of the ABS Subsidiaries		9
	3.4	Authorization		10
	3.5	No Conflicting Agreements; Consents		11
	3.6	Financial Statements		11
	3.7	Absence of Undisclosed Liabilities		12
	3.8	Absence of Certain Changes		12
	3.9	Legal Proceedings, etc		13
	3.10	Contracts; No Defaults		13
	3.11	Title to Property		13
	3.12	Employees; Labor Matters; Employee Benefit Plans; ERISA		15
	3.13	Bank Accounts		16
	3.14	Taxes		17
	3.15	Insurance		19
	3.16	Intellectual Property		19
	3.17	Compliance with Laws		19
	3.18	Environmental Matters		19
	3.19	Books and Records		20
	3.20	No Material Adverse Change		20
	3.21	Brokers		20
	3.22	HIPAA Matters		20
	3.23	Medical Waste		21
	3.24	Certificates of Need		21
	3.25	Medicare Participation; Accreditation		21
	3.26	Compliance Program		21
	3.27	Regulatory Compliance		22
	3.28	Medical Staff Matters		23
	3.29	Third Party Payor Cost Reports		23
	3.30	Reimbursement		23
	3.31	Statutory Funds		24
	3.32	Controlled Substances		24
	3.33	Statements and Other Documents Not Misleading		24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER				24
	4.1	Organization		24
	4.2	Corporate Authorization		24
	4.3	No Conflicting Agreements; Consents		24
	4.4	Legal Proceedings, etc		25
	4.5	Financial Capability		25

i

			Page
	4.6	Brokers		25
	4.7	Investment Representations		25
	4.8	Statements and Other Documents Not Misleading		25
ARTICLE V COVENANTS OF SELLER				26
	5.1	Regulatory Approvals; Consents		26
	5.2	Conduct Prior to the Closing		26
	5.3	Employee Matters		27
	5.4	Access by Purchaser		27
	5.5	Financial Statements and Reports		27
	5.6	Closing Conditions		28
	5.7	Transfer of Assets		28
	5.8	Encumbrances		28
	5.9	Condition of Assets		28
	5.10	Intercompany Accounts		28
	5.11	Exclusivity		28
	5.12	Resignations		29
	5.13	Company Plans		29
	5.14	Restrictive Covenants Agreement		29
	5.15	Standstill		29
	5.16	Third Party Payor Cost Reports		29
	5.17	Qualifacts Agreement		29
	5.18	Indebtedness		29
	5.19	Texas Assets and Operations		29
ARTICLE VI COVENANTS OF PURCHASER; CERTAIN ADDITIONAL COVENANTS OF THE PARTIES				30
	6.1	Notice of Certain Occurrences		30
	6.2	Regulatory Approvals		30
	6.3	Public Announcements		30
	6.4	Closing Conditions		30
	6.5	Employee Matters		30
	6.6	WARN Act Compliance; COBRA		31
	6.7	Tax Matters		31
	6.8	Tax Indemnification		33
	6.9	Consents Not Obtained by Closing		34
	6.10	Consultative Process		34
	6.11	Confidentiality		34
	6.12	Books and Records		34
	6.13	Section 338 Election		34
	6.14	Seller Minimum Net Worth; Restrictions on Seller Transfers		35
	6.15	Shared Services Agreement; Agreements between Acquired Entities and RX Innovations		35
	6.16	Corporate Office Lease		35
	6.17	Cash Management		35
	6.18	Severance Payments		35
ARTICLE VII CONDITIONS TO OBLIGATIONS OF PURCHASER				35
	7.1	Representations and Warranties		36
	7.2	Compliance with Agreement		36
	7.3	Closing Certificates		36
	7.4	Secretary’s Certificates		36
	7.5	Opinion of Counsel		36
	7.6	Consents, Authorizations, Etc		36
	7.7	No Action or Proceeding		36
	7.8	Constituent Documents		37

ii

			Page
	7.9	Resignation of Boards of Directors and Officers		37
	7.10	Good Standing Certificates		37
	7.11	Title Policies, Surveys and Environmental Site Assessments		37
	7.12	Termination of Guarantees		37
	7.13	Restrictive Covenants Agreements		37
	7.14	FIRPTA		37
	7.15	Joinder		37
	7.16	Shared Services Agreement		37
	7.17	Qualifacts Agreement		38
	7.18	No Material Adverse Change		38
	7.19	Absence of Liens		38
	7.20	2005 Audited Financials		38
	7.21	Waiver of Conditions		38
ARTICLE VIII CONDITIONS TO OBLIGATIONS OF SELLER				38
	8.1	Representations and Warranties		38
	8.2	Compliance with Agreement		38
	8.3	Closing Certificates		38
	8.4	Secretary’s Certificate		38
	8.5	Opinion of Counsel		39
	8.6	Consents, Authorizations, Etc		39
	8.7	No Action or Proceeding		39
	8.8	Good Standing Certificate		39
	8.9	Restricted Stock Agreement		39
	8.10	Waiver of Conditions		39
ARTICLE IX INDEMNIFICATION				39
	9.1	Indemnification by Seller		39
	9.2	Indemnification by Purchaser		39
	9.3	Claims Procedures		40
	9.4	Limitations on Claims		40
	9.5	Miscellaneous		41
ARTICLE X TERMINATION				41
	10.1	Termination		41
	10.2	Effect of Termination		41
ARTICLE XI NOTICES				42
	11.1	Notices		42
ARTICLE XII MISCELLANEOUS				43
	12.1	Fees and Expenses		43
	12.2	Entire Agreement		43
	12.3	Waiver		43
	12.4	Amendment		43
	12.5	Counterparts; Facsimile Signatures		44
	12.6	No Third Party Beneficiary		44
	12.7	GOVERNING LAW, CONSTRUCTION; WAIVER OF JURY TRIAL		44
	12.8	Binding Effect		44
	12.9	No Assignment		44
	12.10	Headings; Gender, Etc		44
	12.11	Access to Information		44
	12.12	Severability; Invalid Provisions		44
	12.13	Cooperation		45
	12.14	Further Assurance Clause		45
	12.15	Documents to be Provided to Purchaser		45

iii

STOCK PURCHASE AGREEMENT

     THIS STOCK PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of May 26, 2006, by and between FHC Health Systems, Inc., a Virginia corporation (“Seller”), and Psychiatric Solutions, Inc., a Delaware corporation (“Purchaser”).

RECITALS:

     WHEREAS, Seller owns 100% of the ABS Shares (as defined below);

     WHEREAS, ABS (as defined below) owns, directly or indirectly, 100% of the issued and outstanding equity securities of each of the ABS Subsidiaries (as defined below);

     WHEREAS, Seller wishes to sell the ABS Shares to Purchaser, and Purchaser wishes to purchase the ABS Shares from Seller, on the terms, subject to the conditions and for the consideration set forth in this Agreement.

     NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants and other agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows:

ARTICLE I
DEFINITIONS

     As used in this Agreement, the following defined terms shall have the meanings indicated below and, where appropriate, shall include the singular and plural of the term defined:

     “ABS” shall mean Alternative Behavioral Services, Inc., a Virginia corporation.

     “ABS Shares” shall have the meaning ascribed to it in Section 3.2(b).

     “ABS Subsidiaries” shall have the meaning ascribed to it in Section 3.3(a).

     “ABS Subsidiary Shares” shall have the meaning ascribed to it in Section 3.3(d).

     “Acquired Entities” shall mean ABS and the ABS Subsidiaries.

     “Acquisition Proposal” shall mean any inquiries or proposals that constitute, or are likely to result in, a proposal or offer for a merger, consolidation, business combination, sale of substantial assets, sale of shares of capital stock or other securities (including by way of a tender offer) or similar transaction involving any of the Acquired Entities.

     “Affiliate” shall mean, as to the Person in question, any Person that directly or indirectly controls, is controlled by, or is under common control with the Person in question and any successors or assigns of such Persons; and the term “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person whether through ownership of voting securities, by contract or otherwise.

     “Affiliated Group” shall mean any affiliated group within the meaning of Code Section 1504(a).

     “Agreement” shall mean this Stock Purchase Agreement, including the exhibits and schedules attached hereto.

     “Applications” shall have the meaning ascribed to it in Section 3.24.

     “Balance Sheet Date” shall mean December 31, 2005.

     “Books and Records” shall mean all existing accounting, business, marketing, corporate, and other files, documents, instruments, papers, books and records, including, without limitation, financial statements, budgets, ledgers, journals, deeds, titles, policies, manuals, organizational documents, operating agreements, minute books, stock certificates and books, stock transfer ledgers, contracts, franchises, permits, supplier lists, reports, computer files and data, retrieval programs and operating data or plans.

     “Break-up Fee” shall have the meaning ascribed to it in Section 10.2(d).

     “Business Associate Agreements” shall have the meaning ascribed to it in Section 3.22(c).

     “Business Day” shall mean a day other than Saturday, Sunday, or any day on which the principal commercial banks located in the State of Tennessee or the Commonwealth of Virginia are authorized or obligated to close under the Laws of such states.

     “Certificate of Need” shall have the meaning ascribed to it in Section 3.24.

     “Claim” shall have the meaning ascribed to it in Section 9.3.

     “Closing” shall mean the consummation of the transactions contemplated by this Agreement, as provided in Article II.

     “Closing Date” shall have the meaning ascribed to it in Section 2.3.

     “Closing Statement” shall have the meaning ascribed to it in Section 2.2.

     “COBRA” shall have the meaning ascribed to it in Section 3.12(i).

     “Code” shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.

     “Company” shall mean the Acquired Entities on a consolidated basis.

     “Company Financial Statements” shall have the meaning ascribed to it in Section 3.6(a).

     “Company Intellectual Property” shall have the meaning ascribed to it in Section 3.16.

     “Company Permits” shall have the meaning ascribed to it in Section 3.17.

     “Company Plans” shall mean each “employee benefit plan” (within the meaning of Section 3(3) of ERISA) and each stock purchase, stock option, other stock-based, severance, change-in-control, disability, vacation, holiday, sick leave, fringe benefit, bonus, incentive, deferred compensation, welfare and other employee benefit plan, program, policy or other arrangement and any employment (including severance and change of control) agreement, whether or not subject to ERISA (including any funding mechanism therefor now in effect or required in the future as a result of the transactions contemplated by this Agreement or otherwise); whether formal or informal, oral or written; under which any employee or former employee or director (or dependent or beneficiary thereof) of any Acquired Entity has any present or future right to benefits or which has been sponsored, contributed to or maintained by Seller, any Acquired Entity or any ERISA Affiliate during the past six (6) years.

     “Confidentiality Agreement” shall mean that certain Confidentiality & Nondisclosure Agreement, dated as of February 21, 2006, between Purchaser and ABS.

     “Constituent Documents” shall mean the certificate of formation, certificate of incorporation, articles of incorporation, bylaws, articles of organization, operating agreement, limited liability company agreement, partnership agreement, limited partnership agreement, minute books and such other organizational or governance documents, as amended to the relevant date, of a given entity.

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     “Contract” shall mean any agreement, commitment, lease, sublease, license, sublicense, promissory note, evidence of indebtedness, or other contract to which any of the Acquired Entities is a party or by which assets of any of the Acquired Entities are bound.

     “Controlled Group Member” shall mean any entity (whether or not incorporated) other than Seller and the Acquired Entities that, together with Seller and Acquired Entities, is considered under common control and treated as one employer under Section 414(b), (c), (m) or (o) of the Code.

     “Corporate Office Lease” shall mean that certain Deed of Lease, dated as of January 1, 2006, between FHC Property Holdings, Inc., a Virginia corporation, and ABS.

     “Court Order” shall mean any judgment, order, award or decree of any federal, state, local or other court or judicial or quasi-judicial tribunal and any award in any binding arbitration proceeding.

     “Covered Entities” shall have the meaning ascribed to it in Section 3.22(a).

     “Credit Facilities” shall mean, collectively, (a) the Loan and Guaranty Agreement, dated as of December 18, 2003, among Seller, certain subsidiaries of Seller, including ABS and certain of the ABS Subsidiaries, the Lenders party thereto from time to time, Goldman Sachs Credit Partners L.P., as Joint Lead Arranger, Joint Book Runner, Term Loan Collateral Agent and Term Loan Administrative Agent, Credit Suisse First Boston, acting through its Cayman Islands Branch, as Joint Lead Arranger, Joint Book Runner and Syndication Agent, and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Revolver Collateral Agent and Revolver Administrative Agent, and certain other agreements, instruments and documents related thereto, and (b) the Third Lien Term Loan and Guaranty Agreement, dated as of February 9, 2005, among Seller, certain subsidiaries of Seller, including ABS and certain of the ABS Subsidiaries, the Lenders party thereto from time to time, Goldman Sachs Credit Partners L.P., as Lead Arranger, Book Runner and Syndication Agent, and The Bank of New York, as Administrative Agent and Collateral Agent, and certain other agreements, instruments and documents related thereto, as each may be further amended, restated, supplemented or otherwise modified from time to time and one or more replacement agreements or facilities existing at any time to refund, refinance, replace or renew (including any subsequent refinancings, replacements and renewals) amounts thereunder.

     “Damages” shall mean any and all losses, damages, claims, costs, fines, fees, Taxes, penalties, interest obligations and deficiencies (including, without limitation, reasonable attorneys’ fees and other expenses of litigation).

     “Destruction Notice” shall have the meaning ascribed to it in Section 6.12.

     “Effective Time” shall have the meaning ascribed to it in Section 2.3.

     “Election Forms” shall have the meaning ascribed to it in Section 6.13(b).

     “Environmental Claim” shall mean any claim, action, cause of action, investigation or notice by any Person alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from: (i) the presence or release or threat of release into the environment of any Materials of Environmental Concern at any location, which is or has been owned, leased, operated or utilized by any of the Acquired Entities; or (ii) circumstances forming the basis of any violation or alleged violation of any Environmental Law by any of the Acquired Entities.

     “Environmental Laws” shall mean, as they exist on the date hereof and as of the Effective Time, all applicable United States federal, state, local and non-U.S. Laws relating to pollution or protection of human health (as relating to the environment or the workplace) and the environment (including ambient air, surface water, ground water, land surface or sub-surface strata), including laws and regulations relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern, including, but not limited to, Comprehensive

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Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq., Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., OSHA, the Clean Air Act, 42 U.S.C. § 7401 et seq., and the Clean Water Act, 33 U.S.C. § 1251 et seq., each as may have been amended or supplemented, and any applicable environmental transfer statutes or laws.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.

     “ERISA Affiliate” shall mean (i) any Controlled Group Member; (ii) any other company, entity, trade or business that has adopted or has ever participated in any Company Plan; and (iii) any predecessor or successor company, entity, trade or business of Seller or Acquired Entities or any entity described in (i) and (ii).

     “Excluded Assets” shall have the meaning ascribed to it in Section 2.1.

     “Excluded Liabilities” shall have the meaning ascribed to it in Section 2.1.

     “Excluded Subsidiaries” shall mean ABS LINCS TX, Inc., a Kentucky corporation (“ABS LINCS TX”); NetCare of Virginia, Inc., a Virginia corporation; RX Innovations, LLC, a Virginia limited liability company (“RX Innovations”); and WorldWide, Inc., a Virginia corporation.

     “Exemption Certificate” shall have the meaning ascribed to it in Section 3.24.

     “Federal Privacy Regulations” shall have the meaning ascribed to it in Section 3.22(a).

     “Federal Transaction Regulations” shall have the meaning ascribed to it in Section 3.22(a).

     “FTC” shall have the meaning ascribed to it in Section 7.7.

     “GAAP” shall mean generally accepted accounting principles in the United States of America, consistently applied during the periods involved.

     “Governmental Authority” shall mean any foreign, national, state or local government, any political subdivision thereof or any other governmental, quasi-governmental (including fiscal intermediaries and carriers), judicial, public or statutory instrumentality, authority, body, agency, department, bureau, commission or entity, or any arbitrator with authority to bind a party at law.

     “Hazardous Substances” shall mean any toxic or hazardous waste, pollutants or substances, including, without limitation, friable asbestos, polychlorinated biphenyls, petroleum products, byproducts, or other hydrocarbon substances, substances defined or listed as a “hazardous substance,” “toxic substance,” “toxic pollutant” or a similarly identified substance or mixture, in or pursuant to any Environmental Law.

     “HIPAA” shall have the meaning ascribed to it in Section 3.22(a).

     “HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder.

     “Indebtedness” shall mean any long-term indebtedness (including the current portion thereof), any indebtedness for borrowed money, including from a bank or similar financial institution, any intercompany or related party indebtedness, and letters of credit, specifically excluding capital lease obligations.

     “Indemnifying Party” shall have the meaning ascribed to it in Section 9.3.

     “Indemnitee” shall have the meaning ascribed to it in Section 9.3.

     “Intellectual Property” shall have the meaning ascribed to it in Section 3.16.

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     “IRS” shall mean the United States Internal Revenue Service.

     “JCAHO” shall have the meaning ascribed to it in Section 3.25.

     “Knowledge” shall mean (a) with respect to a natural Person, if (i) the Person is actually aware of the fact or matter; or (ii) a prudent Person could be expected to discover or otherwise become aware of the fact or matter in the course of conducting a reasonable investigation regarding the accuracy of the representations and warranties made herein, (b) with respect to Seller, if any of the Persons identified on Schedule 1.1 has, or at any time had, Knowledge of that fact or other matter (as set forth in (a) above), and any such Person will be deemed to have conducted a reasonable investigation regarding the accuracy of the representations and warranties made herein, and (c) with respect to Purchaser, if any of the Persons identified on Schedule 1.2 has, or at any time had, Knowledge of that fact or other matter (as set forth in (a) above), and any such Person will be deemed to have conducted a reasonable investigation regarding the accuracy of the representations and warranties made herein.

     “Laws” shall mean all statutes, laws, ordinances, rules, regulations and other pronouncements of any Governmental Authority having the effect of law in the United States, any state or commonwealth of the United States, or any city, county, municipality, department, commission, board, bureau, agency or instrumentality thereof.

     “Leases” shall have the meaning ascribed to it in Section 3.11(c).

     “Liability Threshold” shall have the meaning ascribed to it in Section 9.4(a).

     “Lien” shall mean any mortgage, pledge, assessment, security interest, lease, sublease, lien, adverse claim, levy, charge or other encumbrance of any kind, or any conditional sale contract, title retention contract, or other contract to give or to refrain from giving any of the foregoing.

     “Liquidated Damages” shall mean $3,000,000.00.

     “Material Adverse Effect” shall mean any circumstance involving change in or effect on an Acquired Entity (a) that is, individually or in the aggregate, materially adverse to the business, operations, earnings, results of operations, prospects, assets or liabilities (including contingent liabilities), or financial condition of such Acquired Entity or the business of any facility of such Acquired Entity; or (b) that might reasonably be expected to prevent or materially delay or impair the ability of Seller to consummate the transactions contemplated by this Agreement, other than changes or effects that are generally applicable in the behavioral health care industry of the United States (provided that such events, effects or changes do not adversely affect the Acquired Entities or their facilities in a disproportionate manner).

     “Material Contracts” shall have the meaning ascribed to it in Section 3.10.

     “Materials of Environmental Concern” shall mean chemicals, pollutants, contaminants, hazardous materials, Hazardous Substances and hazardous wastes, Medical Waste, toxic substances, petroleum and petroleum products and by-products, asbestos-containing materials, PCBs, and any other chemicals, pollutants, substances or wastes, in each case so defined, identified, or regulated under any Environmental Law.

     “Medical Waste” includes, but is not limited to, (a) pathological waste, (b) blood, (c) sharps, (d) wastes from surgery or autopsy, (e) dialysis waste, including contaminated disposable equipment and supplies, (f) cultures and stocks of infectious agents and associated biological agents, (g) contaminated animals, (h) isolation wastes, (i) contaminated equipment, (j) laboratory waste and (k) various other biological waste and discarded materials contaminated with or exposed to blood, excretion, or secretions from human beings or animals. “Medical Waste” also includes any substance, pollutant, material, or contaminant listed or regulated under MWTA and applicable state Law.

     “Medical Waste Law” shall mean the following, including regulations promulgated and orders issued thereunder, all as may be amended from time to time: the MWTA, the U.S. Public Vessel Medical Waste Anti-Dumping Act of 1988, 33 U.S.C. § 2501 et seq., the Marine Protection, Research, and Sanctuaries Act of 1972, 33

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U.S.C. § 1401 et seq., OSHA, the United States Department of Health and Human Services, National Institute for Occupations Self-Safety and Health Infectious Waste Disposal Guidelines, Publication No. 88-119, and any other federal, state, regional, county, municipal, or other local Laws insofar as they purport to regulate Medical Waste, or impose requirements relating to Medical Waste.

     “Multiemployer Plan” shall mean any “multiemployer plan” within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA.

     “MWTA” shall mean the Medical Waste Tracking Act of 1988, 42 U.S.C. § 6992, et seq.

     “OSHA” shall mean the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq.

     “PCBs” shall have the meaning ascribed to it in Section 3.18(f).

     “Permits” shall mean all licenses, permits, franchises, rights, registrations, approvals, authorizations, consents, certifications, waivers, exemptions, clearances, releases, variances or orders of, or filings with, or otherwise issued by, any Governmental Authority.

     “Permitted Liens” shall mean (i) Liens for Taxes not yet due and payable as of the Closing Date, (ii) landlords’, carriers, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business consistent with past practice, none of which is overdue, (iii) pledges or deposits in connection with worker’s compensation, unemployment insurance and other social security legislation, (iv) such minor defects, irregularities, encumbrances, easements, rights-of-way, restrictions, encroachments and other similar encumbrances incurred in the ordinary course of business consistent with past practice and which, individually or in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of any Acquired Entity’s business on such property and which do not materially interfere with or impair the present use and operation of such property subject thereto, and (v) any Lien approved in writing by Purchaser.

     “Person” shall mean any natural person, corporation, general partnership, limited partnership, limited liability company, union, association, court, trust, Governmental Authority or other entity or authority.

     “Pre-Closing Period” shall have the meaning ascribed to it in Section 6.7(a)(i).

     “Pre-Closing Period Tax Returns” shall have the meaning ascribed to it in Section 6.7(a)(i).

     “Programs” shall have the meaning ascribed to it in Section 3.25.

     “Provider Agreements” shall have the meaning ascribed to it in Section 3.25.

     “Provider Numbers” shall have the meaning ascribed to it in Section 3.25.

     “Purchase Price” shall have the meaning ascribed to it in Section 2.2.

     “Purchaser” shall mean Psychiatric Solutions, Inc., a Delaware corporation.

     “Purchaser Indemnitee” shall have the meaning ascribed to it in Section 9.1.

     “Purchaser Material Breach” shall have the meaning ascribed to it in Section 10.1(c).

     “Qualifacts Agreement” shall mean that certain Qualifacts Application Services Agreement, dated October 8, 2004, between Qualifacts Systems, Inc., a Delaware corporation, and ABS.

     “Real Property” shall have the meaning ascribed to it in Section 3.11(b).

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     “Restrictive Covenants Agreements” shall have the meaning ascribed to it in Section 5.14.

     “Section 338 Election” shall have the meaning ascribed to it in Section 6.13(a).

     “Securities Act” shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

     “Seller” shall mean FHC Health Systems, Inc., a Virginia corporation.

     “Seller Indemnitee” shall have the meaning ascribed to it in Section 9.2.

     “Seller Material Breach” shall have the meaning ascribed to it in Section 10.1(c).

     “Shared Services Agreement” shall mean that certain Shared Services Agreement, dated as of January 1, 2006, between ValueOptions, Inc., a Virginia corporation, and ABS.

     “Straddle Period” shall have the meaning ascribed to it in Section 6.7(a)(ii).

     “Straddle Period Tax Returns” shall have the meaning ascribed to it in Section 6.7(a)(ii).

     “Tax” or “Taxes” shall mean (a) any and all taxes and other governmental charges of the same or of a similar nature (including, but not limited to, taxes on or with respect to net or gross income, franchise, profits, gross receipts, capital, sales, use, ad valorem, value added, transfer, real property transfer, transfer gains, inventory, capital stock, license, payroll, employment, social security, unemployment, severance, occupation, real or personal property, estimated taxes, rent, excise, occupancy, recordation, bulk transfer, intangibles, alternative minimum, doing business, withholding and stamp), together with any interest thereon, penalties (or other governmental charges of the same or of a similar nature), additions to tax or additional amounts with respect thereto, imposed by any Governmental Authority or other applicable jurisdiction, (b) any liability for payment of amounts described in clause (a) whether as a result of transferee liability, of being a member of an affiliated, consolidated, combined or unitary group for any period, or otherwise through operation of law, and (c) any liability for the payment of amounts described in clauses (a) or (b) as a result of any tax sharing, tax indemnity or tax allocation agreement or any other express or implied agreement to indemnify any other Person.

     “Tax Indemnification Agreement” shall have the meaning ascribed to it in Section 3.14(e).

     “Tax Proceeding” shall have the meaning ascribed to it in Section 6.7(c)(i).

     “Tax Return” shall mean any return, declaration, report, statement, information statement and other document (including any related or supporting information) with respect to Taxes, including any claims for refunds of Taxes and any amendments or supplements of any of the foregoing.

     “Termination Expenses” shall have the meaning ascribed to it in Section 10.2(c).

     “Transfer Taxes” shall have the meaning ascribed to it in Section 6.7(b).

     “2005 Audited Financial Statements” shall have the meaning ascribed to it in Section 5.5(a).

     “WARN Act” shall mean the Workers Adjustment and Retraining Notification Act, 29 U.S.C. §2101-2109.

ARTICLE II
PURCHASE AND SALE; CLOSING

     2.1 Sale of the ABS Shares. On and subject to the terms and conditions set forth in this Agreement, at the Closing, Seller shall sell, assign, transfer and deliver to Purchaser, free and clear of all Liens, the ABS Shares, and Purchaser shall purchase from Seller, the ABS Shares. Notwithstanding anything express or implied to the

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contrary contained in this Section 2.1 or elsewhere herein, the assets (the “Excluded Assets”) and liabilities (the “Excluded Liabilities”) of the Acquired Entities set forth on Schedule 2.1 are excluded from the assets and liabilities of the Acquired Entities being acquired by or transferred to Purchaser at Closing through Purchaser’s acquisition of the ABS Shares. With the exception of the Excluded Assets and the Excluded Liabilities, and without limiting any of the representations, warranties, covenants and other provisions of this Agreement, the Acquired Entities shall retain all of the assets and liabilities of the Acquired Entities, including, without limitation, their respective trade payables, operational liabilities, guarantees, accrued expenses, contingent liabilities and other obligations. On or before the Closing Date, Seller shall cause the Excluded Assets to be transferred to Seller or another Person designated by Seller by means of dividend or otherwise, and Seller shall either pay the Excluded Liabilities, obtain the release of the Acquired Entities from any obligation with respect to the Excluded Liabilities or execute and deliver an assumption agreement evidencing its assumption of the Excluded Liabilities.

     2.2 Consideration. Subject to the terms and conditions hereof, in reliance upon the representations, warranties, covenants and agreements of Seller herein set forth and as consideration for the sale and purchase of the ABS Shares as herein contemplated, Purchaser shall pay to Seller a purchase price (the “Purchase Price”) equal to TWO HUNDRED FIFTY MILLION AND 00/100 DOLLARS ($250,000,000.00) in the manner and at the time as set forth in this Section 2.2 and Section 2.3. At the Closing, Purchaser shall pay to Seller, by wire transfer of immediately available funds, an amount equal to the Purchase Price less those obligations of Seller identified on Schedule 2.2 (which Seller shall pay directly to, or deposit with, the payee thereof identified on such Schedule 2.2), as such amounts and/or payees may be supplemented or amended by a “Closing Statement” signed by Purchaser and Seller and delivered to one another at Closing. The Closing Statement, if there shall be one, shall not modify, limit or expand the scope or content of any representation, warranty or covenant herein, but shall provide only for the expedient delivery of amounts to Seller and/or other Persons, as Purchaser and Seller may agree.

     2.3 Closing. The Closing will take place at the offices of Waller Lansden Dortch & Davis, LLP, 511 Union Street, Suite 2700, Nashville, Tennessee, or such other place, or in such other manner, as shall be mutually agreed by the parties hereto on the first Business Day of the month following the satisfaction (or due waiver) of the conditions set forth in Articles VII and VIII (other than those conditions which by their nature are to be satisfied at the Closing). The date on which the Closing takes place is referred to herein as the “Closing Date”. The Closing shall be deemed to occur at 12:00:01 a.m., Eastern Time, on the Closing Date, or such other time as shall be mutually agreed upon in writing by the parties hereto (the “Effective Time”).

     2.4 Deliveries of Seller at Closing. At Closing, and unless otherwise waived in writing by Purchaser, Seller shall deliver to Purchaser the following:

          (a) one or more certificates evidencing all the ABS Shares, in each case duly endorsed in blank or accompanied by duly executed stock powers in blank with signatures guaranteed by a bank or trust company as reasonably requested by Purchaser;

          (b) the certificates and documents required to be delivered by Seller pursuant to Article VII; and

          (c) such other instruments and documents as Purchaser reasonably deems necessary to effect the transactions contemplated hereby.

     2.5 Deliveries of Purchaser at Closing. At Closing and unless otherwise waived in writing by Seller, Purchaser shall deliver to Seller the following:

          (a) the portion of the Purchase Price to which Seller is entitled at the Closing pursuant to Section 2.2, and Purchaser shall deliver funds to the other payees as contemplated by Schedule 2.2 and/or the Closing Statement;

          (b) the certificates and documents required to be delivered by Purchaser pursuant to Article VIII; and

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          (c) such other instruments and documents as Seller reasonably deems necessary to effect the transactions contemplated hereby.

     2.6 Additional Acts. From time to time after Closing, Seller shall execute and deliver such other instruments of conveyance and transfer, and take such other actions as Purchaser may reasonably request, to convey and transfer more effectively full right, title and interest to, to vest in, and to place Purchaser in legal and actual possession of any and all of the ABS Shares, as contemplated by and in accordance with the terms of this Agreement.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER

     Seller represents and warrants to Purchaser as follows:

     3.1 Organization of Seller. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the Commonwealth of Virginia. Seller is duly qualified or licensed to transact business and is in good standing in all jurisdictions in which such qualification or licensure is required pursuant to the Laws of such jurisdictions.

     3.2 Organization and Capitalization of ABS.

          (a) ABS (i) is a corporation duly organized, validly existing and in good standing under the Laws of the Commonwealth of Virginia, (ii) has the corporate power and authority to own or lease and to operate its assets and to conduct its business as currently conducted, and (iii) is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions listed in Schedule 3.2(a) and is not required to be so qualified by the requirement of any Laws in any other jurisdiction based on the nature of its operations or the ownership of its assets, except where failure to be so qualified would not reasonably be expected to have a Material Adverse Effect.

          (b) The authorized capital stock of ABS consists of 5,000 shares of common stock, $1.00 par value per share, of which 1,000 shares (the “ABS Shares”) are issued and outstanding. The ABS Shares have been duly authorized and validly issued and are fully paid and non-assessable.

          (c) (i) Seller has good and marketable title to, and owns, the ABS Shares, beneficially and of record, (ii) the ABS Shares are free and clear of all Liens of any nature whatsoever, except for Liens granted pursuant to the Credit Facilities, (iii) Seller has full voting power over the ABS Shares, subject to no proxy, stockholders’ agreement, voting trust or other agreement relating to the voting of any of the ABS Shares, except for restrictions under the Credit Facilities, and (iv) other than this Agreement and the Credit Facilities, there is no agreement between Seller and any other Person with respect to the disposition of the ABS Shares or otherwise relating to the ABS Shares.

          (d) (i) No Person has any preemptive right to purchase any stock or other securities of ABS, (ii) there are no outstanding securities or other instruments of ABS that are convertible into or exchangeable for any shares of its capital stock, (iii) other than the ABS Shares, there are no outstanding securities or other instruments of ABS giving the owner or holder thereof the right to vote on any matters on which ABS’s stockholders may vote, other than as set forth in the Credit Facilities, (iv) other than the Credit Facilities, there are no contracts, arrangements, commitments or restrictions relating to the issuance, sale, transfer, purchase or obtaining of capital stock or other securities or instruments of ABS, and (v) other than the Credit Facilities, there is no existing option, warrant, right, call or commitment of any character granted or issued by ABS governing the issuance of shares of its capital stock.

     3.3 Organization and Capitalization of the ABS Subsidiaries.

          (a) Schedule 3.3(a) contains a true, complete and correct list of all subsidiaries, direct or indirect, of ABS other than the Excluded Subsidiaries (the “ABS Subsidiaries”). Except for the ABS Subsidiaries and

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the Excluded Subsidiaries, ABS does not directly or indirectly own, of record or beneficially, or have the right to acquire, any outstanding equity interests in any other Person.

          (b) Each ABS Subsidiary (i) is a corporation or limited liability company, as the case may be, duly organized or formed, validly existing and in good standing under the laws of the state of its organization or formation, as identified on Schedule 3.3(b), (ii) has the corporate or limited liability company power and authority to own or lease and to operate its assets and to conduct its business as currently conducted, and (iii) is duly qualified to transact business as a foreign corporation or limited liability company and is in good standing in each of the jurisdictions listed in Schedule 3.3(b) and is not required to be so qualified by the requirement of any Laws in any other jurisdiction based on the nature of its operations or the ownership of its assets, except where failure to be so qualified would not reasonably be expected to have a Material Adverse Effect.

          (c) Schedule 3.3(c) sets forth the authorized equity securities of each ABS Subsidiary and indicates the number of issued and outstanding equity securities of such ABS Subsidiary. The shares of capital stock of each ABS Subsidiary that is a corporation have been duly authorized and validly issued and are fully paid and non-assessable.

          (d) (i) ABS has good and marketable title to, and owns, directly or indirectly, all of the outstanding shares of capital stock or other outstanding equity securities of each ABS Subsidiary (the “ABS Subsidiary Shares”), beneficially and of record; (ii) the ABS Subsidiary Shares are free and clear of all Liens of any nature whatsoever, except for Liens granted pursuant to the Credit Facilities; (iii) ABS has full voting power over the ABS Subsidiary Shares, subject to no proxy, stockholders’ agreement, voting trust or other agreement relating to the voting of any of the ABS Subsidiary Shares, except restrictions under the Credit Facilities; and (iv) other than this Agreement and the Credit Facilities, there is no agreement between Seller and any other Person with respect to the disposition of the ABS Subsidiary Shares or otherwise relating to the ABS Subsidiary Shares.

          (e) (i) No Person has any preemptive right to purchase any stock, equity interests or other securities of any ABS Subsidiary, (ii) there are no outstanding securities or other instruments of any ABS Subsidiary that are convertible into or exchangeable for any shares of its capital stock or any other equity securities, (iii) other than the ABS Subsidiary Shares, there are no outstanding securities or other instruments of any of the ABS Subsidiaries giving the owner or holder thereof the right to vote on any matters on which ABS Subsidiary equityholders may vote, other than as set forth in the Credit Facilities, (iv) other than the Credit Facilities, there are no contracts, arrangements, commitments or restrictions relating to the issuance, sale, transfer, purchase or obtaining of capital stock or other securities or instruments of any ABS Subsidiary, and (v) other than the Credit Facilities, there is no existing option, warrant, right, call or commitment of any character granted or issued by any ABS Subsidiary governing the issuance of shares of its capital stock or other securities or instruments.

     3.4 Authorization.

          (a) The execution, delivery and performance by Seller of this Agreement and the other agreements to be entered into by it pursuant to the terms of this Agreement, and the consummation by Seller of the transactions contemplated hereby and thereby, are within Seller’s corporate powers, are not in contravention of the terms of Seller’s Constituent Documents, and have been duly authorized and approved by Seller’s board of directors and, if required by Law or Seller’s Constituent Documents, by the stockholders of Seller. No other corporate or limited liability company, as the case may be, proceedings on the part of Seller or any Acquired Entity are necessary to authorize the execution, delivery and performance by Seller or any Acquired Entity of this Agreement or the other agreements to be entered into by Seller or any Acquired Entity pursuant to the terms of this Agreement.

          (b) This Agreement has been duly and validly executed and delivered by Seller, and, as of the Closing, the other agreements to be entered into by Seller or any Acquired Entity pursuant to the terms of this Agreement will have been duly and validly executed and delivered by Seller or such Acquired Entity, as the case may be. This Agreement constitutes, and upon their execution and delivery, such other agreements will constitute, the legal, valid and binding obligations of Seller and any Acquired Entity party thereto, enforceable against Seller and any Acquired Entity party thereto in accordance with their respective terms (assuming the valid authorization, execution and delivery hereof and thereof by Purchaser and any other unaffiliated entity that is a party thereto), subject, in each

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case, to bankruptcy, insolvency, reorganization, moratorium and similar Laws of general application relating to or affecting creditors’ rights and to general principles of commercial reasonableness, good faith and fair dealing.

     3.5 No Conflicting Agreements; Consents. Except as set forth in Schedule 3.5, neither the execution and delivery of this Agreement or any of the other agreements to be entered into by Seller or any Acquired Entity pursuant to the terms of this Agreement nor the consummation of any of the transactions contemplated hereby or thereby will:

          (a) violate, conflict with, result in a breach or termination of the terms, conditions or provisions of, constitute a default under, or entitle any party to terminate or accelerate (i) the respective Constituent Documents of Seller or any of the Acquired Entities, (ii) any Contract (other than the Credit Facilities), except such violations, conflicts, breaches, defaults, terminations or accelerations which, either individually or in the aggregate, (A) would not materially impair the ability of Seller and the Acquired Entities to perform their respective obligations hereunder or under the other agreements contemplated hereby to be entered into by any of them or would not prevent the consummation of the transactions contemplated hereby or thereby, or (B) would not reasonably be expected to have a Material Adverse Effect, (iii) any Court Order to which Seller or any of the Acquired Entities is a party or by which Seller or any of the Acquired Entities is bound, or (iv) any requirements of Law affecting Seller or any of the Acquired Entities, except such violations, conflicts, breaches or defaults of such requirements of Law which, either individually or in the aggregate, (A) would not materially impair the ability of Seller and the Acquired Entities to perform their respective obligations hereunder or under the other agreements contemplated hereby to be entered into by any of them or would not prevent the consummation of the transactions contemplated hereby or thereby or (B) would not reasonably be expected to have a Material Adverse Effect;

          (b) result in the creation or imposition of any Lien upon any of the assets or securities of any Acquired Entity (except for Permitted Liens);

          (c) require a permit from, the approval, consent or authorization of, or the making by Seller or any of the Acquired Entities of any declaration, filing or registration with, any Governmental Authority, except as provided in Section 5.1 or Section 6.2 and except for such approvals, consents, authorizations, declarations, filings or registrations, the failure of which to be obtained or made (i) would not, individually or in the aggregate, materially impair the ability of Seller and the Acquired Entities to perform their respective obligations hereunder or under the other agreements contemplated hereby to be entered into by any of them or prevent the consummation of the transactions contemplated hereby or thereby or (ii) would not reasonably be expected to have a Material Adverse Effect; or

          (d) require the approval, consent or authorization of, or notice to, any third party to any Material Contract.

     3.6 Financial Statements.

          (a) Schedule 3.6 contains copies of the audited consolidated balance sheets of the Company at December 31, 2003 and 2004 and the unaudited consolidated balance sheet of the Company at March 31, 2006, and the audited consolidated statements of income of the Company for the years ended December 31, 2003 and 2004 and the unaudited consolidated statement of income of the Company for the three months ended March 31, 2006 (collectively, and including the 2005 Audited Financial Statements as and when delivered in accordance with Section 5.5 hereof, the “Company Financial Statements”). The Company Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby (except as may be indicated in such Company Financial Statements, the notes thereto or Schedule 3.6), present fairly in all material respects the financial condition of the Company as of such dates and the results of operations of the Company for such periods, are correct and complete, and are consistent in all material respects with the Books and Records of the Company (which Books and Records are correct and complete).

          (b) Company has designed internal controls to ensure that material information relating to the Company Financial Statements and other financial information is made known to its executive officers by other officers and employees of Seller and the Acquired Entities. There are no significant deficiencies in the design or

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operation of internal controls that could adversely affect the Company’s ability to record, process, summarize, and report financial data.

          (c) The accounts receivable set forth on the Company Financial Statements, and all accounts receivable arising since the Balance Sheet Date, represent bona fide claims of the Acquired Entities against debtors for sales, services performed or other charges arising on or before the date hereof, and all the goods delivered and services performed that gave rise to said accounts were delivered or performed in accordance with the applicable orders, Contracts or customer requirements. Said accounts receivable are subject to no defenses, counterclaims or rights of setoff, except to the extent of the appropriate reserves for bad debts on accounts receivable as set forth on the Company Financial Statements and, in the case of accounts receivable arising since the date of the Company Financial Statements, to the extent of a reasonable reserve rate for bad debts on accounts receivable which is not greater than the rate reflected by the reserve for bad debts on the Company Financial Statements.

     3.7 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 3.7, the Company does not have any material liabilities or obligations required by GAAP to be reflected on a consolidated balance sheet (whether accrued, absolute, asserted or unasserted, contingent or otherwise) except for (a) liabilities reflected or reserved against in the Company Financial Statements, (b) liabilities incurred in the ordinary course of the Company’s business since the Balance Sheet Date, or (c) liabilities incurred in connection with the transactions contemplated by this Agreement.

     3.8 Absence of Certain Changes. Except as disclosed in Schedule 3.8 or as contemplated elsewhere in this Agreement, since the Balance Sheet Date, the Acquired Entities have conducted their businesses only in the ordinary course of such businesses and:

          (a) no Acquired Entity has (i) declared, set aside or paid any dividend or made or agreed to make any other distribution or payment in respect of its capital stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its capital stock or (ii) amended its Constituent Documents;

          (b) no Acquired Entity has incurred any liabilities that under GAAP would be required to be reflected on a balance sheet for the Company (other than current liabilities incurred in the ordinary course of its business consistent with past practice);

          (c) no Acquired Entity has sold, assigned or transferred any of its assets or properties (other than dispositions or sales of inventory in the ordinary course of business);

          (d) no Acquired Entity has mortgaged, pledged or subjected to any Lien any of the assets or properties of such Acquired Entity other than Permitted Liens;

          (e) no Acquired Entity has suffered any damage, destruction or loss, whether or not covered by insurance, that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

          (f) except as contemplated by Schedule 3.12(i), no Acquired Entity has entered into any employment, severance or termination agreement with any of the employees of an Acquired Entity;

          (g) neither Seller nor the Company has made any change in its accounting principles, practices or methodologies in any material respect;

          (h) no Acquired Entity has (i) made any increase in the rate of compensation payable to any of its employees, other than normal and customary increases consistent with past practice or increases that otherwise were required by such Acquired Entity’s obligations pursuant to applicable Law or Contracts in effect on the Balance Sheet Date, or (ii) increased severance or termination obligations to any of its employees; and

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          (i) neither Seller nor any Acquired Entity has entered into any agreement or arrangement, or made any other commitment (whether oral or written), to do any of the foregoing.

     3.9 Legal Proceedings, etc. There are no investigations, actions, suits or proceedings pending, or, to the Knowledge of Seller, threatened against Seller or any of its subsidiaries (including the Acquired Entities) and, to the Knowledge of Seller, no event has occurred or circumstance exists that would reasonably be expected to give rise to or serve as a basis for the commencement of any action, suit or proceeding which, either individually or in the aggregate, if decided adversely, could reasonably be expected to (a) materially impair the ability of Seller or any Acquired Entity to perform its respective obligations hereunder or under the other agreements contemplated hereby to be entered into by any of them or (b) prevent the consummation of the transactions contemplated hereby or thereby. Except as set forth in Schedule 3.9, there are no investigations, actions, suits or proceedings pending, or, to the Knowledge of Seller, threatened against Seller or any of its subsidiaries (including the Acquired Entities) and, to the Knowledge of Seller, no event has occurred or circumstance exists that would reasonably be expected to give rise to or serve as a basis for the commencement of any investigation, action, suit or proceeding which, either individually or in the aggregate, if decided adversely, could reasonably be expected to result in a liability to the Acquired Entities in excess of $100,000. Except as otherwise disclosed in Schedule 3.9 and except for investigations or proceedings conducted in the ordinary course of the Acquired Entities’ business, neither Seller nor any Acquired Entity has received written or, to the Knowledge of Seller, oral notice from any Governmental Authority that any Acquired Entity is the target of any investigation or proceeding by any Governmental Authority nor to the Knowledge of Seller is any such investigation or proceeding pending.

     3.10 Contracts; No Defaults. Schedule 3.10 sets forth a complete and accurate list of the following Contracts: (i) all Contracts that have an aggregate annual value or result in an aggregate annual expense of at least $50,000; (ii) any agreement that grants a right of first refusal with respect to the purchase or sale of any asset of an Acquired Entity or an equity interest in an Acquired Entity; (iii) any agreement relating to the borrowing or lending of money (other than advances to employees to cover business expenses in the ordinary course of business); (iv) any joint venture Contract, partnership Contract or similar Contract evidencing an ownership interest or a participation in or sharing of profits; (v) any guaranty, contribution agreement or other agreement that includes any material indemnification or contribution obligation; (vi) any agreement (including any non-competition agreement) limiting the ability of any Acquired Entity to engage in any line of business or in business with any Person or restricting the geographical area in which such Acquired Entity may engage in any business; (vii) any employment, consulting, management, severance or indemnification contract or agreement with annual obligations in excess of $50,000; and (viii) all agreements with any physician or an immediate family member of a physician, or with an entity which, to the Knowledge of Seller, is owned by a physician or an immediate family member of a physician (collectively, the “Material Contracts”). All of the Material Contracts are with respect to the Acquired Entities, and, to Seller’s Knowledge, with respect to all other parties thereto, valid and binding obligations and are in full force and effect in accordance with their terms. Except as set forth in Schedule 3.10, there is not, under any of the Material Contracts, any existing default, event of default or other event which, with or without due notice or lapse of time or both, would constitute a default or event of default on the part of any Acquired Entity, except such defaults, events of default and other events as to which requisite waivers or consents have been obtained or would not reasonably be expected to cause a Material Adverse Effect. To Seller’s Knowledge, no party to any of the Material Contracts intends to cancel, terminate or exercise any option under any of the Material Contracts. Seller has provided to Purchaser true and complete copies of the Material Contracts.

     3.11 Title to Property.

          (a) Each of the Acquired Entities is in possession of and has good title to, or has valid leasehold interests in or valid rights under Contract to use, all of the personal property and such other assets used in or reasonably necessary for the conduct of its business; such assets and properties include all personal property reflected on the Company Financial Statements and all of the personal properties purchased or otherwise acquired by the Acquired Entities since the Balance Sheet Date, other than (i) current assets or properties disposed of since the Balance Sheet Date in the ordinary course of business consistent with past practice, and (ii) the Excluded Assets. None of such assets or properties is subject to any Liens (other than Permitted Liens).

          (b) Each of the Acquired Entities has good and valid fee simple title to or a valid leasehold interest in all real property and other real property interests used in connection with the operation of the business of

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such Acquired Entity, together with all buildings, improvements and fixtures located thereupon and all construction in buildings, improvements and fixtures located thereupon and all construction in progress (such real property is referred to herein as the “Real Property”). The address and legal description for the Real Property that each Acquired Entity owns is listed in Schedule 3.11(b).

          (c) Schedule 3.11(c) lists all leases to which an Acquired Entity is a party involving rental of real property as a lessor, lessee, sublessor or sublessee (the “Leases”). Seller has delivered to Purchaser true and correct copies of all Leases. All of the Leases are valid and binding obligations of the parties thereto, are in full force and effect, and are enforceable against the parties thereto in accordance with their terms; and no event has occurred including, but not limited to, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby which (whether with or without notice, lapse of time or both) would constitute a default thereunder by an Acquired Entity. To the Knowledge of Seller, none of the other parties to any of the Leases (i) is in default under any such Lease or (ii) considers an Acquired Entity to be in default thereunder. No property leased under any of the Leases is subject to any Lien or limitation that might in any respect interfere with or impair the present and continued use thereof in the usual and normal conduct of the business of the applicable Acquired Entity. With respect to the property and assets it leases, each Acquired Entity is in compliance with such Leases, except where the failure to be in compliance would not reasonably be expected to have a Material Adverse Effect.

          (d) Seller has provided to Purchaser true and correct copies of rent rolls for each building in which an Acquired Entity leases or subleases space to tenants, which rent rolls identify the space leased, and with respect to each lease or sublease, identify (i) the tenant or subtenant, (ii) the number of square feet leased, (iii) the term commencement date and expiration date, (iv) any term renewal options, (v) the annual or monthly rent, and (vi) the amount of security deposits.

          (e) Seller has provided to Purchaser a true and correct list of the most current owner’s title policies issued to Seller or an Acquired Entity with respect to any of the Real Property or any portion thereof, and copies thereof have been supplied to Purchaser.

          (f) Seller has provided Purchaser a true and correct list of the most current “as-built” surveys or boundary surveys obtained by Seller or an Acquired Entity with respect to any of the Real Property or any portion thereof, and copies thereof have been supplied to Purchaser.

          (g) Seller has provided Purchaser a true and correct copy of all environmental site assessments obtained by Seller or an Acquired Entity with respect to any of the Real Property or any portion thereof.

          (h) No Acquired Entity has received any notice of any violation of any building codes, zoning regulations, or other Law in respect of the Real Property or structures or their use by such Acquired Entity. The present use of the Real Property is permitted, and it is a conforming structure under applicable zoning and building laws and ordinances. There are no pending or, to Seller’s Knowledge, threatened requests, applications or proceedings to alter or restrict the zoning or other use restrictions applicable to the Real Property. No variance, special permit, special exceptions or other approval is required under the local zoning or planning Laws from any Governmental Authority to operate a behavioral health care business at the Real Property. No portion of the Real Property is subject to a condemnation or similar proceeding. Schedule 3.11(h) describes all construction work, if any, which any Acquired Entity has contracted for and which is presently in progress in respect of the business of such Acquired Entity and also contains a good faith estimate, as of the date of this Agreement, of the cost to complete each such project.

          (i) The Real Property constitutes valid subdivided parcels in accordance with all applicable subdivision restrictions. The Acquired Entities have all easements, servitudes, and rights-of-way necessary for access to the Real Property. All utilities serving the Real Property are adequate to operate a behavioral health care business at the Real Property in the manner it is currently operating. No improvements (i) encroach onto adjacent property, (ii) violate setback, building or side lines or (iii) encroach onto any easements or servitudes located on the Real Property. Except as set forth on Schedule 3.11(i), no portion of the Real Property is located within a flood plain or constitutes an area classified as a protected wetland. Neither Seller nor any Acquired Entity has received

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written notice of any action to alter the zoning or zoning classification or to condemn, requisition or otherwise take all or any portion of the Real Property.

          (j) To the Knowledge of Seller, there are no defects in the condition of the Real Property that will impair the condition of the Real Property or the operation of the behavioral health care facility at the Real Property. There is no defect in the Real Property, the structural elements thereof, the mechanical systems (including without limitation all heating, ventilating, air conditioning, plumbing, electrical, elevator, security, utility and sprinkler systems) therein, or the parking and loading areas, and all such systems are safe and adequate for the uses to which they are put in the operation of the behavioral health care facility at the Real Property. The Real Property is in good operating condition, ordinary wear and tear excepted. There are no defects or deficiencies in any necessary utility services and, to the Knowledge of Seller, easements for such services including, without limitation, electrical, gas, water, sewer and telephone.

     3.12 Employees; Labor Matters; Employee Benefit Plans; ERISA.

          (a) No Acquired Entity is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the Knowledge of Seller, threatened against an Acquired Entity relating to its business. To the Knowledge of Seller, there are no organization efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of any Acquired Entity. There is no labor strike, material slowdown or material work stoppage or lockout actually pending or, to the Knowledge of Seller, threatened against or affecting any Acquired Entity, and an Acquired Entity has not experienced any strike, material slowdown or material work stoppage or lockout since January 1, 2001. No Acquired Entity is delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it or amounts required to be reimbursed to such employees. Each Acquired Entity is in material compliance with all applicable laws respecting labor, employment, fair employment practices, terms and conditions of employment, workers’ compensation, occupational safety, plant closings, and wages and hours. Each Acquired Entity has withheld all amounts required by Law or by agreement to be withheld from the wages, salaries, and other payments to employees. No Acquired Entity is liable for any arrears of wages or any Taxes or any penalty for failure to comply with any of the foregoing.

          (b) Schedule 3.12(b) contains a list of each Company Plan. Neither the Acquired Entities nor any other Person has any express or implied commitment, whether legally enforceable or not, to modify, change or terminate any Company Plan in any material respect, other than with respect to a modification, change or termination required by ERISA or the Code.

          (c) Seller has delivered to Purchaser a current, accurate and complete copy (or, to the extent no such copy exists, an accurate description) of each Company Plan and each of the following, to the extent applicable: (i) any related trust agreement or other funding instrument; (ii) the most recent IRS determination letter, if applicable; (iii) any summary plan description, summary of material modifications, employee handbooks and other material written communications provided over the past three (3) years to participants in the Company Plans; and (iv) for the three (3) most recent years (A) the Form 5500 and attached schedules, (B) audited Company Plan financial statements, (C) actuarial valuation reports and (D) attorney’s response to an auditor’s request for information.

          (d) Except as set forth on Schedule 3.12(d), (i) each Company Plan has been established, drafted and administered in all material respects in accordance with its terms and the applicable provisions of ERISA, the Code and other applicable Laws; (ii) each Company Plan that is intended to be qualified within the meaning of Code Section 401(a) has received a favorable IRS determination letter as to its qualification, and nothing has occurred, whether by action or failure to act, that could reasonably be expected to adversely affect the qualified status of any such Company Plan or the exempt status of any such trust; (iii) for each Company Plan with respect to which a Form 5500 has been filed, no material change has occurred with respect to the matters covered by the most recent Form 5500 since the date thereof; (iv) no “reportable event” (as such term is defined in ERISA Section 4043) has occurred with respect to any Company Plan; (v) neither Seller, any ERISA Affiliate, nor, to the Knowledge of Seller, any other party in interest or a disqualified person (as defined in Code Section 4975(e)(2)) has breached any fiduciary duty or engaged in a “prohibited transaction” (within the meaning of ERISA Section 406 and Code Section

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4975) with respect to any Company Plan for which there is no exemption under ERISA Section 408 or Code Section 4975; (vi) except as required by COBRA, no Company Plan provides post-employment or retiree welfare benefits and no Acquired Entity has any obligations to provide any post-employment or retiree welfare benefits; (vii) contributions required to be made under the terms of any of the Company Plans as of the date of this Agreement have been timely made or, if not yet due, have been properly reflected on the Company Financial Statements; (viii) no event has occurred and, to the Knowledge of Seller, there exists no condition or set of circumstances in connection with which any Acquired Entity, ERISA Affiliate or Company Plan would reasonably be expected to be subject to any material liability (other than for routine benefit liabilities) under the terms of, or with respect to, such Company Plans, ERISA, the Code or any other applicable Law; (ix) neither the Acquired Entities nor any ERISA Affiliate has any liability under ERISA Section 502; (x) all Tax, annual reporting and other governmental filings required by ERISA and the Code have been timely filed with the appropriate governmental agency and all notices and disclosures have been timely provided to participants; (xi) no excise Tax could be imposed upon the Acquired Entities under Chapter 43 of the Code; and (xii) the Acquired Entities do not maintain, sponsor, contribute to or have any liability with respect to any employee benefit plan, program or arrangement that provides benefits to non-resident aliens with no U.S. source income outside of the United States.

          (e) None of the Company Plans is subject to, and no Acquired Entity or ERISA Affiliate has been liable at any time for contributions to, any plan or program that is, or has been at any time, subject to Section 4.12 of the Code, Section 302 of ERISA and/or Title IV of ERISA.

          (f) There is no Multiemployer Plan under which any employee or any former employee of any Acquired Entity has any present or future right to benefits or under which any Acquired Entity has any present or future liability. The Acquired Entities and their ERISA Affiliates have not sponsored or contributed to or been required to contribute to a Multiemployer Plan.

          (g) With respect to any Company Plan, no actions, suits or claims (other than routine claims for benefits in the ordinary course) are pending or, to the Knowledge of Seller, threatened. No Company Plan is currently subject to an audit or other investigation by the IRS, the Department of Labor or any other governmental authority.

          (h) No Company Plan or other agreement exists that could result in the payment to any present or former employee or director of any Acquired Entity of any money or other property or accelerate or provide any other rights or benefits to any present or former employee of any Acquired Entity as a result of the transactions contemplated by this Agreement, whether or not such payment would constitute a parachute payment within the meaning of Code Section 280G.

          (i) The Acquired Entities and their ERISA Affiliates have complied with the continuation coverage provisions of Title I, Part 6, of ERISA (“COBRA”) with respect to all current and former employees and their beneficiaries. Attached hereto as Schedule 3.12(i) is a complete and accurate list of all current and former employees of the Company and their beneficiaries who are eligible for and/or who have elected continuation coverage under COBRA. At the Closing, Seller shall deliver to Purchaser a revised version of such list, updated through the Closing Date.

          (j) The Acquired Entities and their ERISA Affiliates and the Company Plans have properly classified individuals providing services to the Acquired Entities and their ERISA Affiliates as independent contractors or employees, as the case may be.

     3.13 Bank Accounts. Schedule 3.13 is a list of the names and locations of all financial institutions at which any Acquired Entity maintains a checking account, deposit account, securities account, safety deposit box or other deposit or safekeeping arrangement, the name of the Acquired Entity that maintains each such account or arrangement and the number or other means of identification of each such account and arrangement.

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     3.14 Taxes.

          (a) Except as set forth on Schedule 3.14, (i) the Acquired Entities have duly and timely filed all Tax Returns that they are required to have filed, (ii) all Tax Returns filed by the Acquired Entities were true, correct and complete in all material respects, and (iii) the Acquired Entities have timely paid all Taxes that have become due and payable (whether or not shown on a Tax Return) and have adequately reserved in the Company Financial Statements in accordance with GAAP for all Taxes (whether or not shown on any Tax Return) that have accrued but are not yet due or payable as of the dates thereof. No federal income Tax Return that was filed by the Acquired Entities contains, or was required to contain (in order to avoid a penalty, and determined without regard to the effect of post-filing disclosure), a disclosure statement under Section 6662 of the Code. None of the Acquired Entities has entered into any “reportable transaction” as defined in Treasury Regulation Section 1.6011-4(b).

          (b) Except as set forth on Schedule 3.14, the Acquired Entities have no present or contingent liability for Taxes, other than Taxes reflected on the Company Financial Statements or incurred in the ordinary course of business since the Balance Sheet Date in amounts consistent with prior years adjusted to reflect changes in operating results of the Acquired Entities. Except as set forth on Schedule 3.14, Seller has no Knowledge of any basis for the assertion by a Governmental Authority of a Tax deficiency against any Acquired Entity.

          (c) Except as set forth on Schedule 3.14, (i) there is no dispute or claim concerning any Tax liability of the Acquired Entities either (A) claimed or raised by any Governmental Authority in writing or (B) as to which Seller has Knowledge; (ii) no Tax audits or administrative or judicial Tax proceedings are pending or being conducted with respect to any Acquired Entity; (iii) no Acquired Entity has received from any Governmental Authority any notice indicating an intent to open an audit or other review or any request for information related to Taxes; (iv) no jurisdiction in which any of the Acquired Entities do not file a Tax Return has made a claim in writing that any of the Acquired Entities is required to file a Tax Return for such jurisdiction, and Seller has no Knowledge that any such jurisdiction has otherwise made any such claim; and (v) neither ABS nor any of the ABS Subsidiaries is a party to or bound by any closing or other agreement with any Governmental Authority with respect to Taxes.

          (d) The Acquired Entities have complied in all material respects with all applicable Laws relating to the payment and withholding of Taxes (including, but not limited to, withholding in connection with payments to employees, independent contractors, creditors, stockholders, partners or other third parties) and have, within the time and manner prescribed by Law, withheld and paid over to the proper Governmental Authorities all material amounts required to be withheld and paid over under all applicable Laws.

          (e) Neither ABS nor any of the ABS Subsidiaries has been a member of any Affiliated Group filing a consolidated federal income Tax Return or a member of a combined, consolidated or unitary group for state, local or foreign Tax purposes, other than a group the common parent of which has at all times been Seller, or has any liability for the Taxes of any other Person (other than an entity that is a member of the consolidated group of corporations that has at all times had Seller as its common parent) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign Law), as a transferee or successor, by contract, or otherwise. Except as set forth on Schedule 3.14, neither ABS nor any of the ABS Subsidiaries is a party to, is bound by, or has any obligation under any Tax sharing agreement, Tax indemnification agreement or similar contract or arrangement, whether written or, to the Knowledge of Seller, unwritten (a “Tax Indemnification Agreement”), and ABS and the ABS Subsidiaries do not have any potential liability or obligation to any Person as a result of, or pursuant to, any such Tax Indemnification Agreement. Seller has filed a consolidated federal income Tax Return with ABS and the ABS Subsidiaries for the taxable year immediately preceding the current taxable year and is eligible to make a Section 338 Election.

          (f) Except as set forth on Schedule 3.14, (i) neither ABS nor any of the ABS Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending on or after the Closing Date as a result of any adjustment pursuant to Section 481(a) of the Code by reason of a change in accounting method, and the IRS has not proposed any such adjustment or a change in any accounting method used by ABS or any of the ABS Subsidiaries; (ii) neither ABS nor any of the ABS Subsidiaries has taken any action inconsistent with its practices in prior years that would have the effect of deferring a liability for Taxes from a period prior to the Effective Time to a period following the Effective

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Time; and (iii) neither ABS nor any of the ABS Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending on or after the Closing Date as a result of any intercompany transaction or excess loss account described in Treasury Regulations promulgated under Section 1502 of the Code (or any corresponding or similar provision of state, local or foreign income Tax law).

          (g) Except as set forth on Schedule 3.14, none of the Acquired Entities is subject to any waiver or extension of the statute of limitations applicable to the assessment or collection of any Tax. Except as disclosed on Schedule 3.14, no power of attorney or similar grant of authority is in place with respect to the Tax matters of the Acquired Entities.

          (h) None of the Acquired Entities is a party to any Contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in connection with this Agreement or any change of control of the Acquired Entities, in the payment of any “excess parachute payments” within the meaning of Section 280G of the Code.

          (i) None of the Acquired Entities is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

          (j) There are no Liens for Taxes on any assets of the Acquired Entities, other than Liens for Taxes not yet due and payable.

          (k) No Acquired Entity has distributed stock of another Person, or has had its stock distributed by another Person, in a transaction purported or intended to be governed in whole or in part by Section 355 or 361 of the Code.

          (l) Except as set forth on Schedule 3.14, no Acquired Entity is a party to any joint venture, partnership or other arrangement or Contract that could be treated as a partnership for federal income tax purposes. Schedule 3.14 sets forth all elections pursuant to Treasury Regulation Section 301.7701-3 that have been made by business entities in which any Acquired Entity owns an equity interest.

          (m) Each Affiliated Group has filed all income Tax Returns that it was required to file for each taxable period during which any of the Acquired Entities was a member of the group. All such Tax Returns were correct and complete in all respects. All income Taxes owed by any Affiliated Group (whether or not shown on any Tax Return) have been paid for each taxable period during which any of the Acquired Entities was a member of the group.

          (n) Except as set forth on Schedule 3.14, (i) to the Knowledge of Seller, no Governmental Authority intends to assess any additional income Taxes against any Affiliated Group for any taxable period during which any of the Acquired Entities was a member of the group; (ii) there is no dispute or claim concerning any income Tax Liability of any Affiliated Group for any taxable period during which any of the Acquired Entities was a member of the group either (A) claimed or raised by any Governmental Authority in writing or (B) as to which Seller has Knowledge; and (iii) no Affiliated Group has waived any statute of limitations in respect of any income Taxes or agreed to any extension of time with respect to an income Tax assessment or deficiency for any taxable period during which any of the Acquired Entities was a member of the group.

          (o) No Acquired Entity has any liability for the Taxes of any Person other than the Acquired Entities (i) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign Law), (ii) as a transferee or successor, (iii) by Contract, or (iv) otherwise.

          (p) Seller has no Knowledge, after consultation with tax counsel, that Purchaser’s acquisition of the ABS Shares pursuant to this Agreement would not qualify as a “qualified stock purchase” within the meaning of Section 338 of the Code and Treasury Regulations thereunder, as to which a Section 338 Election properly may be made.

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          (q) No Acquired Entity has entered into any transactions with Health Related Research, Incorporated, a Virginia nonstock corporation, or Foundations for Home and Community, Inc., a Virginia nonstock corporation, that have resulted or may result in the net earnings of such entities inuring to the benefit of any private person as is prohibited by Section 501(c)(3) of the Code or which has constituted or may constitute an “excess benefit transaction” within the meaning of Section 4958 of the Code and the Treasury Regulations thereunder.

     3.15 Insurance. Schedule 3.15 includes a list of all material insurance policies maintained by or for the benefit of any Acquired Entity, including fire and extended coverage and casualty, liability and other forms of insurance. Seller covenants and agrees to use commercially reasonable efforts to keep such insurance or comparable insurance in full force and effect until the Effective Time. None of the Acquired Entities has received notice from any insurance carrier that any insurance policy will be canceled or that coverage thereunder will be reduced or eliminated.

     3.16 Intellectual Property. Except as set forth in Schedule 3.16, each Acquired Entity owns or has the right to use (and following the Closing will continue to own or have the right to use) all patents, trademarks, trade names, service marks, trade secrets, copyrights and other intellectual property rights and licenses (the “Intellectual Property”) as are material to, or necessary to conduct, its business as currently conducted (the “Company Intellectual Property”), free of all Liens except Permitted Liens. Except as set forth in Schedule 3.16, (a) to the Knowledge of Seller, no infringement exists by any of the Acquired Entities on the Intellectual Property of any other Person that results in any way from the operations of the businesses of the Acquired Entities, and (b) there has been no notice given to any of the Acquired Entities that its operations, activities or business infringe any Intellectual Property of any other Person. Except as set forth in Schedule 3.16, (i) no Court Orders or proceedings are pending, or, to the Knowledge of Seller, threatened, against Seller or any of the Acquired Entities that challenge the validity of, or an Acquired Entity’s ownership of or right to use, any Company Intellectual Property, and (ii) to the Knowledge of Seller, there is no infringing use of any of the Company Intellectual Property owned by any Acquired Entity by any other Person. Schedule 3.16 lists all registrations or applications therefor with regard to Company Intellectual Property. Schedule 3.16 lists all material software used by an Acquired Entity under license from a third party, except for operating system software or other commercially available “off the shelf” software that is covered by so-called shrink-wrap or click-wrap licenses.

     3.17 Compliance with Laws. The Acquired Entities hold all required Permits applicable to their respective businesses (the “Company Permits”), except where the failure to obtain such Permits would not reasonably be expected to have a Material Adverse Effect. The Acquired Entities are in compliance with the terms of the Company Permits in all material respects. Except as set forth in Schedule 3.17, the Acquired Entities are in compliance with all Laws of any Governmental Authority in all material respects. Except as set forth in Schedule 3.17, to the Knowledge of Seller, there is no threatened suspension, cancellation or termination of any Company Permits.

     3.18 Environmental Matters. Except as set forth in Schedule 3.18:

          (a) The operations and properties of each of the Acquired Entities have been in compliance with the Environmental Laws in all material respects, which compliance includes but is not limited to the possession by each of the Acquired Entities of all Permits required under applicable Environmental Laws, and compliance in all material respects with the terms and conditions thereof.

          (b) No Acquired Entity has treated, stored, managed, disposed of, transported, handled, released, or used any Materials of Environmental Concern except in the ordinary course of its business, and in compliance in all material respects with all Environmental Laws.

          (c) There are no Environmental Claims pending or, to the Knowledge of Seller, threatened against any of the Acquired Entities.

          (d) There are no off-site locations where any of the Acquired Entities has stored, disposed or arranged for the disposal of Materials of Environmental Concern except as permitted by applicable Law, and none of the Acquired Entities has been notified in writing that it is a potentially responsible party at any such location under any Environmental Laws.

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          (e) None of the Acquired Entities has assumed or undertaken any corrective, investigatory or remedial obligation of any other Person relating to any Environmental Law.

          (f) To the Knowledge of Seller, (i) there are no underground storage tanks located on property owned, leased or operated by any of the Acquired Entities; (ii) there is no asbestos-containing material (as defined under Environmental Laws) contained in or forming part of any building, building component, structure or office space owned, leased or operated by any of the Acquired Entities; and (iii) there are no polychlorinated biphenyls (“PCBs”) or PCB-containing items contained in or forming part of any building, building component, structure or office space owned, leased or operated by any of the Acquired Entities, except as permitted by applicable Law.

     3.19 Books and Records. The Books and Records of the Acquired Entities are complete and correct in all material respects and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls. The records contained in the minute books of the Acquired Entities are accurate in all material respects.

     3.20 No Material Adverse Change. Since the Balance Sheet Date through the date of this Agreement, there has not been any change in the business, operations, assets, condition (financial or otherwise), prospects, or results of operations of the Acquired Entities that would reasonably be expected to result in a Material Adverse Effect.

     3.21 Brokers. Neither Seller nor any Affiliate of Seller (including any of the Acquired Entities) has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

     3.22 HIPAA Matters.

          (a) Each entity owned or controlled by an Acquired Entity that is a health plan, healthcare clearinghouse or healthcare provider that transmits any health information in electronic form in connection with a Transaction (as defined in the Federal Transaction Regulations), as such terms are defined in the Federal Privacy Regulations (collectively, the “Covered Entities”), is in compliance in all material respects with and has not violated in any material respect the administrative simplification section of the Health Insurance Portability and Accountability Act of 1996, as codified at 42 U.S.C. Sections 1320d through d-8 (collectively, “HIPAA”), the regulations contained in 45 C.F.R. Parts 160 and 164, Subparts A and E, as amended (collectively, the “Federal Privacy Regulations”), the regulations contained in 45 C.F.R. Parts 160 and 162, as amended (collectively, the “Federal Transaction Regulations”), or applicable state privacy laws.

          (b) Each Acquired Entity is a Covered Entity, and there is no Organized Health Care Arrangement (as defined in the Federal Privacy Regulations) in which a Covered Entity participates. Complete and accurate copies of each Covered Entity’s policies relating to the privacy of its patients’ Protected Health Information (as defined in the Federal Privacy Regulations) and any privacy notice relating thereto, or the most recent draft thereof, have been furnished to Purchaser. Each such policy relating to the privacy of patients’ Protected Health Information complies with the Federal Privacy Regulations and applicable state privacy laws in all material respects.

          (c) A complete and accurate list of all agreements (collectively, “Business Associate Agreements”) between a Covered Entity and a Business Associate (as defined in the Federal Privacy Regulations), together with a complete and accurate summary of the terms and conditions of such Business Associate Agreements and any oral arrangements with Business Associates, have been furnished to Purchaser. Neither Seller nor any Covered Entity is aware of any breach by a Business Associate of any Business Associate Agreement or any violation by a Business Associate of HIPAA, the Federal Transaction Regulations, or the Federal Privacy Regulations in any material respect.

          (d) No patient has filed a HIPAA-related complaint with Seller, any of the Acquired Entities or, to the Knowledge of Seller, any Governmental Authority that would reasonably be expected to result in a Material Adverse Effect.

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     3.23 Medical Waste. The operations of the Acquired Entities have been in compliance with the Medical Waste Laws in all material respects.

     3.24 Certificates of Need. Except as set forth on Schedule 3.24 hereto, no application for any Certificate of Need, Exemption Certificate (each as defined below) or declaratory ruling has been made by any Acquired Entity with any Governmental Authority that is currently pending or open before such Governmental Authority, and no such application (collectively, the “Applications”) filed by any Acquired Entity within the past three (3) years has been ultimately denied by any Governmental Authority or withdrawn by any Acquired Entity. Except as set forth on Schedule 3.24 hereto, (i) no Acquired Entity has had any Applications pending or any approved Applications that relate to projects not yet completed and (ii) neither Seller nor any Acquired Entity has prepared, filed or presented opposition to any Applications filed by any other Person during the past three (3) years. Each Acquired Entity has properly filed all required Applications which are complete and correct in all material respects with respect to any and all material improvements, projects, changes in services, zoning requirements, construction and equipment purchases, and other changes for which approval is required under any applicable federal or state Law. As used herein “Certificate of Need” means a written statement issued by a Governmental Authority evidencing community need for a new, converted, expanded or otherwise significantly modified health care facility, health service or hospice, and “Exemption Certificate” means a written statement from a Governmental Authority stating that a health care project is not subject to the Certificate of Need requirements under applicable state Law.

     3.25 Medicare Participation; Accreditation. Each facility of the Acquired Entities that participates and receives reimbursement in the Medicare, Medicaid and TRICARE programs, as applicable (the “Programs”), is certified for participation and reimbursement in the Programs, and each Acquired Entity has a provider agreement with each such Program (the “Provider Agreements”). As applicable, each of the Acquired Entities, and each facility owned or operated by any of them, is in compliance in all material respects with the conditions of participation of the Programs and with the terms, conditions and provisions of the Provider Agreements. The Provider Agreements are each in full force and effect, and Seller has no Knowledge of any fact or circumstance that would cause any such Provider Agreement not to remain in force or be renewed on and after the Closing. Attached hereto as Schedule 3.25 is a complete list of all Medicaid and Medicare provider numbers (the “Provider Numbers”) in the name of an Acquired Entity or a facility owned or operated by an Acquired Entity or as otherwise specified, which an Acquired Entity is currently using in its operations and excluding any Provider Numbers for facilities that were sold or closed by an Acquired Entity prior to the date of this Agreement. Each facility of the Acquired Entities is duly accredited, with all Type I recommendations removed, by the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”). Copies of the two most recent accreditation survey reports from JCAHO pertaining to each facility owned or operated by an Acquired Entity have been made available to Purchaser. Since the date of its most recent JCAHO survey, none of the Acquired Entities has made any changes in policy or operations that it believes would cause any facility to lose such accreditation or to be denied participation in the Programs. Except as set forth on Schedule 3.25, there is no proceeding, investigation or survey pending or, to Seller’s Knowledge threatened, involving any of the Programs or any other third party payor programs, with respect to the Acquired Entities, and Seller has no reason to believe that any such investigations or surveys are pending, threatened, or imminent.

     3.26 Compliance Program. The Acquired Entities have provided to Purchaser a copy of their current compliance program materials. Neither Seller nor any Acquired Entity (a) is a party to a Corporate Integrity Agreement with the Office of Inspector General of the Department of Health and Human Services, (b) has reporting obligations pursuant to any settlement agreement entered into with any Governmental Authority, (c) to Seller’s Knowledge, has been the subject of any government payor program investigation conducted by any Governmental Authority, (d) has been a defendant in any qui tam/False Claims Act or similar litigation, (e) has been served with or received any search warrant, subpoena, civil investigative demand, contact letter, or telephone or personal contact by or from any Governmental Authority, except in connection with medical services provided to third parties who may be defendants or the subject of investigation into conduct unrelated to the operation of the facilities of the Acquired Entities or any other health care businesses conducted by an Acquired Entity or (f) has received any written complaints or complaints through their telephonic hotlines from employees, independent contractors, vendors, physicians, or any other Person that would indicate that an Acquired Entity has in the past violated, or is currently in violation of, any Law. Purchaser has been provided with a description of each audit and investigation conducted by an Acquired Entity pursuant to its compliance program with respect to the facilities of the Acquired Entities during

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the last five (5) years. For purposes of this Agreement, the term “compliance program” refers to provider programs of the type described in the Compliance Program Guidance published by the Office of Inspector General of the Department of Health and Human Services.

     3.27 Regulatory Compliance. Except as set forth on Schedule 3.27(a):

          (a) (i) Neither Seller nor any Acquired Entity has received any written notice from any Governmental Authority, whether federal, state or local, that any of the Acquired Entities are not in compliance in all material respects with all applicable Laws; (ii) the Acquired Entities have timely filed all reports, data and other information required to be filed under applicable Laws; and (iii) the Acquired Entities have been and are in compliance in all material respects with all Laws required to carry on their business as currently conducted.

          (b) Except to the extent permitted by applicable Law, no Acquired Entity and, to the Knowledge of Seller, no director, officer or employee of an Acquired Entity and no agent acting on behalf of or for the benefit of any of the foregoing, has directly or indirectly: (i) offered, paid or received any remuneration, in cash or in kind, to, or made any financial arrangements with, any past, present or potential customers, past or present suppliers, patients, medical staff members, contractors or third party payors of an Acquired Entity in exchange for business or payments from such Persons; (ii) given or agreed to give, received or agreed to receive, or is aware that there has been made or that there is any agreement to make, any gift or gratuitous payment of any kind, nature or description (whether in money, property or services) to any customer or potential customer, supplier or potential supplier, contractor, third party payor or any other Person in exchange for business or payments; (iii) made or agreed to make, or is aware that there has been made or that there is any agreement to make, any contribution, payment or gift of funds or property to, or for the private use of, any governmental official, employee or agent where either the contribution, payment or gift or the purpose of such contribution, payment or gift is or was illegal under any Law of the United States or under the Laws of any Governmental Authority having jurisdiction over such payment, contribution or gift; (iv) established or maintained any unrecorded fund or asset for any improper purpose or made any misleading, false, or artificial entries on any of its Books and Records for any reason; (v) made, or agreed to make, or is aware that there has been made or that there is any agreement to make, any improper payment to any Person; (vi) knowingly made any payment for or agreed to make any payment for any goods, services, or property in excess of fair market value; or (vii) knowingly committed a violation of any Law, specifically including, but not limited to, Medicare and Medicaid fraud and abuse provisions of the Social Security Act, including any activity which is prohibited under (A) the Federal Anti-kickback Statute, 42 U.S.C. Section 1320a-7b et seq.; (B) the physician self-referral provisions of the Stark Law (42 U.S.C. § 1395nn) or the regulations thereunder; (C) the False Claims Act (31 U.S.C. §3729); (D) the Civil Monetary Penalties Law (42 U.S.C. §§ 1320a-7a); (E) Mail and Wire Fraud (18 U.S.C. §§ 1341-1343); (F) False Statements Relating to Health Care Matters (18 U.S.C. §1035); and (G) Health Care Fraud (18 U.S.C. § 1347) or regulations related to any of the above (or related state and local fraud and abuse statutes or regulations).

          (c) Except as permitted by applicable Law, no Acquired Entity nor to Seller’s Knowledge any of their directors, officers or employees is a party to any contract, lease agreement or other arrangement (including but not limited to any joint venture or consulting agreement) related to an Acquired Entity, its assets or its securities with any physician, health care facility, hospital, nursing facility, home health agency or other Person who is in a position to make or influence referrals to or otherwise generate business for Acquired Entities, to provide services, lease space, lease equipment or engage in any other venture or activity.

          (d) Except as set forth on Schedule 3.27(d) hereto, or as set forth in the Shared Services Agreement, no Affiliate of an Acquired Entity, directly or indirectly: (i) provides any services to an Acquired Entity, or is a lessor, lessee or supplier to an Acquired Entity; (ii) has any cause of action or other claim whatsoever against or owes any amount to, or is owed any amount by, an Acquired Entity, except for claims and amounts owed in the ordinary course of business, such as for expense advances or unreimbursed expenses, accrued vacation pay and accrued benefits under Company Plans; (iii) has any interest in or owns property or rights used in the operations of the Acquired Entities; (iv) is a party to any contract, lease or other agreement, arrangement, understanding or commitment relating to the assets of the Acquired Entities or the operation of the facilities of the Acquired Entities (other than compensation and/or employee benefits payable in the ordinary course of business); or (v) received from or furnished to an Acquired Entity any goods or services without adequate consideration.

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     3.28 Medical Staff Matters.

          (a) Seller has provided to Purchaser true, correct, and complete copies of the bylaws and rules and regulations of the medical staff of each facility of the Acquired Entities. With regard to the medical staff of each facility of the Acquired Entities, there are no pending or, to Seller’s Knowledge, threatened disputes with applicants, staff members or health professional affiliates and all appeal periods in respect of any medical staff member or applicant against whom an adverse action has been taken have expired. The Acquired Entities have delivered to Purchaser a written disclosure containing a description of all adverse actions taken in the six (6) months prior to the date hereof against medical staff members or applicants which could result in claims or actions against an Acquired Entity. To Seller’s Knowledge, no employee or independent contractor of an Acquired Entity (whether an individual or entity), or any member of an Acquired Entity’s medical staff, has been excluded from participating in any federal health care program (as defined in 42 U.S.C. § 1320a-7b(f)) during the last five (5) years, nor is any such exclusion threatened or pending, and none of the officers, directors, agents or managing employees (as such term is defined in 42 U.S.C. § 1320a-5(b)) of an Acquired Entity has been excluded from Medicare or any federal health care program (as defined in 42 U.S.C. § 1320a-7b(f)) or been subject to sanction pursuant to 42 U.S.C. § 1320a-7a or 1320a-8 or been convicted of a crime described at 42 U.S.C. § 1320a-7b, nor to Seller’s Knowledge is any such exclusion, sanction or conviction threatened or pending. No Acquired Entity has been excluded from participating in any federal health care program (as defined in 42 U.S.C. § 1320a-7b(f)), nor to Seller’s Knowledge is any such exclusion threatened or pending. No Acquired Entity has been convicted of a criminal offense related to the provision of health care services.

          (b) To Seller’s Knowledge, there are no claims, actions, suits, proceedings or investigations pending or threatened against or affecting any member of the medical staff at law or in equity, or before or by any Governmental Authority wherever located. No member of an Acquired Entity’s medical staff has resigned or had his or her privileges revoked or suspended during the past year.

     3.29 Third Party Payor Cost Reports. Seller duly filed in a timely manner all required “home office” cost reports for all fiscal years through and including the fiscal year ended December 31, 2004. Each Acquired Entity duly filed in a timely manner all required cost reports for all the fiscal years through and including the fiscal year ended December 31, 2004. Except as set forth on Schedule 3.29, all of the cost reports filed by each Acquired Entity accurately reflect the information required to be included thereon and do not claim, and no Acquired Entity has received, reimbursement in any amount in excess of the amounts allowed by applicable Law or any applicable Contract. Schedule 3.29 attached hereto accurately indicates which cost reports have not been audited and finally settled and a brief description of any commenced or scheduled cost report audits, notices of program reimbursement, proposed or pending audit adjustments, disallowances, and any and all other unresolved claims or disputes in respect of the cost reports, including, without limitation, any notice to re-open audited cost reports issued by a fiscal intermediary or which Seller has reason to believe may be issued. Except as set forth on Schedule 3.29 and to the Knowledge of Seller, there are no facts or circumstances which give rise to any disallowance under any such cost reports which could reasonably be expected to result in a Material Adverse Effect.

     3.30 Reimbursement. All billing practices of each Acquired Entity with respect to all third party payors, including the Programs and private insurance companies, have been in compliance with all applicable Laws and policies of such third party payors, private insurance companies, and the Programs in all material respects. All claims, returns, invoices and other forms made by the Acquired Entities to Medicare, Medicaid or any other third party payor are true, complete, correct and accurate in all material respects. No deficiency in any such claims, returns or other filings, including claims for overpayments, setoff or recoupments, or deficiencies for late filings, has been asserted or, to the Knowledge of Seller, threatened by any Governmental Authority or any other third party payor, other than medical or claim reviews arising in the ordinary course of business, and, to the Knowledge of Seller, there is no basis for any such claims or deficiencies. To Seller’s Knowledge, no Acquired Entity within the prior five (5) years has been subject to any audit, investigation, monitoring or other form of review by any Governmental Authority based upon an alleged improper activity. No Acquired Entity has billed or received any payment or reimbursement in excess of amounts allowed by Law. There is no proceeding or investigation (except for medical reviews or claim reviews in the ordinary course of business) pending or, to the Knowledge of Seller, threatened against Seller or the Acquired Entities, involving any of the Programs, or any other third party payor programs. Seller has provided Purchaser copies of all written reports, surveys, deficiency notices, complaints, plans of correction, inquiries or notices of investigation received by Seller or any Acquired Entity within the past

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twenty-four (24) months from any payor, Governmental Authority or accrediting body. The Acquired Entities are not currently under focused medical review or the subject of any probe audits by the Centers for Medicare and Medicaid Services or its contractors and, to the Knowledge of Seller, no such actions have been threatened.

     3.31 Statutory Funds. None of the assets of the Acquired Entities are subject to any liability to which Purchaser may become obligated in respect of amounts received by the Acquired Entities for the purchase or improvements of such assets or any part thereof under restricted or conditioned grants or donations, including monies received under applicable Laws.

     3.32 Controlled Substances. To Seller’s Knowledge, none of the employees, or Persons who provide professional services under Contracts with Seller or an Acquired Entity, has engaged in any activities which are prohibited under the federal Controlled Substances Act, 21 U.S.C. § 801 et seq., or the regulations promulgated pursuant to such statute or any related state or local statutes or regulations concerning the dispensing and sale of controlled substances.

     3.33 Statements and Other Documents Not Misleading. Neither this Agreement, including all exhibits and schedules thereto, nor the other documents and agreements contemplated hereby or required to be delivered by Seller, in each case except as disclosed to Purchaser in writing, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated in order to make such statement, document or other instrument not misleading. No other documents or instruments heretofore or hereafter furnished by Seller to Purchaser in connection with the transactions contemplated hereby contains or will contain any such untrue statement or omission of a material fact.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER

     Purchaser represents and warrants to Seller as follows:

     4.1 Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware.

     4.2 Corporate Authorization.

          (a) The execution, delivery and performance by Purchaser of this Agreement and the other agreements to be entered into by Purchaser pursuant to this Agreement, and the consummation by Purchaser of the transactions contemplated hereby and thereby, are within Purchaser’s corporate powers, are not in contravention of the terms of Purchaser’s Constituent Documents, and have been duly authorized and approved by the board of directors of Purchaser. No other corporate proceedings on the part of Purchaser are necessary to authorize Purchaser’s execution, delivery and performance of this Agreement or the other agreements to be entered into by Purchaser pursuant to this Agreement.

          (b) This Agreement has been duly and validly executed and delivered by Purchaser, and as of the Closing, the other agreements to be entered into by Purchaser pursuant to the terms of this Agreement will have been duly and validly executed and delivered by Purchaser. This Agreement constitutes, and upon their execution and delivery, such other agreements will constitute, the legal, valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their respective terms (assuming the valid authorization, execution and delivery hereof and thereof by Seller, and any other unaffiliated entity that is a party thereto).

     4.3 No Conflicting Agreements; Consents. Except as set forth on Schedule 4.3, neither the execution and delivery of this Agreement or any of the other agreements to be entered into by Purchaser pursuant to this Agreement nor the consummation of any of the transactions contemplated hereby or thereby will:

          (a) violate, conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default under (i) the Constituent Documents of Purchaser or any Affiliate thereof, (ii) any Contract (substituting the term “Purchaser or one of its Affiliates” for the phrase “Acquired Entities” in the definition

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thereof), except such violations, conflicts, breaches or defaults which, either individually or in the aggregate, would not materially impair the ability of Purchaser to perform its obligations hereunder or under the other agreements contemplated hereby to be entered into by Purchaser or would not prevent the consummation of the transactions contemplated hereby or thereby, (iii) any Court Order to which Purchaser or any of its Affiliates is a party or by which Purchaser or any of its Affiliates is bound, or (iv) any requirements of Law affecting Purchaser or any of its Affiliates, except such violations, conflicts, breaches or defaults of such requirements of Laws which, either individually or in the aggregate, would not materially impair the ability of Purchaser to perform its obligations hereunder or under the other agreements contemplated hereby to be entered into by Purchaser or which would not prevent the consummation of the transactions contemplated hereby or thereby; or

          (b) require a permit from, the approval, consent or authorization of, or the making by Purchaser or one its Affiliates of any declaration, filing or registration with, any Governmental Authority, except as provided in Section 5.1 or Section 6.2 and except for such approvals, consents, authorizations, declarations, filings or registrations, the failure of which to be obtained or made would not, either individually or in the aggregate, materially impair the ability of Purchaser to perform its obligations hereunder or under the other agreements contemplated hereby to be entered into by Purchaser or prevent the consummation of the transactions contemplated hereby or thereby.

     4.4 Legal Proceedings, etc. There are no actions, suits or proceedings pending or, to the Knowledge of Purchaser, threatened against Purchaser or any of its Affiliates which, either individually or in the aggregate, would materially impair the ability of Purchaser to perform its obligations hereunder or under the other agreements contemplated hereby to be entered into by Purchaser or could reasonably be expected to prevent the consummation of the transactions contemplated hereby or thereby.

     4.5 Financial Capability. Purchaser will have, or have available to it for borrowing, as of the Closing Date, sufficient funds to pay the Purchase Price.

     4.6 Brokers. Except for a fee payable to Lehman Brothers, Inc., for which Purchaser shall be solely responsible, Purchaser has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

     4.7 Investment Representations.

          (a) Purchaser is acquiring the ABS Shares for its own account and not with a view to the distribution thereof within the meaning of the Securities Act.

          (b) Purchaser and its representatives and agents have been given the opportunity to ask all questions of the management of Seller and the Acquired Entities regarding the Acquired Entities’ operations and financial condition, as Purchaser has required.

          (c) In reliance on the representations and warranties made in Article III of this Agreement, Purchaser has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of purchasing the ABS Shares and to understand the risks of, and other considerations relating to, its purchase of the ABS Shares.

          (d) Purchaser is aware that as of the Closing Date, the ABS Shares will not have been registered under the Securities Act or any state’s securities laws. Purchaser further understands that the certificates representing the ABS Shares will include an appropriate legend to the effect that such securities have not been registered under the Securities Act or any state’s securities laws and that such securities may not be sold or transferred except in compliance with the Securities Act and applicable state securities laws.

     4.8 Statements and Other Documents Not Misleading. Neither this Agreement, including all exhibits and schedules thereto, nor the other documents and agreements contemplated hereby or required to be delivered by Purchaser, in each case except as disclosed to Seller in writing, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated in order to make such statement, document or other instrument not misleading. No other documents or instruments heretofore or hereafter furnished by

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Purchaser to Seller in connection with the transactions contemplated hereby contains or will contain any such untrue statement or omission of a material fact.

ARTICLE V
COVENANTS OF SELLER

     5.1 Regulatory Approvals; Consents. Seller will, and will cause the Acquired Entities to, (a) use commercially reasonable efforts to obtain, as promptly as practicable, each of the Permits that are or should be listed in Schedule 5.1 hereto, and to make the filings and declarations with Governmental Authorities that are or should be listed in Schedule 5.1 hereto as promptly as practicable after the date hereof (except with respect to the filings pursuant to the HSR Act, which shall be filed by the date set forth below) and to obtain, as soon as practicable (and in no event later than the Effective Time), all necessary waivers, consents, releases and approvals, and to give all notices identified on Schedule 3.5, (b) provide such information and communications to applicable Governmental Authorities that are necessary in connection with the foregoing or in connection with Purchaser’s obtaining any Permits or making any filings or declarations with Governmental Authorities in accordance with Section 6.2 as such Governmental Authorities or Purchaser may reasonably request, (c) cooperate with Purchaser in obtaining or making, as soon as practicable, any Permits that Purchaser is required to obtain or make pursuant to Section 6.2. Additionally, Seller will use commercially reasonable efforts to make a filing and to assist Purchaser in making its filing of a pre-merger notification report form pursuant to the HSR Act on or before June 2, 2006 and (d) obtain all consents, authorizations and approvals required under the Credit Facilities necessary to consummate the transactions contemplated hereby.

     5.2 Conduct Prior to the Closing. On or after the date hereof and prior to the Closing, except (x) as disclosed in Schedule 5.2 hereto, (y) as consented to or approved in writing by an authorized officer of Purchaser or (z) as contemplated by this Agreement:

          (a) Seller shall not act or omit to act, and shall cause the Acquired Entities not to act or omit to act, otherwise than in accordance with the following:

     (i) None of the Acquired Entities shall amend its Constituent Documents;

     (ii) No change shall be made in the number of shares of authorized or issued capital stock (or other authorized capital) of any of the Acquired Entities; nor shall any option, warrant, call, right, commitment or agreement of any character be granted or made by any of the Acquired Entities relating to the capital stock or other securities of such Acquired Entity; nor shall any of the Acquired Entities issue, grant or sell any securities or obligations convertible into or exchangeable for shares of its capital stock, nor shall Seller enter into or permit any of the Acquired Entities to enter into any other agreement with respect to any capital stock of such Acquired Entity or any security convertible into or relating to any capital stock of any of the Acquired Entities;

     (iii) No Acquired Entity shall declare or pay dividends or make any other distributions in respect of its capital stock except as contemplated by Section 2.1;

     (iv) Seller shall not make or change any election, change an annual accounting period, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment relating to the Acquired Entities, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to the Acquired Entities, or take any other similar action relating to the filing of any Tax Return or the payment of any Tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action would have the effect of increasing the Tax liability of the Acquired Entities for any period ending after the Closing Date or decreasing any Tax attribute of the Acquired Entities existing on the Closing Date; and

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     (v) The Acquired Entities will not (A) incur any indebtedness for borrowed money, other than intercompany indebtedness that will be forgiven at the Closing in accordance with Section 5.10 hereof; (B) assume, guaranty, endorse or otherwise become liable or responsible for the obligations of any Person other than another Acquired Entity; (C) make any loans, advances or capital contributions to, or investments in, any other Person; or (D) make any commitments to do any of the foregoing.

          (b) Seller shall use commercially reasonable efforts not to act or omit to act, and shall cause the Acquired Entities to use commercially reasonable efforts not to act or omit to act, otherwise than in accordance with the following:

          (i) The business operations, activities and practices of the Acquired Entities shall be conducted consistent with the ordinary course of business and in conformity with past practice, including keeping the insurance policies covering the Acquired Entities in full force and effect;

          (ii) The respective business organizations of the Acquired Entities shall be preserved intact, and the services of the present employees, agents and representatives of the Acquired Entities shall be kept available for Purchaser (except with respect to those employees or relationships terminated for cause or consistent with sound business practices); and

          (iii) The relationships with, and the goodwill of, the customers and employees of the Acquired Entities and the employees of Seller listed on Schedule 6.5 and others having business relations with the Acquired Entities shall be preserved.

     5.3 Employee Matters. Pending the Closing, except as otherwise consented to or approved in writing by an authorized officer of Purchaser or as otherwise provided in Schedule 5.3 hereto, Seller shall cause the Acquired Entities not to (a) make any increase in the rate of compensation payable to any of the employees of the Acquired Entities and the employees of Seller listed on Schedule 6.5 other than in the ordinary course of business consistent with past practice, (b) increase severance or termination obligations to any of such employees (other than as a result of compensation increases as provided above and in compliance with applicable Law), (c) enter into any employment, consulting, severance or termination agreement with any such employees (other than physicians in the ordinary course of business), or (d) except as provided in this Section 5.3 or as required by applicable Law, amend or terminate any Company Plan, or adopt or enter into any new plan or agreement that would be a Company Plan if it existed on the date hereof.

     5.4 Access by Purchaser. Between the date of this Agreement and the Closing Date, to the extent permitted by Law, Seller will provide Purchaser and its counsel, accountants and other representatives with reasonable access during normal business hours, to all of the assets, properties, facilities, employees, agents, accountants and Books and Records of any Acquired Entity and will furnish or make available to Purchaser and such representatives during such period all such information and data (including, without limitation, copies of the Contracts) concerning the business, operations or affairs of any Acquired Entity in the possession of Seller or any Acquired Entity or under its control as Purchaser or such representatives reasonably may request; provided, however, such investigation shall be coordinated through persons as may be designated in writing by Seller for such purpose. Purchaser’s right of access and inspection shall be made in such a manner as not to interfere unreasonably with the operation of the Acquired Entities. In this regard, Purchaser agrees that such inspection shall not take place, and no employees or other personnel of the Acquired Entities shall be contacted by Purchaser’s representatives, without first coordinating such contact or inspection with any of the officers of Seller or their designee.

     5.5 Financial Statements and Reports.

          (a) On or before July 14, 2006, Seller shall deliver to Purchaser copies of the audited consolidated balance sheet of the Company at December 31, 2005 and the audited consolidated statement of income of the Company for the year ended December 31, 2005, together with the notes and the unqualified report and opinion of PricewaterhouseCoopers relating thereto (collectively, the “2005 Audited Financial Statements”). The 2005 Audited Financial Statements (including the notes thereto) will be prepared in accordance with GAAP applied

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on a consistent basis throughout the period covered thereby (except as may be indicated in such 2005 Audited Financial Statements, the notes thereto or Schedule 3.6), present fairly in all material respects the financial condition of the Company as of such date and the results of operations of the Company for such period, will be correct and complete, and be consistent in all material respects with the Books and Records of the Company (which Books and Records are correct and complete). The 2005 Audited Financial Statements comply in all material respects with the requirements of the rules and regulations of the Securities Act of 1933, as amended.

          (b) If Seller shall not have delivered the 2005 Audited Financial Statements to Purchaser on or before July 14, 2006, then: (i) Seller shall use its continuing best efforts to, and shall deliver the 2005 Audited Financial Statements to Purchaser as soon as practicable thereafter (and in any event on or before August 31, 2006), and (ii) the amount of cash payable as the Purchase Price shall, automatically and without the requirement for the amendment of this Agreement or the consent of any Person, be reduced by THREE MILLION DOLLARS ($3,000,000). Seller’s failure to deliver the 2005 Audited Financial Statements on or before August 31, 2006 shall be, per se, a “Seller Material Breach” for purposes of Section 10.1(c).

          (c) As soon as practicable following the end of each month from and after the date hereof and prior to the Closing Date, Seller will deliver to Purchaser true and complete copies of the unaudited balance sheets and the related unaudited statements of income of the Company (on a consolidated basis) for each month then ended, which financial statements shall have been prepared in accordance with GAAP applied on a consistent basis throughout the period covered thereby (except as may be indicated in such financial statements or the notes thereto) and in accordance with the Books and Records of the Company, and which shall fairly present, in all material respects, the financial position and results of operations of the Company, as of the date and for the period indicated.

     5.6 Closing Conditions. Seller will use its commercially reasonable efforts to cause each of the conditions set forth in Article VII to be satisfied as soon as reasonably practicable.

     5.7 Transfer of Assets. From and after the date hereof and until the Closing, Seller shall cause the Acquired Entities not to sell or dispose of any of their assets or properties without the prior written consent of Purchaser, except for (a) dispositions of the Excluded Assets as contemplated by Section 2.1 or (b) dispositions or sales in the ordinary course of business.

     5.8 Encumbrances. From and after the date hereof and until the Closing, Seller shall not cause or permit the Acquired Entities to enter into or assume any mortgage, pledge, conditional sale or other title retention agreement or permit any Lien to attach upon any of the assets of any Acquired Entity, whether now owned or hereafter acquired, except for Permitted Liens.

     5.9 Condition of Assets . From and after the date hereof and until the Closing, Seller shall use commercially reasonable efforts, and shall cause the Acquired Entities to use commercially reasonable efforts, to maintain and keep in good order, subject to ordinary wear and tear, all Real Property, inventory, machinery, equipment and other tangible personal property owned or leased by the Acquired Entities and used in connection with the operation of the businesses of the Acquired Entities.

     5.10 Intercompany Accounts. Except as otherwise provided in this Agreement, and except as otherwise provided in Schedule 5.10, at or prior to the Closing, (a) all indebtedness and other amounts (i) owed by Seller or any of its Affiliates (other than an Acquired Entity) to an Acquired Entity or (ii) owed by an Acquired Entity to Seller or any of its Affiliates (other than an Acquired Entity) shall be paid, canceled or eliminated (whether or not then due), (b) all Liens relating to any of the aforesaid indebtedness or amounts shall be canceled and shall be discharged of record and (c) all arrangements calling for the transfer of funds by any Acquired Entity in connection with any cash management program of Seller or any Affiliate shall be terminated as of the Closing. Except as set forth in the Company Financial Statements or on Schedule 5.10, as of the date hereof, there were no intercompany account balances between the Acquired Entities, on one hand, and Seller or its Affiliates, on the other hand.

     5.11 Exclusivity. From the date hereof until the earlier of the Closing or the termination of this Agreement, Seller agrees that neither Seller nor any Affiliate thereof nor any of their respective officers, directors or representatives will (a) negotiate with any Persons (other than Purchaser and its Affiliates) with respect to a sale, merger, consolidation, reorganization or other business combination pursuant to which the stock, assets or business

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of any Acquired Entity would be combined with that of, or sold to, any acquirer or any other business or entity (except as contemplated by Section 2.1); (b) solicit or respond to any Acquisition Proposals; (c) furnish any information with respect to the business, activities, operations, assets or liabilities of the Acquired Entities, or other similar matters, to any Person whatsoever (other than as described in this Agreement) with respect to the foregoing; nor (d) proceed or continue with negotiations in respect of the foregoing which may be in progress as of the date of this Agreement.

     5.12 Resignations. Seller shall obtain the written resignations of all directors and officers of the Acquired Entities as are requested by Purchaser not less than ten (10) days in advance of the Closing, such resignations to be effective as of the Effective Time. To the extent that any such officer or director is also an employee of an Acquired Entity, such resignation shall be applicable only to the Person’s position as an officer or director and not to such Person’s employment.

     5.13 Company Plans. Notwithstanding anything herein to the contrary, Seller shall, upon request by Purchaser on or prior to Closing, (i) fully vest the employees of the Acquired Entities in their accounts in the Company Plans and/or (ii) transfer the accounts of the employees of the Acquired Entities in the Company Plans that are intended to qualify under Section 125, 129, 401(a), 403(b) or 457(b) of the Code to plans maintained by Purchaser or its Affiliates.

     5.14 Restrictive Covenants Agreement. Seller shall, and shall cause each of the individuals listed on Schedule 5.14 to execute and deliver to Purchaser a Restrictive Covenants Agreement in the form attached hereto as Exhibit 5.14 (the “Restrictive Covenants Agreement”).

     5.15 Standstill. Seller agrees that if the transactions contemplated by this Agreement are not completed, then for a period of one year following the date of the termination of this Agreement, without the express, prior written consent of Purchaser, Seller will not, and will cause all of its Affiliates to not, directly or indirectly, (a) effect, propose or participate in any manner in (i) the acquisition of any voting securities of Purchaser or securities or rights convertible into or exchangeable for any voting securities of Purchaser, (ii) any acquisition of material assets of Purchaser or its Affiliates or (iii) any merger, other business combination, tender or exchange offer, recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with respect to Purchaser; (b) form, join or in any way participate in a “group” (as such term is used under the Securities Exchange Act of 1934, as amended) with respect to any voting securities of Purchaser; (c) otherwise act, alone or in concert with others, to seek to control or influence the management, board of directors or policies of Purchaser; (d) take any action that might force Purchaser to make a public announcement regarding any of the types of matters set forth in clause (a) above; or (e) enter into discussions or arrangements with any third party with respect to any of the matters set forth in clauses (a) through (d) above. Seller further agrees during such period not to request, directly or indirectly, that Purchaser (or its directors, officers, employees or agents) amend or waive any provision of this Section 5.15 (including this sentence). Seller will promptly advise Purchaser of any inquiry or proposal made to Seller or any of its Affiliates with respect to any of the matters referred to in this Section 5.15.

     5.16 Third Party Payor Cost Reports. Prior to the Closing, Seller shall have duly filed in a timely manner all required “home office” cost reports for the fiscal year ended December 31, 2005, and each Acquired Entity shall have duly filed in a timely manner all required cost reports for the fiscal year ended December 31, 2005.

     5.17 Qualifacts Agreement. Upon written request of Purchaser delivered not less than fifteen (15) days prior to Closing, Seller will cause ABS to terminate the Qualifacts Agreement and satisfy any termination fees or penalties resulting therefrom, and Seller shall receive the benefit of any refunds, reimbursements, or rebates thereunder.

     5.18 Indebtedness. At Closing, no Acquired Entity will have any Indebtedness, other than accounts payable incurred in the ordinary course of business.

     5.19 Texas Assets and Operations. Prior to Closing, Seller shall cause ABS LINCS TX (and any other Affiliate of Seller) to assign to Purchaser (or to an Affiliate of Purchaser designated by Purchaser) any or all assets, operations or property (but no liabilities or obligations) of ABS LINCS TX (or such Affiliate) related to the business

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or proposed business in the State of Texas as requested by Purchaser to be so assigned. The parties shall cooperate in good faith prior to Closing to identify all such assets, operations or property.

ARTICLE VI
COVENANTS OF PURCHASER; CERTAIN ADDITIONAL
COVENANTS OF THE PARTIES

     6.1 Notice of Certain Occurrences. Seller shall give prompt notice to Purchaser, and (in the case of clauses (a) and (d) of this Section 6.1 only) Purchaser shall give prompt notice to Seller, of (a) the occurrence, or failure to occur, of any event, which occurrence or failure to occur has caused or is reasonably likely to cause any representation or warranty of such party contained in this Agreement or the other agreements contemplated hereby to be untrue at any time from the date of this Agreement to the Closing Date, (b) any Material Adverse Effect with respect to the Acquired Entities or any event, change, occurrence, effect, fact, condition, development or circumstance or series of events, changes, occurrences, effects, facts, conditions, developments or circumstances that would reasonably be expected to result in a Material Adverse Effect, (c) any material claims, actions, proceedings, litigation or governmental investigations commenced or, to Seller’s Knowledge, threatened, involving or affecting the Acquired Entities or any of their material property or assets or the transactions contemplated hereby which would reasonably be expected to result in a Material Adverse Effect or (d) any failure of Purchaser or of any officer, director, employee or agent thereof to comply in all material respects with or satisfy any material covenant, condition or agreement to be complied with or satisfied by it hereunder. Notwithstanding anything in this Agreement to the contrary, no such notification shall affect the representations, warranties or covenants of any party or the conditions to the obligations of any party hereunder, nor shall it limit or otherwise affect the remedies available hereunder to the party receiving such notice. Each of Seller and Purchaser shall give prompt notice to the other party of any notice or other communication from any third party or Governmental Authority alleging that the consent of such third party or Governmental Authority is or may be required in connection with the transactions contemplated by this Agreement.

     6.2 Regulatory Approvals. Purchaser will (a) use commercially reasonable efforts to obtain, as promptly as practicable, all Permits that are or should be listed in Schedule 6.2 hereto and to make the filings and declarations with Governmental Authorities that are or should be listed in Schedule 6.2 hereto as promptly as practicable after the date hereof (except with respect to the filings pursuant to the HSR Act, which shall be filed by the date set forth below), (b) provide such information and communications to applicable Governmental Authorities as is necessary in connection with the foregoing or in connection with Seller’s obtaining any of the Permits or making any filings or declarations with Governmental Authorities in accordance with Section 5.1 as such Governmental Authorities or Seller may reasonably request, and (c) cooperate with Seller in obtaining or making, as soon as practicable, any Permits that Seller is required to obtain or make pursuant to Section 5.1. Additionally, Purchaser will use commercially reasonable efforts to make a filing, and to assist Seller in making its filing, of a pre-merger notification report form pursuant to the HSR Act on or before June 2, 2006.

     6.3 Public Announcements. On or before the Closing, the parties hereto will each consult with one another prior to making or issuing public statements or announcements with respect to this Agreement or the transactions contemplated hereby and will use good faith efforts to agree on the text of a joint public statement or announcement and/or will use good faith efforts to obtain the other party’s approval of the text of any public statement or announcement to be made solely on behalf of a party. If the parties hereto are unable to agree on or approve such a public statement or announcement and a party, in its reasonable discretion, is of the opinion that such statement or announcement is required by, or advisable under, Law or the regulations of any national securities exchange on which a party’s securities are traded, then such party may make or issue the public statement or announcement.

     6.4 Closing Conditions. Purchaser will use its commercially reasonable efforts to cause the conditions set forth in Article VIII hereof to be satisfied as soon as reasonably practicable.

     6.5 Employee Matters. As of the Effective Time, and subject to the sole discretion of Purchaser, the employees of the Acquired Entities shall continue employment with the Acquired Entities, in each case in substantially similar positions and at a substantially similar level of wages and/or salary and without having incurred a termination of employment or separation from service; provided, however, such employees meet the

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pre-employment screening requirements of Purchaser. All employees are employees at-will. Except as may be specifically required by applicable Law or any Contract, the Acquired Entities shall not be obligated to continue any employment relationship with any employee for any specific period of time.

     6.6 WARN Act Compliance; COBRA. Without limiting the generality of the foregoing, Seller shall be solely responsible for any and all liability arising directly or indirectly under the WARN Act, as a result of the transactions contemplated by this Agreement. Seller acknowledges and agrees that Purchaser does not assume or agree to discharge any liability of Seller under COBRA with respect to any current or former employees (and their beneficiaries) of the Acquired Entities. Seller agrees that it will not take any voluntary action, including the termination of its Company Plans, the effect of which would be, or might reasonably be expected to be, the imposition upon Purchaser of COBRA liability for current or former employees (and their beneficiaries) of the Acquired Entities not hired by Purchaser. Additionally, Seller shall retain any and all liabilities under Section 4980B of the Code and Sections 601 through 608 of ERISA with respect to all current and former employees (and their beneficiaries) of Seller.

     6.7 Tax Matters.

          (a) Preparation and Filing of Tax Returns; Payment of Taxes.

     (i) Seller shall prepare (or cause to be prepared) all Tax Returns required to be filed by the Acquired Entities for all taxable periods that end on or prior to the Closing Date (a “Pre-Closing Period”) (such Tax Returns being the “Pre-Closing Period Tax Returns”) (provided that Seller shall submit a draft of any such Tax Return required to be filed by the Acquired Entities to Purchaser for its review and comment at least twenty (20) days prior to the due date of such Tax Return). Seller shall timely file all such Pre-Closing Period Tax Returns, provided, however, if any Pre-Closing Period Tax Return is due after the Closing and Seller is not authorized to file such Pre-Closing Period Tax Return by Law, Purchaser shall file (or cause to be filed) such Pre-Closing Period Tax Return as prepared by Seller with the appropriate Governmental Authorities. Seller shall pay all Taxes due and payable in respect of all Pre-Closing Periods; provided, however, that if any Pre-Closing Period Tax Return is due after the Closing and is to be filed (or caused to be filed) by Purchaser, Seller shall pay (in immediately available funds) all Taxes due and payable in respect of such Tax Return to Purchaser no later than five (5) days prior to the due date of such Tax Return.

     (ii) Purchaser shall prepare and file (or cause to be prepared and filed) all Tax Returns required to be filed by the Acquired Entities for all taxable periods beginning before the Closing Date and ending after the Closing Date (a “Straddle Period”) (such Tax Returns, the “Straddle Period Tax Returns”). Purchaser shall deliver or cause to be delivered drafts of all Straddle Period Tax Returns to Seller at least twenty (20) days prior to the due date of any such Straddle Period Tax Return (taking into account valid extensions) and notify Seller of Purchaser’s calculation of Seller’s share of the Taxes of the Acquired Entities for any such Straddle Periods. If Seller disputes any item on such Straddle Period Tax Return, it shall notify Purchaser (by written notice within fifteen (15) days of receipt of Purchaser’s calculation) of such disputed item (or items) and the basis for its objection. If Seller does not object by written notice within such period, Purchaser’s calculation of Seller’s share of the Taxes for such Straddle Period shall be deemed to have been accepted and agreed upon, and final and conclusive, for all purposes hereof. Purchaser and Seller shall act in good faith to resolve any such dispute prior to the date on which the Straddle Period Tax Return is required to be filed. No later than three (3) days prior to the filing of such Straddle Period Tax Return, Seller shall pay to Purchaser (in immediately available funds) the amount of Seller’s share of the Tax liability for the Straddle Period determined pursuant to this Section 6.7(a).

     (iii) In order to apportion appropriately any Taxes relating to a Straddle Period, the parties hereto shall, to the extent required or permitted under applicable Law, treat the Closing Date as the last day of the taxable year or period of the Acquired Entities for all Tax purposes. In any case where applicable Law does not permit the Acquired Entities to treat the Closing Date as

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the last day of the taxable year or period, such Taxes (including all real and personal property taxes) shall be prorated as of the Effective Time. With respect to such prorated Taxes, the portion of any Taxes that are allocable to the portion of the Straddle Period ending on the Closing Date shall be: (A) in the case of Taxes that are imposed on a periodic basis (such as real property Taxes), deemed to be the amount of such Taxes for the entire period multiplied by a fraction the numerator of which is the number of calendar days in the Straddle Period ending on (and including) the Closing Date and the denominator of which is the number of calendar days in the entire relevant Straddle Period; and (B) in the case of Taxes not described in (A) (such as (x) Taxes that are based upon or measured by income or receipts or imposed in connection with any sale or other transfer or assignment of property (real or personal, tangible or intangible) and (y) payroll and similar Taxes), deemed equal to the amount that would be payable if the taxable year or period ended on the Closing Date.

          (b) Transfer Taxes. Notwithstanding any provision of this Agreement to the contrary, Seller shall pay all sales, value added, use, privilege, transfer, documentary, gains, stamp, duties and recording taxes and fees (including any penalties, interest or additions) (collectively, the “Transfer Taxes”) imposed upon any party incurred as a result of the sale of the ABS Shares. Seller shall prepare and timely file all necessary Tax Returns and other documentation with respect to any Transfer Taxes. If required by applicable Law, ABS and/or the ABS Subsidiaries shall join in the execution of any such Tax Returns or other documentation.

          (c) Post-Closing Audits and Other Procedures.

     (i) If a notice of deficiency, proposed adjustment, adjustment, assessment, audit, examination or other administrative or court proceeding, suit, dispute or other claim (a “Tax Proceeding”) shall be delivered or sent to or commenced or initiated against any of the Acquired Entities by any Governmental Authority with respect to Taxes for which Purchaser is entitled to indemnification from Seller, Purchaser shall notify Seller in writing of the Tax Proceeding and shall include a copy of the relevant Tax Proceeding notice; provided that the failure by Purchaser to notify Seller of any such notice shall not release Seller from its obligations under this Section 6.7 and Section 6.8, except to the extent Purchaser’s failure to give the required notice materially and adversely impairs Seller’s ability to indemnify, defend or mitigate its Damages, in which case Seller shall have no obligation to indemnify Purchaser to the extent of Damages, if any, caused by such failure to give the required notice.

     (ii) With respect to Tax Proceedings of or relating to Taxes of any of the Acquired Entities for any Pre-Closing Period, Seller may, upon written notice to Purchaser (such written notice to be provided within thirty (30) days after notice of the Tax Proceeding has been given to Seller), assume and control the defense of such Tax Proceeding at its own cost and expense and with its own counsel. If Seller elects to assume the defense of any such Tax Proceeding, notwithstanding anything to the contrary contained herein: (A) Seller shall not enter into any settlement with respect to any such Tax Proceeding without Purchaser’s prior written consent, which consent shall not be unreasonably withheld; (B) Seller shall keep Purchaser informed of all material developments and events relating to such Tax Proceeding (including promptly forwarding copies to Purchaser of any related correspondence and providing Purchaser with an opportunity to review and comment on any material correspondence before Seller sends such correspondence to any Governmental Authority); and (C) at its own cost and expense, Purchaser shall have the right to participate in the defense of such Tax Proceeding.

     (iii) In connection with the contest of any Tax Proceeding that relates to (A) any Straddle Period, (B) any taxable period beginning on or after the Closing Date and (C) any Tax Proceeding that Seller has the ability to control but does not timely elect to control pursuant to Section 6.7(c)(ii), such Tax Proceeding shall be controlled by Purchaser (and Seller shall reimburse Purchaser for reasonable out-of-pocket expenses incurred by Purchaser or its Affiliates relating to a Tax Proceeding described in clause (C)), and Seller agrees to cooperate fully with Purchaser and its Affiliates in pursuing such contest (other than in connection with a Tax

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Proceeding described in clause (B)). Nothing contained herein shall be construed as limiting Purchaser’s right to indemnification under Section 6.8.

     (iv) Notwithstanding anything to the contrary in this Agreement, the procedure for indemnification Claims with regard to Taxes of or relating to the Acquired Entities shall be governed exclusively by this Section 6.7 and Section 6.8.

          (d) Cooperation. Following the Closing, Seller, on the one hand, and Purchaser and the Acquired Entities, on the other hand, agree to furnish or cause to be furnished to each other or their respective representatives, upon request, as promptly as practicable, such information and assistance (including access to Books and Records) relating to the Acquired Entities as is reasonably necessary for the preparation of any Tax Return, claim for refund, audit or similar matter, or the prosecution or defense of any Tax Proceeding relating to any proposed adjustment of Taxes. Purchaser, Seller, the Acquired Entities and their Affiliates shall retain (or cause to be retained) all Books and Records with respect to Tax matters pertinent to the Acquired Entities relating to any Pre-Closing Period, Straddle Period or any taxable period beginning on the Closing Date until the expiration of the relevant statutory period of limitations for the assessment of Tax.

          (e) Termination of Tax Indemnification Agreements. Seller hereby agrees and covenants that any and all Tax Indemnification Agreements that may have been entered into by the Acquired Entities shall be terminated on or before the Closing Date, and no payments to or from the Acquired Entities pursuant to any such Tax Indemnification Agreement shall be made after such termination.

          (f) Consolidated Return Principles. For all taxable periods of the Acquired Entities ending on or before the Closing Date, Seller shall cause the Acquired Entities to join in Seller’s consolidated federal income Tax Return. Seller shall include the income of the Acquired Entities (including any deferred items triggered into income by Treasury Regulation Section 1.1502-13 and any excess loss account taken into income under Treasury Regulation Section 1.1502-19) on Seller’s consolidated federal income Tax Returns for all periods through the Closing Date and pay any Taxes attributable to such income. Such Tax Returns shall be prepared and filed in a manner consistent with prior practice, except as required by a change in applicable Laws. The federal income Tax Returns that include the Acquired Entities for the taxable year that ends on the Closing Date and the taxable year that begins the day after the Closing Date shall be prepared in accordance with Treasury Regulations Section 1.1502-76(b)(1)(ii)(A). Purchaser and Seller further agree that the Acquired Entities shall become members of the federal income consolidated tax group of which Purchaser is the common parent on the day after the Closing Date. To the extent applicable, any state or local income Tax Returns shall be prepared in accordance with provisions comparable to Treasury Regulations Section 1.1502-76(b)(1)(ii)(A) under state or local Law.

          (g) Survival. Notwithstanding anything to the contrary contained in this Agreement, each of the provisions set forth in this Section 6.7 and Section 6.8 shall survive ninety (90) days after the expiration of the applicable statute of limitations (taking into account all valid extensions) for the applicable Taxes or Tax Return to which the provision relates; provided, however, in the event notice of any claim for indemnification under this Agreement shall have been given within the applicable survival period, the provisions that are the subject of the indemnification claim shall survive with respect to such claims until such time as such claim is finally resolved.

     6.8 Tax Indemnification. Seller shall indemnify, defend, and hold harmless Purchaser from and against any and all Damages for: (i) Taxes of or imposed on Seller; (ii) Transfer Taxes required to be paid by Seller pursuant to this Agreement; (iii) Taxes of or imposed upon the Acquired Entities with respect to any Pre-Closing Periods, and for any Straddle Periods but only with respect to the portion of such Straddle Period ending on the Closing Date and as determined in the manner provided in Section 6.7 of this Agreement; (iv) Taxes imposed on the Acquired Entities under Treasury Regulations Section 1.1502-6 (and corresponding provisions of state, local, or foreign Law) as a result of having been a member of any federal, state, local or foreign consolidated, unitary, combined or similar group for any taxable period ending on or before, or that includes, the Closing Date, or as a transferee or successor, pursuant to any Tax Indemnification Agreement, or similar contract or arrangement, or otherwise; (v) any breach by Seller of any of the covenants and obligations contained in Section 6.7 of this Agreement; (vi) the breach or inaccuracy of the representations and warranties set forth in Section 3.14 of this Agreement and (vii) Taxes imposed on or related or attributable to the Excluded Assets or the transfer of the Excluded Assets as contemplated by Section 2.1. All amounts payable or to be paid under this Section 6.8 shall be

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paid in immediately available funds within five (5) Business Days after the receipt of a written request from the indemnified party entitled to such payment. The parties hereto agree to treat any payment made pursuant to this Section 6.8 and Article IX as an adjustment to the Purchase Price for all Tax purposes, except as required under applicable Law. In no event shall the indemnities provided for in this Section 6.8 be subject to the provisions of Article IX of this Agreement.

     6.9 Consents Not Obtained by Closing. Without prejudice to Section 5.1, Section 7.6 or Section 8.6, if any consent, approval, release or waiver identified on Schedule 3.5 has not been given or made, then, to the extent reasonably practicable, the parties shall use commercially reasonable efforts to enter into an alternative, lawful arrangement under which Purchaser shall have the benefit of such Material Contracts (and assume the related obligations) from and after the Effective Time and/or shall work cooperatively after the Closing to secure such consent, approval, release or waiver, in either case as Purchaser may reasonably request.

     6.10 Consultative Process. From and after the date hereof and until the Closing, Purchaser shall designate an individual or individuals whom Seller may contact during normal business hours for the purpose of approving actions or transactions for which the consent of Purchaser is required under this Agreement. The written approval of a designated individual as contemplated in this Section 6.10 shall constitute the consent of Purchaser to the transaction or action so approved.

     6.11 Confidentiality. Purchaser acknowledges and agrees that the Confidentiality Agreement shall survive the execution and delivery of this Agreement by the parties hereto until the Closing shall have occurred and that all information provided to Purchaser or its “Representatives” (as such term is defined in the Confidentiality Agreement) in accordance with this Agreement shall be considered “Confidential Information” (as such term is defined in the Confidentiality Agreement), except as otherwise provided in the Confidentiality Agreement.

     6.12 Books and Records. Until six (6) months after the later to occur of (a) the final adjudication of any dispute or investigation involving Taxes arising out of the business, operations or affairs of the Acquired Entities before the Effective Time, (b) the final adjudication of any matter for which Seller may be required to indemnify or hold harmless any Purchaser Indemnitee pursuant to the terms of this Agreement, or (c) the running of applicable statutes of limitations, Purchaser will maintain all Books and Records of the Acquired Entities that relate to the pre-Closing business, operations, assets and properties of the Acquired Entities, and shall give Seller access to all such Books and Records for legitimate business purposes, following reasonable notice and during regular business hours. In addition to the following, Purchaser shall not, without ninety (90) days’ prior written notification (a “Destruction Notice”) to Seller, destroy any pre-Closing Books and Records of the Acquired Entities. Following Seller’s receipt of a Destruction Notice, if Seller advises Purchaser in writing within such ninety-day period, Purchaser will promptly deliver the applicable Books and Records to Seller.

     6.13 Section 338 Election.

     (a) With respect to the acquisition of the ABS Shares hereunder, Purchaser, Seller and their respective Affiliates shall jointly make an election or elections under Section 338(h)(10) of the Code and any corresponding elections under state, local and foreign Laws with respect to the Acquired Entities (the “Section 338 Election”).

     (b) As soon after the Closing Date as is practicable and in any event not later than sixty (60) days after the Closing Date, Purchaser shall prepare IRS Form 8023 (and all required attachments) and any similar forms required to be filed in order to effect the Section 338 Election under state, local or foreign Law (the “Election Forms”) and shall present such Election Forms to Seller for approval (which approval shall not be unreasonably withheld or delayed) after their completion. Seller and its Affiliates shall timely execute the Election Forms. Purchaser shall file the Election Forms as prescribed by Treasury Regulation Section 1.338(h)(10)-1 or the corresponding provisions of applicable state, local or foreign Law, and Seller and its Affiliates shall cooperate with Purchaser in timely filing the Election Forms and shall take any other actions that are necessary for making or perfecting the Section 338 Election.

     (c) (i) Seller and Purchaser and their respective Affiliates shall cooperate with each other to take all other actions necessary and appropriate (including filing such forms (including IRS Forms 8883), Tax Returns, elections, schedules and other documents as may be required) to preserve and report the Section 338 Election in

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accordance with Section 338(h)(10) of the Code and the corresponding provisions of state, local and foreign Laws, and (ii) Seller and Purchaser and their respective Affiliates shall report the sale of the ABS Shares pursuant to this Agreement consistent with the Section 338 Election and shall take no position contrary thereto in any Tax Return, in any discussion with or proceeding before any taxing authority, or otherwise, except where required otherwise by applicable state, local or foreign Law, and shall take no position contrary thereto unless required to do so pursuant to a “determination” within the meaning of Section 1313 of the Code.

     6.14 Seller Minimum Net Worth; Restrictions on Seller Transfers. Until the later of (i) the second anniversary of the Closing and (ii) the disposition of all Claims (as defined in Section 9.3 hereof) for which Seller may have an obligation to make indemnification, Seller shall maintain a net worth of not less than $50,000,000 and maintain its corporate existence and not dissolve, liquidate, reorganize, merge, sell all or substantially all of its assets, make any distribution of the proceeds received pursuant to this Agreement or enter into or consummate any other similar organic transaction (collectively, an “Organic Transaction”), unless the purchaser, successor, transferee or surviving or resulting entity in any such transaction delivers to Purchaser written evidence (in form and substance reasonably acceptable to Purchaser) that it has (x) fully and irrevocably assumed all of Seller’s obligations under this Agreement and (y) net assets equal to or greater than Seller’s net assets (measured immediately after the Closing). Nothing contained in this Section 6.14 shall entitle Seller to assign this Agreement to any Person or to otherwise avoid (or seek to avoid) its obligations under this Agreement. For purposes of this Section 6.14, a sale of the stock or all or substantially all of the assets of, or any Organic Transaction involving, ValueOptions, Inc., shall constitute an Organic Transaction with respect to Seller.

     6.15 Shared Services Agreement; Agreements between Acquired Entities and RX Innovations. Commencing on the date hereof, the parties agree to negotiate in good faith:

          (a) an amendment to the Shared Services Agreement containing terms mutually satisfactory to Purchaser and Seller; provided, however, at Purchaser’s sole election, the Shared Services Agreement shall be terminated at or prior to Closing without further obligation (including any penalty, fine, termination fee, etc.) of Purchaser or any Acquired Entity; and

          (b) an amendment to any Contract or arrangement between RX Innovations and any Acquired Entity containing terms mutually satisfactory to Purchaser and Seller; provided, however, at Purchaser’s sole election, any Contract or arrangement between RX Innovations and any Acquired Entity shall be terminated at or prior to Closing without further obligation (including any penalty, fine, termination fee, etc.) of Purchaser or any Acquired Entity.

     6.16 Corporate Office Lease. Commencing on the date hereof, the parties agree to negotiate in good faith an amendment to the Corporate Office Lease containing terms mutually satisfactory to Purchaser and Seller; provided, however, it is anticipated that such amendment will (i) reduce the number of square feet rented, (ii) provide that the rent per square foot will not increase above the amount in effect on the date hereof and (iii) provide that the Corporate Office Lease shall be terminable at Purchaser’s sole election with 90 days’ notice; provided, further, however, at Purchaser’s sole election, the Corporate Office Lease shall be terminated at or prior to Closing without further obligation (including any penalty, fine, termination fee, etc.) of Purchaser or any Acquired Entity.

     6.17 Cash Management. At the Effective Time, Purchaser shall assume and take control of all bank accounts of ABS. The last sweep of ABS’ bank accounts by Seller shall occur on the last Business Day immediately preceding the Closing Date. Seller shall be responsible for satisfying all checks, drafts and orders to draw funds on any ABS bank account issued prior to the Effective Date.

     6.18 Severance Payments. Notwithstanding anything to the contrary herein, Seller shall be solely responsible for any payment, obligation or entitlement arising from or related to the termination (on or prior to the Closing Date) of any present or former employee of Seller or any Acquired Entity or otherwise resulting from the transactions contemplated by this Agreement.

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ARTICLE VII
CONDITIONS TO OBLIGATIONS OF PURCHASER

     Except as may be waived by Purchaser, the obligations of Purchaser to purchase the ABS Shares and to consummate the transactions contemplated hereby on the Closing Date shall be subject to the satisfaction on or prior to the Closing Date of the following conditions:

     7.1 Representations and Warranties. The representations and warranties of Seller set forth in this Agreement (i) if qualified by materiality or to Material Adverse Effect, shall be true and correct and (ii) if not qualified by materiality or to Material Adverse Effect, shall be true and correct in all material respects, as though made on and as of the Closing Date (except to the extent such representations speak as of an earlier date, in which case as of such date.)

     7.2 Compliance with Agreement. On and as of the Closing Date, Seller shall have performed and complied in all material respects with each covenant and agreement required by this Agreement to be performed and complied with by it on or before the Closing Date (including, but not limited to, the covenants contained in Section 5.5).

     7.3 Closing Certificates. Seller shall have delivered to Purchaser a certificate, dated as of the Closing Date and signed on behalf of Seller by an authorized officer thereof, certifying the fulfillment of the conditions specified in Sections 7.1 and 7.2 hereof.

     7.4 Secretary’s Certificates. At the Closing, Purchaser shall have received copies of the following, in each case certified as of the Closing Date by a Secretary or an Assistant Secretary of Seller:

          (a) resolutions of the board of directors of Seller authorizing the execution, delivery and performance of this Agreement and the other agreements that Seller is required to execute and deliver pursuant to the terms of this Agreement;

          (b) if approval thereof is required by Law or Seller’s Constituent Documents, resolutions of the stockholders of Seller authorizing the execution, delivery and performance of this Agreement and the other agreements that Seller is required to deliver on the Closing Date pursuant to this Agreement; and

          (c) the signature and incumbency of the respective officers of Seller authorized to execute and deliver this Agreement and the other agreements and certificates that Seller is required to deliver on or before the Closing Date pursuant to this Agreement.

     7.5 Opinion of Counsel. At the Closing, Purchaser shall have received an opinion, dated the Closing Date, of Christian & Barton, LLP, counsel for Seller, in the form of Exhibit 7.5 attached hereto.

     7.6 Consents, Authorizations, Etc. All Permits that are or should be set forth on Schedules 5.1 and 6.2 hereto that are required to be obtained or given prior to the Closing shall have been obtained or given or Seller shall have received reasonable assurances from Governmental Authorities to satisfy Purchaser that such Permits will be obtained in a timely manner post-Closing, and all applicable waiting periods with respect thereto shall have expired, and all consents from third parties to the Material Contracts Permits that are or should be listed on Schedule 3.5 shall have been obtained or given.

     7.7 No Action or Proceeding. On the Closing Date, (a) no valid judgment, order or decree of any court or other Governmental Authority restraining, enjoining or otherwise preventing the consummation of this Agreement or the transactions contemplated hereby shall be outstanding, (b) no action, suit, investigation or proceeding brought by any Governmental Authority shall be pending before any court or other Governmental Authority to restrain, enjoin or otherwise prevent the consummation of this Agreement or the transactions contemplated hereby, which action, suit, investigation or proceeding, in the reasonable opinion of Purchaser, may result in a decision, ruling or finding that individually or in the aggregate has or would reasonably be expected to adversely affect the validity or enforceability of this Agreement, or materially impair the ability of Purchaser to perform its obligations under this Agreement, and (c) neither the U.S. Department of Justice nor the Federal Trade Commission (the “FTC”) shall have requested, orally or in writing, that Seller delay or postpone the Closing, and

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the Attorney General of any State of the United States shall not have requested, in writing, that Seller delay or postpone the Closing.

     7.8 Constituent Documents. Seller shall have delivered to Purchaser true and complete copies of the respective Constituent Documents of the Acquired Entities as in effect on the Closing Date.

     7.9 Resignation of Boards of Directors and Officers. Each then-current officer and/or member of the board of directors of any of the Acquired Entities as requested by Purchaser pursuant to Section 5.12 shall have tendered his or her written resignation as an officer and/or director to the applicable Acquired Entity, such resignations to be effective at or before the Effective Time.

     7.10 Good Standing Certificates. At the Closing, Seller shall have delivered to Purchaser good standing certificates issued with respect to Seller and each of the Acquired Entities issued by the Secretary of State of the relevant entity’s state of incorporation or organization. Each such good standing certificate shall be dated as of a date that is not more than ten (10) days prior to the Closing Date.

     7.11 Title Policies, Surveys, and Environmental Site Assessments.

          (a) Purchaser and its counsel shall have received and approved currently dated commitments for the issuance of title policies or endorsements on all of the Real Property that is either (A) designated in Schedule 3.11(b) as a parcel that is owned by any Acquired Entity or (B) designated in Schedule 3.11(c) as a Real Property leasehold interest;

          (b) Purchaser and its counsel shall have received and approved such affidavits and indemnities from Seller and its officers as may be required by the title company in order to issue Non-Imputation Endorsements;

          (c) Purchaser and its counsel shall have received and approved “as built” surveys with respect to each parcel of Real Property designated in Schedule 3.11(b) and Schedule 3.11(c) hereto as parcels for which as-built survey shall be obtained; and

          (d) Purchaser and its counsel shall have received and approved an environmental site assessment with respect to each parcel of Real Property designated in Schedule 3.11(b) and Schedule 3.11(c) as parcels for which an Environmental Site Assessment shall be obtained.

     7.12 Termination of Guarantees. Except for guarantees pursuant to physician Contracts which have been entered into in the ordinary course of business and identified on Schedule 7.12 hereto, all guarantees executed by any Acquired Entity shall have been terminated.

     7.13 Restrictive Covenants Agreements. Seller shall have executed and delivered the Restrictive Covenants Agreement to Purchaser, and Purchaser shall have received Restrictive Covenants Agreements duly executed by each of each of the individuals listed on Schedule 5.14.

     7.14 FIRPTA. Purchaser shall have received from Seller a copy of a statement, dated not earlier than thirty (30) days before the Closing Date, issued by Seller that complies with the requirements of Section 1.1445-2(c)(3) of the Treasury Regulations and certifies that Seller is not a foreign person.

     7.15 Joinder. Purchaser shall have received a Joinder, in the form attached hereto as Exhibit 7.15, duly executed by the Person identified on such Exhibit 7.15, in which such Person joins in Seller’s covenants and agreements contained in Section 6.14 and agrees to be responsible, on a joint and several basis with Seller, for Seller’s performance of its obligations under such Section 6.14 and any damages to Purchaser arising from a breach by Seller thereof.

     7.16 Shared Services Agreement. At Purchaser’s sole election, Seller shall have (i) executed and delivered to Purchaser an amended and restated Shared Services Agreement reasonably satisfactory to Purchaser or

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(ii) delivered evidence satisfactory to Purchaser that the Shared Services Agreement has been terminated and will be of no force or effect subsequent to Closing.

     7.17 Qualifacts Agreement. If requested by Purchaser in accordance with Section 5.17, Seller shall have delivered evidence satisfactory to Purchaser that the Qualifacts Agreement has been terminated, will be of no force or effect subsequent to Closing and that Seller has satisfied any termination fees or penalties.

     7.18 No Material Adverse Change. Since the date of this Agreement, there shall not have been any change in the business, operations, assets, condition (financial or otherwise), prospects, or results of operations of the Acquired Entities that would reasonably be expected to result in a Material Adverse Effect.

     7.19 Absence of Liens. Purchaser shall have received evidence reasonably satisfactory to it that none of the ABS Shares, the ABS Subsidiary Shares or the assets of any Acquired Entity are subject to any Liens, except for Permitted Liens.

     7.20 2005 Audited Financials. Purchaser shall have received the 2005 Audited Financials.

     7.21 Waiver of Conditions. Purchaser may waive any condition of this Article VII to the extent permitted by applicable Law. Except as otherwise provided herein, the consequences of any such waiver shall be the elimination of the waived condition as a valid basis for Purchaser to refuse to close the transactions contemplated by this Agreement. In addition, if the transactions contemplated hereby close, Purchaser shall be deemed to have waived any unsatisfied conditions under this Article VII.

ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER

     Except as may be waived in writing by Seller, the obligations of Seller to consummate the transactions contemplated hereby on the Closing Date shall be subject to the satisfaction on or prior to the Closing Date of the following conditions:

     8.1 Representations and Warranties. The representations and warranties of Purchaser set forth in this Agreement (i) if qualified by materiality or to Material Adverse Effect, shall be true and correct and (ii) if not qualified by materiality or to Material Adverse Effect, shall be true and correct in all material respects, as though made on and as of the Closing Date (except to the extent such representations speak as of an earlier date, in which case as of such date.)

     8.2 Compliance with Agreement. On and as of the Closing Date, Purchaser shall have performed and complied in all material respects with each covenant and agreement required by this Agreement to be performed and complied with by it on or before the Closing Date.

     8.3 Closing Certificates. Purchaser shall have delivered to Seller a certificate, dated as of the Closing Date and signed on behalf of Purchaser by an authorized officer thereof, certifying the fulfillment of the conditions specified in Sections 8.1 and 8.2 hereof.

     8.4 Secretary’s Certificate. At the Closing, Seller shall have received copies of the following, in each case certified as of the Closing Date by a Secretary or an Assistant Secretary of Purchaser:

          (a) resolutions of the board of directors of Purchaser authorizing the execution, delivery and performance of this Agreement and the other agreements that Purchaser is required to execute and deliver pursuant to the terms of this Agreement; and

          (b) the signature and incumbency of the officers of Purchaser authorized to execute and deliver this Agreement and the other agreements and certificates that Purchaser is required to deliver on or before the Closing Date pursuant to this Agreement.

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     8.5 Opinion of Counsel. At the Closing, Seller shall have received an opinion, dated the Closing Date, of Waller Lansden Dortch & Davis, LLP, counsel for Purchaser, in the form of Exhibit 8.5 attached hereto.

     8.6 Consents, Authorizations, Etc. All Permits that are or should be set forth on Schedules 5.1 and 6.2 hereto that are required to be obtained or given prior to the Closing shall have been obtained or given, and all applicable waiting periods with respect thereto shall have expired, and all consents from third parties to the Material Contracts listed on Schedule 3.5 shall have been obtained or given.

     8.7 No Action or Proceeding. On the Closing Date, (a) no valid judgment, order or decree of any court or other Governmental Authority restraining, enjoining or otherwise preventing the consummation of this Agreement or the transactions contemplated hereby shall be outstanding, (b) no action, suit, investigation or proceeding brought by any Governmental Authority shall be pending before any court or other Governmental Authority or threatened by any Governmental Authority to restrain, enjoin or otherwise prevent the consummation of this Agreement or any of the transactions contemplated hereby, which action, suit, investigation or proceeding, in the reasonable opinion of Seller, may result in a decision, ruling or finding that individually or in the aggregate has or would reasonably be expected to adversely affect the validity or enforceability of this Agreement or materially impair the ability of Seller to perform its obligations under this Agreement, and (c) neither the U.S. Department of Justice nor the FTC shall have requested, orally or in writing, that Seller delay or postpone the Closing, and the Attorney General of any State of the United States shall not have requested, in writing, that Seller delay or postpone the Closing.

     8.8 Good Standing Certificate. At the Closing, Purchaser shall have delivered to Seller a good standing certificate issued with respect to Purchaser by the Secretary of State of Purchaser’s state of incorporation. Such good standing certificate shall be dated as of a date that is not more than five (5) days prior to the Closing Date.

     8.9 Restricted Stock Agreement. At the Closing, Purchaser shall have delivered to Seller the duly executed Restricted Stock Agreement in the form attached hereto as Exhibit 8.9.

     8.10 Waiver of Conditions. Seller may waive any conditions of this Article VIII to the extent permitted by applicable Law. Except as otherwise provided herein, the consequences of any such waiver shall be the elimination of the waived condition as a valid basis for Seller to refuse to close the transactions contemplated by this Agreement. In addition, if the transactions contemplated hereby close, Seller shall be deemed to have waived any unsatisfied conditions under this Article VIII.

ARTICLE IX
INDEMNIFICATION

     9.1 Indemnification by Seller. Subject to the provisions of this Article IX, Seller shall indemnify and hold harmless Purchaser, any Affiliate of Purchaser, the respective officers, directors, stockholders, employees, agents and representatives of Purchaser and its Affiliates, and each such Person’s respective successors and assigns (each, a “Purchaser Indemnitee”) from and after the Effective Time from and against any Damages incurred or suffered by such Purchaser Indemnitee as a result of or arising from (a) any breach, misrepresentation or inaccuracy in any of the representations and warranties made herein by Seller that survive the Closing (other than the representations contained in Section 3.14), (b) any breach of any of the covenants or agreements made herein by Seller that survive the Closing (other than the covenants contained in Sections 6.7 and 6.8), (c) any matter disclosed on Schedule 9.1, (d) the business of the Acquired Entities (including, but not limited to, the ownership and operation thereof) prior to the Effective Time and (e) any fraud, willful misconduct or criminal acts of Seller (including any Affiliate, officer, employee or agent thereof). The sole recourse of a Purchaser Indemnitee for any and all Damages relating to or arising from a breach of any of the representations, covenants or agreements contained in Section 3.14 or Section 6.7 shall be controlled by the provisions of Section 6.8.

     9.2 Indemnification by Purchaser. Purchaser shall indemnify and hold harmless Seller, any Affiliate of Seller, the respective officers, directors, managers, members, employees, agents and representatives of Seller and their respective Affiliates, and each such Person’s respective successors and assigns (each a “Seller Indemnitee”) from and after the Effective Time from and against any Damages incurred or suffered by such Seller Indemnitee as a

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result of or arising from (a) any breach, misrepresentation or inaccuracy in any of the representations and warranties made herein by Purchaser that survive the Closing, (b) any breach of any of the covenants or agreements made herein by Purchaser that survive the Closing, (c) any claims, actions, suits or proceedings arising out of the business of the Acquired Entities (including, without limitation, the ownership and operation thereof) that arises after the Effective Time and (d) any fraud, willful misconduct or criminal acts of Purchaser (including any Affiliate, officer, employee or agent thereof).

     9.3 Claims Procedures. In the case of any Damages for which indemnification is sought hereunder, the party seeking indemnification (the “Indemnitee”) shall promptly notify the party from whom indemnification is sought (the “Indemnifying Party”) in writing of the existence and nature of such Damages, as well as the claim, demand, action or proceeding, if any, out of which the Damages arise (a “Claim”); provided, however, that no failure or delay by the Indemnitee in the performance of the foregoing shall reduce or otherwise affect the obligation of the Indemnifying Party to indemnify and hold the Indemnitee harmless, except to the extent the Indemnitee’s failure to give or delay in giving the required notice materially impairs the Indemnifying Party’s ability to indemnify, defend or mitigate its Damages, in which case the Indemnifying Party shall have no obligation to indemnify the Indemnitee to the extent of Damages, if any, caused by such failure to give or delay in giving the required notice. If such Damages arise out of a Claim by a third party, the Indemnitee must give the Indemnifying Party a reasonable opportunity to defend the same or prosecute such action to conclusion or settlement satisfactory to the Indemnifying Party at the Indemnifying Party’s sole cost and expense and with counsel of its own selection, and the Indemnifying Party shall pay any resulting settlements (including all associated Damages), satisfy any judgments or comply with any decrees; provided, further, however, that the Indemnitee shall at all times also have the right fully to participate in the defense at Indemnitee’s sole cost and expense so long as such participation occurs without hindering or impairing the defense of the Indemnifying Party. Notwithstanding the foregoing, without the prior written consent of the Indemnitee, the Indemnifying Party shall not compromise or settle any Claim if (i) the terms thereof impose any liability or obligations on the Indemnitee or (ii) the terms thereof fail to include an unconditional general release of the Indemnitee with respect to all liabilities and obligations in respect of such Claim. If the Indemnifying Party shall, within a reasonable time after said notice, fail to defend a Claim, the Indemnitee shall have the right, but not the obligation, and without waiving any rights against the Indemnifying Party, to undertake the defense of, and with the consent of the Indemnifying Party (such consent not to be withheld unreasonably), to compromise or settle the Claim on behalf, for the account, and at the risk and expense, of the Indemnifying Party and shall be entitled to collect the amount of any settlement or judgment or decree and all costs and expenses (including, without limitation, reasonable attorneys’ fees) in connection therewith from the Indemnifying Party. Except as provided in the preceding sentence, the Indemnitee shall not compromise or settle any Claim.

     9.4 Limitations on Claims.

          (a) Liability Thresholds. Except as otherwise set forth in this Section 9.4(a), no Damages with respect to Claims arising out of this Article IX shall be payable pursuant to this Article IX unless and until the aggregate amount of Damages incurred by the Indemnitee under this Article IX with respect to such Claims equals or exceeds an amount equal to $250,000.00 (the “Liability Threshold”). Once the Liability Threshold for such Claims has been reached, the Indemnitee shall be entitled to indemnity under this Article IX for any and all Damages back to the first dollar of Damages; provided, however, that with respect to Claims for indemnification pursuant to Section 9.1(a), 9.1(b), 9.1(d), 9.2(a), 9.2(b) or 9.2(c), the aggregate amount of Seller’s and Purchaser’s liability under Article IX shall not exceed $50,000,000.00. Notwithstanding anything in this Agreement to the contrary, Seller’s or Purchaser’s liability for Claims for indemnification pursuant to Sections 6.8, 9.1(c), 9.1(e) and 9.2(d) shall not be subject to any Liability Threshold or liability cap.

          (b) Subrogation. Following full indemnification as provided for hereunder, the Indemnifying Party shall be subrogated to all rights of the Indemnitee with respect to all Persons relating to the matter for which indemnification has been made.

          (c) Survival of Representations and Warranties; Limitation of Time to Bring Claims. The representations and warranties set forth in this Agreement shall survive the Closing and shall expire twenty-four (24) months after the Effective Time, other than (x) those set forth in Sections 3.1, 3.2, 3.3, 3.4, 3.11(a), 3.11(b), 4.1 and 4.2 hereof, which shall survive in perpetuity, and (y) those set forth in Sections 3.12, 3.14, 3.18, 3.22, 3.26, 3.27,

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3.28, 3.29, 3.30 and 3.32 hereof insofar as any Damages relate to Claims made against Purchaser or its Affiliates by third parties, which shall survive until ninety (90) days after the expiration of the applicable statute of limitations (taking into account all valid extensions). No Claim for indemnification arising out of a breach of representations and warranties in this Agreement may be brought after the applicable time provided for in this Section 9.4(c).

     9.5 Miscellaneous.

          (a) The amount of any Damages for which indemnification is provided under this Article IX shall be net of any duplicative amounts recovered by the Indemnitee under insurance policies or from unaffiliated third Persons with respect to such Damages.

          (b) The obligations to indemnify under this Article IX shall be without regard to whether the Indemnitee(s) had any knowledge of the facts or circumstances giving rise to such indemnification.

          (c) For purposes of the calculating the amount of Damages to which an Indemnitee is entitled under this Article IX (but not for purposes of determining whether a representation or warranty has been breached), the terms “material,” “materiality,” “Material Adverse Effect” and other qualifiers, modifiers or limitations (including monetary values and qualifiers as to “knowledge”) shall be disregarded.

ARTICLE X
TERMINATION

     10.1 Termination. This Agreement may be terminated at any time prior to the Effective Time:

          (a) by mutual written consent of Purchaser and Seller;

          (b) by either Purchaser or Seller, by notice in writing to the other party if a Governmental Authority shall have permanently enjoined, restrained or otherwise prohibited (by a Court Order that has become final and non-appealable) the consummation of the transactions contemplated by this Agreement;

          (c) by Purchaser, if Seller shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform (a) would give rise to the failure of a condition set forth in Article VII, except Section 7.7, and (b) cannot be or has not been cured within ten (10) days after Purchaser’s giving written notice to Seller of such breach (a “Seller Material Breach”) (provided that Purchaser is not then in Purchaser Material Breach);

          (d) by Purchaser, if the board of directors of Seller or any committee thereof shall have withdrawn its approval of this Agreement (for any reason other than the event set forth in Section 10.1(f)) or approved, recommended or called any meeting of stockholders to vote on any Acquisition Proposal;

          (e) by Seller, if Purchaser shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform (a) would give rise to the failure of a condition set forth in Article VIII, except for Section 8.7, and (b) cannot be or has not been cured within ten (10) days after Seller’s giving written notice to Purchaser of such breach (a “Purchaser Material Breach”) (provided that Seller is not then in Seller Material Breach);

          (f) by either Purchaser or Seller, by written notice to the other party, if the Closing shall not have occurred by October 31, 2006, provided that Purchaser, if it is the terminating party, is not then in Purchaser Material Breach, and Seller, if it is the terminating party, is not then in Seller Material Breach; or

          (g) by Purchaser, if Seller has not obtained all consents, authorizations and approvals required under the Credit Facilities necessary to consummate the transactions contemplated hereby by August 31, 2006.

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     10.2 Effect of Termination.

          (a) In the event of termination of this Agreement by either Seller or Purchaser pursuant to Section 10.1, this Agreement shall become void and have no effect without any liability or obligation on the part of Purchaser or Seller, except for the obligations and provisions set forth in Article IX and Sections 5.15, 6.11, 10.2, 12.1, 12.2, 12.5, 12.6, 12.7, 12.8, 12.9, 12.10 and 12.12.

          (b) Except as set forth in this Sections 10.2 and 12.1, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the transactions contemplated by this Agreement are consummated.

          (c) In the event of termination of this Agreement by Seller pursuant to Section 10.1(e), Purchaser shall pay Seller the Liquidated Damages and shall pay Seller’s out-of-pocket expenses incurred in connection with this Agreement (and the transactions contemplated hereby), including the reasonable fees and expenses of financial advisors, accountants and legal counsel and printing and filing and mailing fees and expenses (collectively, “Termination Expenses”), in immediately available funds, within two (2) Business Days following termination of this Agreement. In the event of termination of this Agreement by Purchaser pursuant to Sections 10.1(c) or 10.1(g), Seller shall pay Purchaser the Liquidated Damages and shall pay Purchaser’s Termination Expenses in immediately available funds within two (2) Business Days following termination of this Agreement.

          (d) If this Agreement shall have been terminated pursuant to Section 10.1(d), then Seller shall pay Purchaser an amount equal to $10,000,000.00 (the “Break-up Fee”), plus all of Purchaser’s Termination Expenses. Payment of any amounts pursuant to this Section 10.2(d) shall be made as directed by Purchaser by wire transfer of immediately available funds within two (2) Business Days of such termination.

          (e) If within one (1) year after termination of this Agreement by Purchaser pursuant to Section 10.1(c), Seller enters into a definitive agreement concerning an Acquisition Proposal or consummates an Acquisition Proposal, then upon entering into such definitive agreement or consummating an Acquisition Proposal, Seller shall pay Purchaser the Break-up Fee less the Liquidated Damages previously paid to Purchaser by Seller, as directed by Purchaser, by wire transfer of immediately available funds within two (2) Business Days thereof.

          (f) In the event of termination of this Agreement by Purchaser pursuant to Section 10.1(c), or by Seller pursuant to Section 10.1(e), the exclusive remedy of the other party shall be as set forth in Section 10.2(c).

ARTICLE XI
NOTICES

     11.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person or received by telegraphic or other electronic means (including facsimile, telecopy and telex) or when delivered by overnight courier, or if mailed, five (5) days after being deposited in the United States mail, certified or registered mail, first-class postage prepaid, return receipt requested, to the parties at the following addresses or facsimile numbers:

     If to Seller, to:

FHC Health Systems, Inc.
240 Corporate Boulevard
Norfolk, Virginia 23502
Attention: Ronald I. Dozoretz, M.D.
Fax: (757) 459-5402

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     With a copy to:

Christian & Barton, LLP
909 East Main Street, Suite 1200
Richmond, Virginia 23219-3095
Attention: William J. Newman, Jr.
Fax: (804) 697-6153

     If to Purchaser, to:

Psychiatric Solutions, Inc.
840 Crescent Centre Drive, Suite 460
Franklin, Tennessee 37067
Attention: Christopher L. Howard
Fax: (615) 312-5711

     With a copy to:

Waller Lansden Dortch & Davis, LLP
511 Union Street, Suite 2700
Nashville, Tennessee 37219
Attention: Matthew R. Burnstein
Fax: (615) 244-6804

     Any party from time to time may change its address or facsimile number for the purpose of receipt of notices to that party by giving a similar notice specifying a new address or facsimile number to the other notice parties listed above in accordance with the provisions of this Section 11.1.

ARTICLE XII
MISCELLANEOUS

     12.1 Fees and Expenses. Except as otherwise provided in this Agreement, Seller shall pay its own expenses (including, without limitation, the expenses of the Acquired Entities in connection with this Agreement and the transactions contemplated hereby incurred prior to the Effective Time) and Purchaser shall pay its own expenses (including, without limitation, the fees and expenses of the Acquired Entities in connection with this Agreement and the transactions contemplated hereby incurred after the Effective Time) in connection with this Agreement and the transactions contemplated hereby. Purchaser and Seller shall share equally the filing fees with respect to the parties’ filings under the HSR Act.

     12.2 Entire Agreement. Except for documents and agreements executed pursuant hereto, the provisions of the Confidentiality Agreement (which Confidentiality Agreement shall survive the parties’ execution and delivery of this Agreement) and the other documents and agreements contemplated hereby, this Agreement supersedes all prior oral discussions and written agreements between the parties with respect to the subject matter of this Agreement (including any term sheet or similar agreement or document relating to the transactions contemplated hereby). Except for the Confidentiality Agreement, this Agreement, including the exhibits and schedules hereto and other documents and agreements delivered in connection herewith, contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof.

     12.3 Waiver. Any term or condition of this Agreement may be waived at any time by the party which is entitled to the benefit thereof. Any such waiver must be in writing and must be duly executed by such party. A waiver on one occasion shall not be deemed to be a waiver of the same or any other breach, provision or requirement on any other occasion.

     12.4 Amendment. This Agreement may be modified or amended only by a written instrument duly executed by each of the parties hereto.

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     12.5 Counterparts; Facsimile Signatures. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Facsimile signatures on this Agreement shall be deemed to be original signatures for all purposes.

     12.6 No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of Seller, Purchaser and their respective successors or assigns, and it is not the intention of the parties to confer third party beneficiary rights upon any other Person.

     12.7 GOVERNING LAW, CONSTRUCTION; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO ITS CONFLICTS OF LAWS PRINCIPLES. The parties hereto agree that no provisions of this Agreement or any related document shall be construed for or against or interpreted to the advantage or disadvantage of any party hereto by any court or other Governmental Authority by reason of any party’s having or being deemed to have structured or drafted such provision, each party having participated equally in the structuring and drafting hereof. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO DEMAND THAT ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE RELATIONSHIPS OF THE PARTIES HERETO BE TRIED BY JURY. THIS WAIVER EXTENDS TO ANY AND ALL RIGHTS TO DEMAND A TRIAL BY JURY ARISING FROM ANY SOURCE INCLUDING, BUT NOT LIMITED TO, THE CONSTITUTION OF THE UNITED STATES OR ANY STATE THEREIN, COMMON LAW OR ANY APPLICABLE STATUTE OR REGULATIONS. EACH PARTY HERETO ACKNOWLEDGES THAT IS KNOWINGLY AND VOLUNTARILY WAIVING ITS RIGHTS TO DEMAND TRIAL BY JURY.

     12.8 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns, including successors by merger or otherwise.

     12.9 No Assignment. Neither this Agreement nor any right hereunder or part hereof may be assigned by any party hereto without the prior written consent of the other parties hereto; provided, however, that Purchaser may assign its rights and obligations under this Agreement to other Persons who (a) are wholly-owned (directly or indirectly) by Purchaser and (b) agree to be bound by the terms and conditions of this Agreement. Notwithstanding the foregoing, Purchaser may assign its rights and obligations under this Agreement to the administrative agent for the benefit of the lenders as collateral for all obligations under Purchaser’s senior credit facility, as it may exist from time to time. Notwithstanding the assignment of this Agreement or any rights or obligations hereunder, the assignor shall be jointly and severally liable with its assignee for its obligations hereunder.

     12.10 Headings; Gender, Etc. The headings used in this Agreement have been inserted for convenience and do not constitute provisions to be construed or interpreted in connection with this Agreement. Unless the context of this Agreement otherwise requires, (a) words of any gender will be deemed to include each other gender, (b) words using the singular or plural number also will include the plural or singular number, respectively, (c) the terms “hereof”, “herein”, “hereby” and derivative or similar words will refer to this entire Agreement, and (d) the terms “Article,” “Section,” “Schedule” and “Exhibit” will refer to the specified Article or Section of this Agreement or the specified Schedule or Exhibit to this Agreement.

     12.11 Access to Information. Seller and Purchaser agree that, from time to time after the Closing, upon the reasonable request of another party hereto, they will cooperate and will cause its respective Affiliates to cooperate with each other to effect the orderly transition of the business, operations and affairs of the Acquired Entities. Without limiting the generality of the foregoing, (a) Seller will give and will cause its Affiliates to give representatives of the Acquired Entities reasonable access to all Books and Records of Seller reasonably requested by the Acquired Entities or Purchaser in the preparation of any post-Closing financial statements, reports or Tax Returns of the Acquired Entities; and (b) Purchaser will give and will cause the Acquired Entities to give representatives of Seller reasonable access to all Books and Records of the Acquired Entities reasonably requested by Seller in the preparation of any post-Closing financial statements, reports or Tax Returns of Seller.

     12.12 Severability; Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future Law, (a) such provisions will be fully severable; (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof;

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(c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom; and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible.

     12.13 Cooperation. Upon request, each of the parties hereto shall cooperate with the other in good faith, at the requesting party’s expense, in furnishing information, testimony and other assistance in connection with any actions, proceedings, arrangements, or disputes involving any of the parties hereto (other than in a dispute among such parties or entities) and based upon Contracts, arrangements or acts of Seller or an Acquired Entity which were in effect or occurred prior to the Effective Time and which relate to the business of the Acquired Entities. The party requesting documents or information pursuant to this Section shall pay all fees and expenses paid to unaffiliated third parties by the party providing such documents or information in connection with providing such information or document. In addition, following the Closing, the parties hereto shall cooperate fully with each other and make available to the other, as reasonably requested, and to any taxing authority, all information, records and documents relating to Tax liabilities or potential Tax liabilities and Tax basis of the Acquired Entities, and shall preserve all such information, records and documents at least until the expiration of any applicable statute of limitations or extensions thereof.

     12.14 Further Assurance Clause. On and after the Closing Date, Seller, the Acquired Entities and Purchaser will take all appropriate action and execute all documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the provisions hereof, including, without limitation, putting Purchaser in possession and operating control of the business of the Acquired Entities.

     12.15 Documents to be Provided to Purchaser. Wherever this Agreement requires that Seller provide or make available to Purchaser any documents or other information, Seller shall have complied with such requirement if it delivers all such documents and information under cover or correspondence conspicuously identifying the contents attached thereto or enclosed therewith as being provided pursuant to a particular Section of this Agreement.

[The following page is the signature page.]

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     IN WITNESS WHEREOF, the parties have caused this Stock Purchase Agreement to be executed as of the date first above written.

PSYCHIATRIC SOLUTIONS, INC.
By:	/s/ Brent Turner
Name:	Brent Turner
Title:	Executive Vice President, Finance and Administration
FHC HEALTH SYSTEMS, INC.
By:	/s/ Edward C. Irby
Name:	Edward C. Irby
Title:	Vice President

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EX-31.1

EXHIBIT 31.1

PSYCHIATRIC SOLUTIONS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SS. 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joey A. Jacobs, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Psychiatric Solutions, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 2, 2006	/s/ Joey A. Jacobs
	Joey A. Jacobs
	Chairman, Chief Executive Officer and President

EX-31.2

EXHIBIT 31.2

PSYCHIATRIC SOLUTIONS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SS. 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jack E. Polson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Psychiatric Solutions, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 2, 2006	/s/ Jack E. Polson
	Jack E. Polson
	Chief Accounting Officer

EX-32.1

EXHIBIT 32.1

PSYCHIATRIC SOLUTIONS, INC.
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Psychiatric Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joey A. Jacobs, Chairman, Chief Executive Officer and President of the Company, and I, Jack E. Polson, Chief Accounting Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: August 2, 2006

/s/ Joey A. Jacobs  

Joey A. Jacobs 

Chairman, Chief Executive Officer and President 

/s/ Jack E. Polson  

Jack E. Polson 

Chief Accounting Officer