8-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): November 29, 2006

Psychiatric Solutions, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	0-20488	23-2491707
(State or Other Jurisdiction	(Commission File Number)	(IRS Employer
of Incorporation)		Identification No.)

840 Crescent Centre Drive, Suite 460, Franklin, Tennessee 37067
(Address of Principal Executive Offices)

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

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

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

Ex-23.1 Consent of Independent Registered Public Accounting Firm

Ex-99.1 Re-Issued Form 10-K, Item 6. - Selected Financial Data

Ex-99.2 Re-Issued Form 10-K, Item 7. - MD & A

Ex-99.3 Re-Issued Form 10-K, Item 8. - Financial Statements

Item 8.01. Other Events.

     Psychiatric Solutions, Inc. (the “Company”) is re-issuing in an updated format its historical financial statements in connection with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS No. 144”). During the nine month period ended September 30, 2006, the Company exited three of its contracts to manage state-owned facilities in Florida and sold a therapeutic boarding school. In compliance with SFAS No. 144, the Company has reported the operations of such operations, net of applicable income taxes, as discontinued operations for each period presented in its quarterly report for the quarter and nine month period ended September 30, 2006 (including the comparable periods of the prior year). Under Securities and Exchange Commission (“SEC”) requirements, the same reclassification to discontinued operations that is required by SFAS No. 144 is also required for previously issued financial statements for each of the three years shown in the Company’s last annual report on Form 10-K, if those financial statements are incorporated by reference in subsequent filings with the SEC made under the Securities Act of 1933, as amended, even though those financial statements relate to periods prior to the date the contracts were exited. This reclassification has no effect on the Company’s reported net income available to common stockholders.

     This Report on Form 8-K updates Items 6, 7 and 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2005, to reflect the operations that were exited during the nine month period ended September 30, 2006 as discontinued operations. The re-issued consolidated financial statements also include Note 18 for events subsequent to December 31, 2005. All other items of the Form 10-K remain unchanged. No attempt has been made to update matters in the Form 10-K except to the extent expressly provided above.

     The attached information should be read together with the Company’s filings with the SEC subsequent to the Company’s annual report on Form 10-K for the year ended December 31, 2005, including its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2006, June 30, 2006 and September 30, 2006.

Item 9.01. Financial Statements and Exhibits.

     (d) Exhibits:

23.1	Consent of Independent Registered Public Accounting Firm
99.1	Re-issued Form 10-K, Item 6. — Selected Financial Data
99.2	Re-issued Form 10-K, Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations
99.3	Re-issued Form 10-K, Item 8. — Financial Statements and Supplementary Data

SIGNATURES

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

PSYCHIATRIC SOLUTIONS, INC.
By:	/s/ Jack E. Polson
	Jack E. Polson
	Executive Vice President and Chief Accounting Officer

Date: November 29, 2006

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(i)	Registration Statement (Form S-8, No. 333-100635) pertaining to the Psychiatric Solutions, Inc. 1997 Incentive and Nonqualified Stock Option Plan for Key Personnel of Psychiatric Solutions, Inc.;
(ii)	Registration Statement (Form S-8, No. 333-94983) pertaining to the 1997 Equity Incentive Plan of PMR Corporation;
(iii)	Registration Statement (Form S-8, No. 333-38419) pertaining to the 1997 Equity Incentive Plan, 1995 Warrant Grant and the 1996 Stock Option Grants of PMR Corporation;
(iv)	Registration Statement (Form S-8, No. 333-118529) pertaining to the Amended and Restated Psychiatric Solutions, Inc. Equity Incentive Plan and the Amended and Restated Outside Directors’ Non-Qualified Stock Option Plan;
(v)	Registration Statement (Form S-8, No. 333-127085) of Psychiatric Solutions, Inc.;
(vi)	Registration Statement (Form S-8, No. 333-128047) pertaining to the Amended and Restated Psychiatric Solutions, Inc. Equity Incentive Plan; and
(vii)	Registration Statement (Form S-8, No. 333-136339) pertaining to the Amended and Restated Psychiatric Solutions, Inc. Equity Incentive Plan;

of our report dated February 28, 2006, except for Note 4, as to which the date is November 28, 2006, with respect to the consolidated financial statements of Psychiatric Solutions, Inc., our report dated February 28, 2006, with respect to Psychiatric Solutions, Inc. management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Psychiatric Solutions, Inc. for the year ended December 31, 2005, included in this current report on Form 8-K.

/s/ Ernst & Young  

November 28, 2006
Nashville, Tennessee

EX-99.1

Exhibit 99.1

Item 6. Selected Financial Data.

     The selected financial data presented below for the years ended December 31, 2005, 2004 and 2003, and at December 31, 2005 and December 31, 2004, are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected financial data for the years ended December 31, 2002 and 2001, and at December 31, 2003, 2002 and 2001, are derived from our audited consolidated financial statements not included herein. The selected financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Psychiatric Solutions, Inc.
Selected Financial Data
As of and for the Years Ended December 31,

	2005		2004		2003		2002			2001
	(In thousands, except per share amounts)
Income Statement Data:
Revenue	$	715,324	$	470,969	$	277,575	$	113,912		$	43,999
Costs and expenses:
Salaries, wages and employee benefits		392,309		254,897		142,292		62,326			26,183
Other operating expenses		202,149		143,560		95,025		35,716			11,322
Provision for doubtful accounts		13,498		10,794		6,312		3,681			662
Depreciation and amortization		14,738		9,808		5,707		1,770			945
Interest expense		27,056		18,964		14,778		5,564			2,660
Other expenses (1)		21,871		6,407		5,271		178			1,237
Total costs and expenses		671,621		444,430		269,385		109,235			43,009
Income from continuing operations before income taxes		43,703		26,539		8,190		4,677			990
Provision for (benefit from) income taxes		16,836		10,085		3,477		(1,007	)		—
Income from continuing operations	$	26,867	$	16,454	$	4,713	$	5,684		$	990
Net income	$	27,154	$	16,801	$	5,216	$	5,684		$	2,578
Basic earnings per share from continuing operations	$	0.60	$	0.54	$	0.23	$	0.47		$	0.10
Basic earnings per share	$	0.61	$	0.55	$	0.26	$	0.47		$	0.26
Shares used in computing basic earnings per share		44,792		29,140		16,740		12,222			10,020
Diluted earnings per share from continuing operations	$	0.58	$	0.47	$	0.20	$	0.43		$	0.09
Diluted earnings per share	$	0.59	$	0.48	$	0.22	$	0.43		$	0.24
Shares used in computing diluted earnings per share from continuing operations		46,296		35,146		23,498		13,972			10,618

     See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements describing the reclassification from continuing operations to discontinued operations of eight contracts to manage state-owned facilities in Florida. We exited three contracts during 2006, two contracts during 2005 and three contracts during 2004. In 2006, we also sold a therapeutic boarding school.

Psychiatric Solutions, Inc.
Selected Financial Data (continued)
As of and for the Years Ended December 31,

	2005		2004		2003		2002		2001
	(In thousands, except operating data)
Balance Sheet Data:
Cash	$	54,700	$	33,451	$	44,948	$	2,392	$	1,262
Working capital (deficit)		138,844		39,843		66,446		2,369		(3,624	)
Property and equipment, net		378,162		217,927		149,275		33,547		17,980
Total assets		1,175,031		496,684		346,202		90,138		54,294
Total debt		482,389		174,336		175,003		43,822		36,338
Series A convertible preferred stock		—		—		25,316		—		—
Stockholders’ equity		539,712		244,515		91,328		30,549		9,238
Operating Data:
Number of facilities		55		34		24		5		4
Number of licensed beds		6,389		4,295		3,128		699		489
Admissions		77,097		49,484		26,278		14,737		3,027
Patient days		1,392,877		996,840		525,055		145,575		30,511
Average length of stay		18		20		20		10		10

(1) As a result of our adoption of Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections, we have reclassified certain losses on refinancing of long-term debt previously reported as an extraordinary item to a component of income from continuing operations for the year ended December 31, 2001.

EX-99.2

Exhibit 99.2

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion and analysis should be read in conjunction with the selected financial data and the accompanying consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K.

Overview

     On July 1, 2005, we completed the acquisition of all of the outstanding capital stock of Ardent Behavioral from Ardent. Ardent Behavioral owns and operates 20 inpatient psychiatric facilities, which produced revenues of $294.3 million in 2004 and have a total of approximately 2,000 inpatient beds. The purchase price for Ardent Behavioral consisted of $500 million in cash and the issuance of 2,725,520 shares of our common stock. The cash portion of the acquisition price was financed through a new $325 million senior secured term loan facility, a $150 million bridge loan facility and borrowings on our $150 million revolving credit facility, which was amended and restated on July 1, 2005. On July 6, 2005, we closed on the sale of $220 million of the 7³/₄% Notes, the proceeds of which were used to repay the bridge loan facility as well as repurchase approximately $61.3 million of our 10⁵/₈% Notes. On September 20, 2005, we closed on the sale of 8,050,000 shares of our common stock at a price of $25.12 per share. Net proceeds of approximately $192.6 million received from the offering were used to repay $125 million of indebtedness under our senior secured term loan facility and the outstanding balance of our revolving credit facility.

     Our business strategy is to acquire inpatient behavioral health care facilities and improve operating results within new and existing inpatient facilities and our managed inpatient behavioral health care operations. In 2003, we acquired six inpatient behavioral health care facilities from The Brown Schools, Inc. (“The Brown Schools”); Ramsay Youth Services, Inc. (“Ramsay”), an operator of 11 owned or leased inpatient behavioral health care facilities; and two inpatient behavioral health care facilities from other sellers. In 2004, we acquired 10 inpatient behavioral health care facilities in five separate transactions, the most significant being the acquisition of four inpatient behavioral health care facilities from Heartland Healthcare (“Heartland”). On July 1, 2005, we acquired 20 inpatient psychiatric facilities in the acquisition of Ardent Behavioral and on August 1, 2005, we acquired Canyon Ridge Hospital in Chino, California.

     We strive to improve the operating results of new and existing 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 year ended December 31, 2005, our same-facility revenue from owned and leased inpatient facilities increased by 7.7% as compared to the year ended December 31, 2004. Same-facility growth also produced gains in owned and leased inpatient facility patient days and revenue per patient day of 3.9% and 3.8%, respectively, during the year ended December 31, 2005. Same-facility growth refers to the comparison of each inpatient facility owned during 2004 with the comparable period in 2005.

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. For the year ended December 31, 2005, patient service revenue comprised approximately 92.7% of our total revenue.

Management Contract Revenue

     Our management contracts 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. For the year ended December 31, 2005, management contract revenue comprised approximately 7.3% of our total revenue.

Results of Operations

     The following table illustrates our consolidated results of operations for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands).

	Results of Operations, Consolidated Psychiatric Solutions
	For the Year Ended December 31,
	2005					2004					2003
	Amount		%			Amount		%			Amount			%
Revenue	$	715,324		100.0	%	$	470,969		100.0	%	$	277,575			100.0	%
Salaries, wages, and employee benefits		392,309		54.8	%		254,897		54.1	%		142,292			51.3	%
Professional fees		73,177		10.2	%		52,200		11.1	%		32,086			11.6	%
Supplies		42,993		6.0	%		29,717		6.3	%		15,765			5.7	%
Provision for doubtful accounts		13,498		1.9	%		10,794		2.3	%		6,312			2.3	%
Other operating expenses		85,979		12.0	%		61,643		13.1	%		47,174			17.0	%
Depreciation and amortization		14,738		2.1	%		9,808		2.1	%		5,707			2.0	%
Interest expense, net		27,056		3.8	%		18,964		4.0	%		14,778			5.3	%
Other expenses:
Loss on refinancing long-term debt		21,871		3.1	%		6,407		1.4	%		4,856			1.7	%
Change in valuation of put warrants		—		—			—		—			960			0.3	%
Change in reserve on stockholder notes		—		—			—		—			(545	)		-0.2	%
Income from continuing operations before income taxes		43,703		6.1	%		26,539		5.6	%		8,190			3.0	%
Provision for income taxes		16,836		2.3	%		10,085		2.1	%		3,477			1.3	%
Income from continuing operations	$	26,867		3.8	%	$	16,454		3.5	%	$	4,713			1.7	%

Year Ended December 31, 2005 Compared To Year Ended December 31, 2004

     The following table compares key operating statistics for owned and leased inpatient facilities for the years ended December 31, 2005 and 2004 (revenue in thousands). Same-facility statistics for the year ended December 31, 2005 are shown on a comparable basis with total facility statistics for the year ended December 31, 2004.

	Year Ended December 31,				%
	2005		2004		Change
Total facility results:
Revenue	$	663,236	$	419,701		58.0	%
Number of facilities at period end		55		34		61.8	%
Admissions		77,097		49,484		55.8	%
Patient days		1,392,877		996,840		39.7	%
Average length of stay		18.1		20.1		-10.0	%
Revenue per patient day	$	476	$	421		13.1	%
Same-facility results:
Revenue	$	452,161	$	419,701		7.7	%
Number of facilities at period end		34		34		0.0	%
Admissions		50,438		49,484		1.9	%
Patient days		1,035,302		996,840		3.9	%
Average length of stay		20.5		20.1		2.0	%
Revenue per patient day	$	437	$	421		3.8	%

     Revenue. Revenue from continuing operations was $715.3 million for the year ended December 31, 2005 compared to $471.0 million for the year ended December 31, 2004, an increase of $244.4 million, or 51.9%. Revenue from owned and leased inpatient facilities accounted for $663.2 million of the 2005 results compared to $419.7 million of the 2004 results, an increase of $243.5 million, or 58.0%. The increase in revenue from owned and leased inpatient facilities relates primarily to acquisitions. The acquisition of Ardent Behavioral and other acquisitions accounted for $159.5 million and $51.6 million, respectively, of the increase in revenue during 2005 as compared to 2004. The remainder of the increase in revenue from owned and leased inpatient facilities is primarily attributable to same-facility growth in patient days of 3.9% and revenue per patient day of 3.8%. Revenue from inpatient management contracts accounted for $52.1 million of the 2005 results compared to $51.3 million of the 2004 results, an increase of $0.8 million or 1.6%.

     Salaries, wages, and employee benefits. Salaries, wages and employee benefits (“SWB”) expense was $392.3 million for the year ended December 31, 2005, or 54.8% of total revenue, compared to $254.9 million for the year ended December 31, 2004, or 54.1% of total revenue. SWB expense for owned and leased inpatient facilities was $359.7 million in 2005, or 54.2% of revenue. Same-facility

SWB expense for owned and leased inpatient facilities was $244.7 million in 2005, or 54.1% of revenue, compared to $227.8 million in 2004, or 54.3% of revenue. SWB expense for inpatient management contracts was $18.9 million in 2005 compared to $19.1 million in 2004. SWB expense for our corporate office was $13.7 million for 2005 compared to $8.0 million for 2004 as the result of the hiring of additional staff necessary to manage the inpatient facilities acquired during 2004 and 2005.

     Professional fees. Professional fees were $73.2 million for the year ended December 31, 2005, or 10.2% of total revenue, compared to $52.2 million for the year ended December 31, 2004, or 11.1% of total revenue. Professional fees for owned and leased inpatient facilities were $66.0 million in 2005, or 10.0% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $45.4 million in 2005, or 10.0% of revenue, compared to $45.3 million in 2004, or 10.8% of revenue. Professional fees for inpatient management contracts were $3.7 million in 2005 compared to $3.6 million in 2004. Professional fees for our corporate office were approximately $3.5 million in 2005 compared to approximately $3.3 million in 2004.

     Supplies. Supplies expense was $43.0 million for the year ended December 31, 2005, or 6.0% of total revenue, compared to $29.7 million for the year ended December 31, 2004, or 6.3% of total revenue. Supplies expense for owned and leased inpatient facilities was $42.0 million in 2005, or 6.3% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $30.6 million in 2005, or 6.8% of revenue, compared to $28.8 million in 2004, or 6.9% of revenue. Supplies expense for inpatient management contracts was $0.8 million in 2005 compared to $0.7 million in 2004. Supplies expense for our corporate office consists of office supplies and is negligible to supplies expense overall.

     Provision for doubtful accounts. The provision for doubtful accounts was $13.5 million for the year ended December 31, 2005, or 1.9% of total revenue, compared to $10.8 million for the year ended December 31, 2004, or 2.3% of total revenue. The provision for doubtful accounts at owned and leased inpatient facilities comprises the majority of our provision for doubtful accounts as a whole.

     Other operating expenses. Other operating expenses consist primarily of rent, utilities, insurance, travel, and repairs and maintenance expenses. Other operating expenses were approximately $86.0 million for the year ended December 31, 2005, or 12.0% of total revenue, compared to $61.6 million for the year ended December 31, 2004, or 13.1% of total revenue. Other operating expenses for owned and leased inpatient facilities were $61.1 million in 2005, or 9.2% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $42.3 million in 2005, or 9.4% of revenue, compared to $40.4 million in 2004, or 9.6% of revenue. Other operating expenses for inpatient management contracts were $18.5 million in 2005 compared to $18.0 million in 2004. Other operating expenses at our corporate office increased to $6.4 million in 2005 from approximately $3.3 million in 2004.

     Depreciation and amortization. Depreciation and amortization expense was $14.7 million for the year ended December 31, 2005 compared to $9.8 million for the year ended December 31, 2004, an increase of approximately $4.9 million. This increase in depreciation and amortization expense is primarily the result of the numerous acquisitions of inpatient facilities during 2004 and 2005.

     Interest expense, net. Interest expense, net of interest income, was $27.1 million for the year ended December 31, 2005 compared to $19.0 million for the year ended December 31, 2004, an increase of $8.1 million or 42.6%. The increase in interest expense is primarily attributable to debt incurred to fund the 2005 acquisition of Ardent Behavioral. On December 31, 2005, we had $482.4 million in long-term debt, compared to $174.3 million at December 31, 2004. During January 2005, we repaid $50.0 million of our 10⁵/₈% Notes with $20.0 million in cash and $30.0 million in borrowings under our revolving credit facility. During the July 2005 acquisition of Ardent Behavioral, we borrowed $150.0 million, $45.0 million and $325.0 million, respectively, under a bridge loan, our revolving credit facility and senior secured term facility. We issued $220 million of our 7³/₄% Notes and also repaid $61.3 million of our 10⁵/₈% Notes during July 2005. During September 2005 we repaid all borrowings under our revolving credit facility and $125 million of our senior secured term facility with proceeds from an offering of our common stock.

     Other expenses. Other expenses in 2005 consisted of $21.9 million in losses on the refinancing of our long-term debt relating to the refinancings of $125.0 million of our senior secured term loan facility, $111.3 million of our 10⁵/₈% Notes and the $150.0 million bridge loan utilized in the acquisition of Ardent Behavioral. Other expenses in 2004 consisted of $6.4 million in losses on the refinancing of our long-term debt relating to the termination of our former senior credit facility.

     Income from discontinued operations, net of taxes. Income from discontinued operations (net of income tax effect) of $0.3 million for the years ended December 31, 2005 and 2004 is from eight contracts to manage inpatient facilities for the Florida Department of Juvenile Justice and the operating results of a therapeutic boarding school sold in 2006. The management contracts were assumed in the Ramsay acquisition in 2003 and three were terminated in 2006, two were terminated in 2005 and three were terminated in 2004.

Year Ended December 31, 2004 Compared To Year Ended December 31, 2003

     The following table compares key operating statistics for owned and leased inpatient facilities for the years ended December 31, 2004 and 2003 (revenue in thousands). Same-facility statistics for the year ended December 31, 2004 are shown on a comparable basis with total facility statistics for the year ended December 31, 2003.

	Year Ended December 31,				%
	2004		2003		Change
Total facility results:
Revenue	$	419,701	$	223,340		87.9	%
Number of facilities at period end		34		24		41.7	%
Admissions		49,484		26,278		88.3	%
Patient days		996,840		525,055		89.9	%
Average length of stay		20.1		20.0		0.5	%
Revenue per patient day	$	421	$	425		-0.9	%
Same-facility results:
Revenue	$	243,424	$	223,340		9.0	%
Number of facilities at period end		24		24		0.0	%
Admissions		27,773		26,278		5.7	%
Patient days		565,237		525,055		7.7	%
Average length of stay		20.4		20.0		2.0	%
Revenue per patient day	$	431	$	425		1.4	%

     Revenue. Revenue from continuing operations was $471.0 million for the year ended December 31, 2004 compared to $277.6 million for the year ended December 31, 2003, an increase of $193.4 million, or 69.7%. Revenue from owned and leased inpatient facilities accounted for $419.7 million of the 2004 results compared to $223.3 million of the 2003 results, an increase of $196.4 million, or 87.9%. The increase in revenue from owned and leased inpatient facilities relates primarily to acquisitions. The acquisitions of the inpatient facilities from The Brown Schools, Ramsay, Brentwood Behavioral Health (“Brentwood”), Heartland, and other acquisitions during 2004 and 2003 accounted for $175.4 million of the increase in revenue during 2004 as compared to 2003. 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 7.7% and 1.4%, respectively. Revenue from inpatient management contracts accounted for $51.3 million of the 2004 results compared to $54.2 million of the 2003 results, a decrease of approximately $2.9 million, or 5.4%. The increase in revenues from inpatient management contracts relates primarily to revenues from inpatient management contracts assumed in the Ramsay acquisition.

     Salaries, wages, and employee benefits. SWB expense was $254.9 million for the year ended December 31, 2004, or 54.1% of total revenue, compared to $142.3 million for the year ended December 31, 2003, or 51.3% of total revenue. SWB expense for owned and leased inpatient facilities was $227.8 million in 2004, or 54.3% of revenue. Same-facility SWB expense for owned and leased inpatient facilities was $131.7 million in 2004, or 54.1% of revenue, compared to $121.3 million in 2003, or 54.3% of revenue. SWB expense for inpatient management contracts was $19.1 million in 2004 compared to $16.3 million in 2003. SWB expense for our corporate office was $8.0 million for 2004 compared to $4.7 million for 2003 as the result of the hiring of additional staff necessary to manage the inpatient facilities and inpatient management contracts acquired during 2003 and 2004.

     Professional fees. Professional fees were $52.2 million for the year ended December 31, 2004, or 11.1% of total revenue, compared to $32.1 million for the year ended December 31, 2003, or 11.6% of total revenue. Professional fees for owned and leased inpatient facilities were $45.3 million in 2004, or 10.8% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $26.9 million in 2004, or 11.0% of revenue, compared to $26.2 million in 2003, or 11.7% of revenue. Professional fees for inpatient management contracts were $3.6 million in 2004 compared to $3.9 million in 2003. Professional fees for corporate office were approximately $3.3 million in 2004 compared to approximately $1.9 million in 2003. The increase in professional fees in our corporate office relates to accounting, legal and other services required to meet the needs of a public company and achieving our acquisition strategy.

     Supplies. Supplies expense was $29.7 million for the year ended December 31, 2004, or 6.3% of total revenue, compared to $15.8 million for the year ended December 31, 2003, or 5.7% of total revenue. Supplies expense for owned and leased inpatient facilities was $28.8 million in 2004, or 6.9% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $16.9 million in 2004, or 6.9% of revenue, compared to $15.2 million in 2003, or 6.8% of revenue. Supplies expense for inpatient management contracts was $0.7 million in 2004 compared to $0.4 million in 2003. Supplies expense at owned and leased inpatient facilities has historically comprised the majority of our supplies expense as a whole; however, inpatient management contracts began to utilize supplies to a larger extent beginning in the second half of 2003 due to the assumption of inpatient management contracts from Ramsay. Supplies expense for our corporate office consists of office supplies and is negligible to supplies expense overall.

     Provision for doubtful accounts. The provision for doubtful accounts was $10.8 million for the year ended December 31, 2004, or 2.3% of total revenue, compared to $6.3 million for the year ended December 31, 2003, or 2.3% of total revenue. The provision for doubtful accounts at owned and leased inpatient facilities comprises the majority of our provision for doubtful accounts as a whole.

     Other operating expenses. Other operating expenses were approximately $61.6 million for the year ended December 31, 2004, or

13.1% of total revenue, compared to $47.2 million for the year ended December 31, 2003, or 17.0% of total revenue. Other operating expenses for owned and leased inpatient facilities were $40.4 million in 2004, or 9.6% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $21.4 million in 2004, or 8.8% of revenue, compared to $21.4 million in 2003, or 9.6% of revenue. Other operating expenses for inpatient management contracts were $18.0 million in 2004 compared to $23.5 million in 2003. This decrease in other operating expenses for inpatient management contracts on a same-facility basis, as compared to 2003, is primarily attributable to the net presentation of pharmacy receipts related to our Tennessee case management contract as an offset to other operating expenses. Other operating expenses at our corporate office increased to $3.3 million in 2004 from approximately $2.3 million in 2003.

     Depreciation and amortization. Depreciation and amortization expense was $9.8 million for the year ended December 31, 2004 compared to $5.7 million for the year ended December 31, 2003, an increase of approximately $4.1 million. This increase in depreciation and amortization expense is primarily the result of the numerous acquisitions of inpatient facilities during 2003 and 2004.

     Interest expense, net. Interest expense, net of interest income, was $19.0 million for the year ended December 31, 2004 compared to $14.8 million for the year ended December 31, 2003, an increase of $4.2 million or 28.3%. The increase in interest expense is primarily attributable to the increase in our long-term debt during 2004. We began 2004 with $175.0 million in long-term debt, increasing to $191.9 million, $249.6 million and $244.4 million for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, respectively, due to borrowings under our revolving line of credit to finance the acquisition of inpatient behavioral health care facilities. On December 31, 2004, we had $174.3 million in long-term debt as the result of repaying borrowings under our revolving line of credit with proceeds from our secondary offering of common stock that closed on December 20, 2004.

     Other expenses. Other expenses in 2004 consisted of $6.4 million in loss on the refinancing of our former senior credit facility. Other expenses in 2003 consisted of $4.9 million in loss on the refinancing of our long-term debt, $1.0 million in expense recorded to recognize the increase in fair value of stock purchase “put” warrants (for additional information on these warrants, see “Liquidity and Capital Resources” below) and the release of $0.5 million in reserves related to our stockholder notes.

     Income from discontinued operations, net of taxes. Income from discontinued operations (net of income tax effect) of approximately $0.3 million and $0.5 million for the years ended December 31, 2004 and 2003, respectively, resulted from eight contracts to manage inpatient facilities for the Florida Department of Juvenile Justice. These contracts were assumed in the Ramsay acquisition in 2003 and three were terminated in 2006, two were terminated in 2005 and three were terminated in 2004.

Liquidity and Capital Resources

     Working capital at December 31, 2005 was $138.8 million, including cash and cash equivalents of $54.7 million, compared to working capital of $39.8 million, including cash and cash equivalents of $33.5 million, at December 31, 2004. At December 31, 2004, our current liabilities included $20 million of our 10⁵/₈% Notes, which were repaid on January 14, 2005. The increase in working capital is primarily due to working capital acquired with Ardent Behavioral and an increase in cash and cash equivalents.

     Cash provided by continuing operating activities was $79.6 million for the year ended December 31, 2005 compared to $39.9 million for the year ended December 31, 2004. The increase in cash flows from operating activities was primarily due to the cash generated from the inpatient facilities we acquired in 2005 and the full year operations of the inpatient facilities acquired during 2004.

     Cash used in investing activities was $536.4 million for the year ended December 31, 2005 compared to $154.2 million for the year ended December 31, 2004. Cash used in investing activities for the year ended December 31, 2005 was primarily the result of $514.5 million paid for acquisitions and $21.8 million paid for the purchases of fixed assets. Cash used in the acquisition of Ardent Behavioral was approximately $506 million, which came from borrowings on our revolving credit facility and senior secured term facility and our issuance of 7³/₄% Notes. Cash used for routine and expansion capital expenditures was approximately $13.4 million and $8.4 million, respectively, for the year ended December 31, 2005. We define expansion capital expenditures as those which increase our capacity or otherwise enhance revenue. Routine or maintenance capital expenditures were 1.9% of our net revenue for the year ended December 31, 2005. Cash used in investing activities for the year ended December 31, 2004 was primarily the result of $136.5 million paid for acquisitions and capital expenditures of approximately $17.2 million. During 2004 we acquired ten inpatient behavioral health care facilities, including four inpatient facilities from Heartland. During 2004, our capital expenditures included typical routine capital expenditures of approximately $7.0 million, as well as expansion capital expenditures.

     Cash provided by financing activities was $477.9 million for the year ended December 31, 2005 compared to $102.5 million for the year ended December 31, 2004. During 2005, we raised $220 million from our offering of 7³/₄% Notes and borrowed $325 million under our Senior Secured Term Facility. Also during 2005, we repaid approximately $111.3 million of our 10⁵/₈% Notes and $125 million of our senior secured term facility and as a result paid approximately $15.4 million in refinancing costs. We raised approximately $199.0 million from issuances of our common stock during 2005 as a result of an offering of our common stock and stock option exercises. During 2005, we paid approximately $13.9 million in loan and issuance costs related to borrowings of long-term debt and issuances of common stock. During 2004, we received cash from an offering of our common stock and stock option

exercises of approximately $109.1 million. Also during 2004, we paid approximately $3.8 million to refinance our long-term debt and $2.3 million in loan and issuance costs.

     On September 20, 2005, we received net proceeds of approximately $192.6 million on the sale of 8,050,000 shares of our common stock at a price of $25.12 per share. This sale of common stock drew upon a universal shelf registration statement on Form S-3 registering $250.0 million of our common stock, common stock warrants, preferred stock and debt securities. We have approximately $47.8 million available under this universal shelf registration statement and may from time to time offer these securities, in one or more series, in amounts, at prices and on terms satisfactory to us. We repaid $125 million on our senior secured term loan facility with proceeds from this sale of our common stock. These repayments are permanent and we cannot re-borrow amounts previously repaid on the senior secured term loan facility. We recorded a loss on refinancing long-term debt of approximately $2.8 million to write off capitalized finance costs associated with the debt that was repaid. The remainder of the proceeds from this sale of our common stock was used to repay all indebtedness outstanding under our revolving credit facility.

     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 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.

Obligations and Commitments

	Payments Due by Period (in thousands)
			Less than						After
	Total		1 year		1-3 years		3-5 years		5 years
Long-term debt (1):
Senior Credit Facility:
Senior Secured Term Loan Facility, expiring on July 1, 2012 and bearing interest of 6.2% at December 31, 2005	$	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 2037 and 2038 bearing fixed interest rates of 5.65% to 5.95%		23,377		248		542		608		21,979
		482,058		248		542		608		480,660
Lease and other obligations		47,053		15,471		9,495		5,584		16,503
Total contractual obligations	$	529,111	$	15,719	$	10,037	$	6,192	$	497,163

(1) Excludes capital lease obligations, 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 $227.4 million and approximately $44.0 million, respectively, as of December 31, 2005. The fair value of our $150 million 10⁵/₈% Notes was approximately $173 million as of December 31, 2004. The carrying value of our other long-term debt, including current maturities, of $223.7 million and $24.3 million at December 31, 2005 and December 31, 2004, respectively, approximated fair value. We had zero and $200 million, respectively, of variable rate debt outstanding under our revolving credit facility and term loan facility as of December 31, 2005. In addition, interest rate swap agreements effectively convert $38.7 million of fixed rate debt into variable rate debt at December 31, 2005. At our December 31, 2005 borrowing level, a hypothetical 10% increase in interest rates would decrease our annual net income and cash flows by approximately $1.0 million.

Impact of Inflation and Economic Trends

     Although inflation has not had a material impact on our results of operations, the health care industry is very labor intensive and salaries and benefits are subject to inflationary pressures as are rising supply costs which tend to escalate as vendors pass on the rising costs through price increases. Some of our freestanding owned, leased and managed inpatient behavioral health care facilities we operate are experiencing the effects of the tight labor market, including a shortage of nurses, which has caused and may continue to cause an increase in our SWB expense in excess of the inflation rate. Although we cannot predict our ability to cover future cost increases, management believes that through adherence to cost containment policies, labor management and reasonable price increases, the effects of inflation on future operating margins should be manageable. Our ability to pass on increased costs associated

with providing health care to Medicare and Medicaid patients is limited due to various federal, state and local laws which have been enacted that, in certain cases, limit our ability to increase prices. In addition, as a result of increasing regulatory and competitive pressures and a continuing industry wide shift of patients into managed care plans, our ability to maintain margins through price increases to non-Medicare patients is limited.

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

Critical Accounting Policies

     Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses included in 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 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 December 31, 2005, 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 inpatient facilities purchased from Ardent were added to our insurance program on July 1, 2005. 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 hampers 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.

EX-99.3

Exhibit 99.3

Item 8. Financial Statements and Supplementary Data.

PSYCHIATRIC SOLUTIONS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
Report of Independent Registered Public Accounting Firm		F-2
Management’s Report on Internal Control over Financial Reporting		F-3
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting		F-4
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2005 and 2004		F-5
Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003		F-6
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003		F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		F-8
Notes to Consolidated Financial Statements		F-10

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Psychiatric Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Psychiatric Solutions, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Psychiatric Solutions, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Psychiatric Solutions, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2006, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Nashville, Tennessee
February 28, 2006, except for Note 4,
as to which the date is November 28, 2006

F-2

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2005 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Psychiatric Solutions, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Psychiatric Solutions, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Psychiatric Solutions, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Psychiatric Solutions, Inc. maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Psychiatric Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Psychiatric Solutions, Inc. as of December 31, 2005 and 2004 and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005 of Psychiatric Solutions, Inc. and our report dated February 28, 2006, except for Note 4, as to which the date is November 28, 2006, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Nashville, Tennessee
February 28, 2006

F-4

PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

	December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	54,700		$	33,451
Accounts receivable, less allowance for doubtful accounts of $15,355 and $10,662, respectively		132,288			75,329
Prepaids and other		52,142			17,217
Total current assets		239,130			125,997
Property and equipment:
Land		79,139			30,461
Buildings		289,946			182,709
Equipment		37,968			19,942
Less accumulated depreciation		(28,891	)		(15,185	)
		378,162			217,927
Cost in excess of net assets acquired		526,536			128,962
Other assets		31,203			23,798
Total assets	$	1,175,031		$	496,684
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,726		$	10,058
Salaries and benefits payable		46,872			26,751
Other accrued liabilities		34,363			28,581
Current portion of long-term debt		325			20,764
Total current liabilities		100,286			86,154
Long-term debt, less current portion		482,064			153,572
Deferred tax liability		32,151			8,020
Other liabilities		20,818			4,423
Total liabilities		635,319			252,169
Stockholders’ equity:
Common stock, $0.01 par value, 125,000 shares authorized; 52,430 and 40,935 issued and outstanding, respectively		524			409
Additional paid-in capital		495,768			227,840
Accumulated earnings		43,420			16,266
Total stockholders’ equity		539,712			244,515
Total liabilities and stockholders’ equity	$	1,175,031		$	496,684

See accompanying notes.

F-5

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

	Year Ended December 31,
	2005		2004		2003
Revenue	$	715,324	$	470,969	$	277,575
Salaries, wages and employee benefits		392,309		254,897		142,292
Professional fees		73,177		52,200		32,086
Supplies		42,993		29,717		15,765
Rentals and leases		11,450		8,876		3,989
Other operating expenses		74,529		52,767		43,185
Provision for doubtful accounts		13,498		10,794		6,312
Depreciation and amortization		14,738		9,808		5,707
Interest expense		27,056		18,964		14,778
Loss on refinancing long-term debt		21,871		6,407		4,856
Change in valuation of put warrants		—		—		960
Change in reserve of stockholder notes		—		—		(545	)
		671,621		444,430		269,385
Income from continuing operations before income taxes		43,703		26,539		8,190
Provision for income taxes		16,836		10,085		3,477
Income from continuing operations		26,867		16,454		4,713
Income from discontinued operations, net of income tax provision of $180, $213 and $308 for 2005, 2004 and 2003, respectively		287		347		503
Net income		27,154		16,801		5,216
Accrued preferred stock dividends		—		663		811
Net income available to common stockholders	$	27,154	$	16,138	$	4,405
Basic earnings per share:
Income from continuing operations	$	0.60	$	0.54	$	0.23
Income from discontinued operations, net of taxes		0.01		0.01		0.03
Net income	$	0.61	$	0.55	$	0.26
Diluted earnings per share:
Income from continuing operations	$	0.58	$	0.47	$	0.20
Income from discontinued operations, net of taxes		0.01		0.01		0.02
Net income	$	0.59	$	0.48	$	0.22
Shares used in computing per share amounts:
Basic		44,792		29,140		16,740
Diluted		46,296		35,146		23,498

See accompanying notes.

F-6

PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

							Additional			Notes			Accumulated			Accumulated
	Common Stock						Paid-In			Receivable from			Unrealized			Earnings
	Shares			Amount			Capital			Stockholders			Losses			(Deficit)			Total
Balance at December 31, 2002		15,477		$	155		$	34,930		$	(259	)	$	—		$	(4,277	)	$	30,549
Issuance of common stock		6,543			65			48,832			—			—			—			48,897
Conversion of convertible debt		1,076			11			4,574			—			—			—			4,585
Payment of notes receivable from stockholders with stock		(96	)		(1	)		(482	)		466			—			—			(17	)
Change in reserve on stockholder notes		—			—			—			(545	)		—			—			(545	)
Exercise of stock options and warrants		873			9			3,263			—			—			—			3,272
Income tax benefit of stock option exercises		—			—			186			—			—			—			186
Unrealized loss on investments available for sale		—			—			—			—			(4	)		—			(4	)
Net income available to common stockholders		—			—			—			—			—			4,405			4,405
Balance at December 31, 2003		23,873			239			91,303			(338	)		(4	)		128			91,328
Issuance of common stock		6,570			66			104,625			—			—			—			104,691
Conversion of series A convertible preferred stock		9,627			96			25,819			—			—			—			25,915
Payment on notes receivable from stockholders		—			—			—			338			—			—			338
Exercise of stock options and warrants		865			8			4,420			—			—			—			4,428
Income tax benefit of stock option exercises		—			—			1,673			—			—			—			1,673
Unrealized gain on investments available for sale		—			—			—			—			4			—			4
Net income available to common stockholders		—			—			—			—			—			16,138			16,138
Balance at December 31, 2004		40,935			409			227,840			—			—			16,266			244,515
Issuance of common stock, net of issuance costs		8,050			81			191,917			—			—			—			191,998
Common stock issued in acquisition		2,726			27			64,738			—			—			—			64,765
Exercise of stock options		719			7			6,378			—			—			—			6,385
Income tax benefit of stock option exercises		—			—			4,895			—			—			—			4,895
Net income available to common stockholders		—			—			—			—			—			27,154			27,154
Balance at December 31, 2005		52,430		$	524		$	495,768		$	—		$	—		$	43,420		$	539,712

See accompanying notes.

F-7

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

	Year Ended December 31,
	2005			2004			2003
Operating activities:
Net income	$	27,154		$	16,801		$	5,216
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Depreciation and amortization		14,738			9,808			5,707
Amortization of loan costs		1,187			691			1,478
Loss on refinancing long-term debt		21,871			6,407			4,856
Change in income tax assets and liabilities		9,494			6,920			2,809
Change in valuation of put warrants		—			—			960
(Release of) additional reserve on stockholder notes		—			—			(545	)
Income from discontinued operations, net of taxes		(287	)		(347	)		(503	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(9,399	)		(3,066	)		(3,318	)
Prepaids and other current assets		(3,673	)		2,388			4,205
Accounts payable		2,116			(5,327	)		(2,299	)
Salaries and benefits payable		2,598			5,199			1,318
Accrued liabilities and other liabilities		13,340			391			198
Other		463			—			—
Net cash provided by continuing operating activities		79,602			39,865			20,082
Net cash provided by (used in) discontinued operating activities		173			295			(1,528	)
Net cash provided by operating activities		79,775			40,160			18,554
Investing activities:
Cash paid for acquisitions, net of cash acquired		(514,525	)		(136,495	)		(99,856	)
Capital purchases of leasehold improvements, equipment and software		(21,750	)		(17,201	)		(5,747	)
Purchases of short-term investments		(29,400	)		—			—
Sales of short-term investments		29,400			—			—
Sale (purchase) of long-term securities		—			953			(971	)
Cash paid for investments in equity method investees		(1,340	)		—			—
Other assets		1,219			(1,417	)		(1,148	)
Net cash used in continuing investing activities		(536,396	)		(154,160	)		(107,722	)
Net cash used in discontinued investing activities		—			—			(568	)
Net cash used in investing activities		(536,396	)		(154,160	)		(108,290	)

(Continued)

F-8

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

	Year Ended December 31,
	2005			2004			2003
Financing activities:
Net decrease in revolving credit facility, less acquisitions	$	—		$	—		$	(34,148	)
Borrowings on long-term debt		545,000			—			159,981
Principal payments on long-term debt		(236,822	)		(810	)		(63,853	)
Payment of loan and issuance costs		(13,932	)		(2,300	)		(1,998	)
Refinancing of long-term debt		(15,398	)		(3,844	)		(1,410	)
Proceeds from issuance of series A convertible preferred stock, net of issuance costs		—			—			24,505
Proceeds from public offering of common stock		192,637			104,691			48,897
Proceeds from exercises of common stock options		6,385			4,428			318
Proceeds from repayment of stockholder notes		—			338			—
Net cash provided by financing activities		477,870			102,503			132,292
Net increase (decrease) in cash		21,249			(11,497	)		42,556
Cash and cash equivalents at beginning of the year		33,451			44,948			2,392
Cash and cash equivalents at end of the year	$	54,700		$	33,451		$	44,948
Supplemental Cash Flow Information:
Interest paid	$	16,694		$	18,821		$	13,326
Income taxes paid	$	7,490		$	3,354		$	318
Effect of Acquisitions:
Assets acquired, net of cash acquired	$	624,821		$	148,345		$	199,578
Cash paid for prior year acquisitions		5,793			—			—
Liabilities assumed		(51,324	)		(11,850	)		(35,957	)
Common stock issued		(64,765	)		—			—
Long-term debt issued		—			—			(63,765	)
Cash paid for acquisitions, net of cash acquired	$	514,525		$	136,495		$	99,856
Significant Non-cash Transactions:
Refinancing of long-term debt	$	6,473		$	2,563		$	3,446
Issuance of common stock upon conversion of series A convertible preferred stock	$	—		$	25,915		$	—
Financing of loan costs	$	—		$	—		$	9,172
Issuance of common stock upon conversion of convertible debt	$	—		$	—		$	4,585
Issuance of common stock upon exercise of warrants	$	—		$	—		$	2,979

See accompanying notes.

F-9

1. Summary of Significant Accounting Policies

Description of Business

Psychiatric Solutions, Inc. was incorporated in 1988 as a Delaware corporation and has its corporate office in Franklin, Tennessee. Psychiatric Solutions, Inc. and its subsidiaries (“we,” “us” or “our”) are a leading provider of inpatient behavioral health care services in the United States. Through our owned and leased facilities, we operated 55 owned or leased inpatient behavioral health care facilities with approximately 6,400 beds in 27 states at December 31, 2005. In addition, our management contract segment manages inpatient behavioral health care units for third parties.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The majority of our expenses are “cost of revenue” items. Costs that could be classified as general and administrative expenses at our corporate office were approximately 3% of net revenue for the year ended December 31, 2005.

The consolidated financial statements include the accounts of Psychiatric Solutions, Inc. and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

All shares and per share amounts have been adjusted to reflect a 2-for-1 stock split which was completed on January 9, 2006.

Cash and Cash Equivalents

Cash consists of demand deposits held at financial institutions. We place our cash in financial institutions that are federally insured. At December 31, 2005, the majority of our cash is deposited with two financial institutions. Cash equivalents are short-term investments with original maturities of three months or less.

Accounts Receivable

Accounts receivable vary according to the type of service being provided. Accounts receivable for our owned and leased facilities segment is comprised of patient service revenue and is recorded net of allowances for contractual discounts and estimated doubtful accounts. Such amounts are owed by various governmental agencies, insurance companies and private patients. Medicare comprised approximately 11% of net patient receivables for our owned and leased facilities segment at December 31, 2005 and 2004. Medicaid comprised approximately 38% and 31% of net patient receivables for our owned and leased facilities segment at December 31, 2005 and 2004, respectively. Concentration of credit risk from other payors is reduced by the large number of patients and payors.

Accounts receivable for our management contract segment is comprised of contractually determined fees for services rendered. Such amounts are recorded net of estimated allowances for doubtful accounts. Concentration of credit risk is reduced by the large number of customers.

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 is 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 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 on receivables due under our inpatient management contracts is contract 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

F-10

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.

Income Taxes

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

Long-Lived Assets

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the useful lives of the assets, which range from 25 to 35 years for buildings and improvements and 2 to 7 years for equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful lives of the assets. Depreciation expense was $14.0 million, $8.8 million and $4.7 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Cost in Excess of Net Assets Acquired (Goodwill)

We account for acquisitions using the purchase method of accounting. Goodwill is generally allocated to reporting units based on operating results. Goodwill is reviewed at least annually for impairment. Potential impairment is noted for a reporting unit if its carrying value exceeds the fair value of the reporting unit. For those reporting units that we have identified with potential impairment of goodwill, we determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, an impairment loss is recorded. Our annual impairment test of goodwill in 2005 and 2004 resulted in no goodwill impairment.

The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2004 (in thousands):

Balance at December 31, 2003	$	67,828
Acquisition of Brentwood		3,956
Acquisition of Palmetto		5,349
Acquisition of Heartland		44,714
Acquisition of Piedmont		5,703
Acquisition of Alliance Behavioral		7,552
Release of deferred tax asset valuation allowance		(6,684	)
Other		544
Balance at December 31, 2004		128,962
Acquisition of Ardent Behavioral		393,017
Release of deferred tax asset valuation allowance		(395	)
Other		4,952
Balance at December 31, 2005	$	526,536

Other Assets

Other assets include contracts that represent the fair value of inpatient management contracts and service contracts purchased and are being amortized using the straight-line method over their estimated life, which is between 4 years and 5 years. At December 31, 2005 and 2004, contracts totaled $1.4 million and $2.1 million and are net of accumulated amortization of $2.0 million and $1.3 million, respectively. Amortization expense related to contracts was $701,000, $987,000 and $944,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Estimated amortization expense for the years ended December 31, 2006, 2007 and 2008 of contracts is $690,000, $690,000 and $13,000, respectively, upon which the contracts will be fully amortized.

When events, circumstances and operating results indicate that the carrying values of certain long-lived assets and the related identifiable intangible assets might be impaired, we prepare projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fair value. Fair value is estimated based upon projections of discounted cash flows.

Other assets also include loan costs that are deferred and amortized over the term of the related debt. Loan costs at December 31, 2005 and 2004 totaled $13.9 million and $8.3 million and are net of accumulated amortization of $1.6 million and $966,000, respectively.

F-11

The weighted average amortization period for loan costs incurred in 2005 is approximately 8 years. Amortization expense related to loan costs, which is reported as interest expense, was approximately $1.2 million, $700,000 and $1.5 million for the years ended December 31, 2005, 2004 and 2003, respectively. Estimated amortization expense of loan costs for the years ended December 31, 2006, 2007, 2008, 2009 and 2010 is $1.6 million, $1.7 million, $1.7 million, $1.7 million and $1.4 million, respectively.

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement on Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123 (“SFAS 148”). SFAS 148 amends Statement on Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 had no material impact on our results of operations or financial position. We have included the required disclosures below and in Note 10.

We account for our stock option plans using the intrinsic value method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations as more fully described in Note 10. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. We will begin expensing stock options in the first quarter of 2006 in accordance with Statement of Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment (“SFAS 123R”). See Recent Accounting Pronouncements for a discussion of SFAS 123R.

Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if we had accounted for our employee stock options under the fair value method of that Statement. During 2005, 2004 and 2003, we granted approximately 2.2 million, 1.4 million and 1.4 million stock options, respectively. The fair value of these options was estimated using the Black-Scholes option pricing model.

The following weighted-average assumptions were used in the respective pricing models:

	2005			2004			2003
Risk-free interest rate		4.16	%		3.17	%		2.79	%
Expected volatility		32.65	%		31.87	%		51.99	%
Expected life		5.0			5.2			5.6
Dividend yield		0.00	%		0.00	%		0.00	%

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

	2005		2004		2003
Exercise Price equal to Market Price	$	7.83	$	3.67	$	2.53
Exercise Price less than Market Price	$	—	$	—	$	—
Exercise Price greater than Market Price	$	—	$	—	$	2.52

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

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

	2005		2004		2003
Net income available to common stockholders	$	27,154	$	16,138	$	4,405
Pro forma compensation expense from stock options, net of tax		4,361		1,691		605
Pro forma net income	$	22,793	$	14,447	$	3,800
Basic earnings per share:
As reported	$	0.61	$	0.55	$	0.26
Pro forma	$	0.51	$	0.50	$	0.23
Diluted earnings per share:
As reported	$	0.59	$	0.48	$	0.22
Pro forma	$	0.49	$	0.43	$	0.20

F-12

Derivatives

During 2005 we exited approximately $11.3 million of our $50 million in interest rate swap agreements entered into during 2004 to manage our exposure to fluctuations in interest rates. These interest rate swap agreements effectively convert $38.7 million of fixed-rate long-term debt to a LIBOR indexed variable rate instrument plus an agreed upon interest rate spread. Under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”), we have designated our interest rate swap agreements as fair value hedges. Accordingly, the changes in the fair value of the interest rate swaps are recorded in interest expense. If our derivatives were deemed to be cash flow hedges under SFAS 133, changes in the fair value of the derivatives would be recognized as other comprehensive income and recorded to the income statement in the period when the hedged item affects earnings. We believe our interest rate swap agreements to be highly effective in offsetting fair value changes in our hedged fixed-rate long-term debt.

Risk Management

We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. At December 31, 2005, all of our operations have professional and general liability insurance in umbrella form for claims in excess of a $3.0 million self-insured retention with an insured excess limit of $50.0 million. The facilities purchased from Ardent were added to our insurance program on July 1, 2005. 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 hampers timely adjustments to the assumptions used in these estimates. The reserve for professional and general liability was approximately $13.8 million and $4.9 million as of December 31, 2005 and 2004, respectively.

We carry statutory workers’ compensation insurance from an unrelated commercial insurance carrier. Our statutory workers’ compensation program is fully insured with a $350,000 deductible per accident. We believe that adequate provision has been made for workers’ compensation and professional and general liability risk exposures. The reserve for workers’ compensation liability was approximately $13.5 million and $5.4 million as of December 31, 2005 and 2004, respectively.

Fair Value of Financial Instruments

The carrying amounts reported in the accompanying Consolidated Balance Sheets for cash, accounts receivable, and accounts payable approximate their fair value given the short-term maturity of these instruments. At December 31, 2005, the carrying value and fair value of our 7³/₄% Senior Subordinated Notes (the “7³/₄% Notes”) was $220 million and $227.4 million, respectively, and the carrying value and fair value of our 10⁵/₈% Senior Subordinated Notes (the “10⁵/₈% Notes”) was $38.7 million and $44.0 million, respectively. At December 31, 2004, the carrying value and fair value of our 10⁵/₈% Notes was approximately $150 million and $173 million, respectively. Based upon the borrowing rates currently available to us, the carrying amounts reported in the accompanying Consolidated Balance Sheets for other long-term debt approximate fair value.

Reclassifications

Certain reclassifications have been made to the prior year to conform with current year presentation.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, which 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. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. On April 15, 2005, the Securities and Exchange Commission extended the effective date of SFAS No. 123R to the first interim reporting period of the first fiscal year beginning on or after June 15, 2005. We began expensing stock options in accordance with SFAS No. 123R under the prospective method in the first quarter of 2006. We believe the impact of adopting SFAS No. 123R on our 2006 financial results will be approximately $0.09 to $0.11 per diluted share. However, because of the uncertainty surrounding future grants and the variables necessary to value them, actual expense recorded in 2006 upon adoption of SFAS No. 123R may differ materially.

F-13

2. Revenue

Revenue consists of the following amounts (in thousands):

	December 31,
	2005		2004		2003
Patient service revenue	$	663,236	$	419,701	$	223,340
Management fee revenue		52,088		51,268		54,235
Total revenue	$	715,324	$	470,969	$	277,575

Net Patient Service Revenue

Patient service revenue is reported on the accrual basis in the period in which services are provided, at established rates, regardless of whether collection in full is expected. Net patient service revenue includes amounts we estimate to be reimbursable by Medicare and Medicaid under provisions of cost or prospective reimbursement formulas in effect. Amounts received are generally less than the established billing rates of the facilities and the differences (contractual allowances) are reported as deductions from patient service revenue at the time the service is rendered. The effect of other arrangements for providing services at less than established rates is also reported as deductions from patient service revenue. During the years ended December 31, 2005 and 2004, approximately 35% and 37%, respectively, of our revenues related to patients participating in the Medicaid program. During the years ended December 31, 2005 and 2004, approximately 13% and 12% of our revenues related to patients participating in the Medicare program.

We provide care without charge to patients who are financially unable to pay for the health care services they receive. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. Settlements under cost reimbursement agreements with third party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. Final determination of amounts earned under the Medicare and Medicaid programs often occur in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions.

Our revenue is particularly sensitive to regulatory and economic changes in the State of Texas. At December 31, 2005 and 2004, we operated eight inpatient facilities in Texas. At December 31, 2003, we operated seven inpatient facilities in Texas. We generated approximately 19%, 28% and 35% of our revenue from our Texas operations for the years ended December 31, 2005, 2004 and 2003, respectively.

Management Contract Revenue

Revenue is recorded as management contract revenue for our inpatient management contract segment. Our inpatient management contract segment receives contractually determined management fees from hospitals and clinics for providing inpatient psychiatric management and development services.

3. Earnings Per Share

Statement of Financial Accounting Standards No. 128, Earnings per Share (“SFAS 128”), 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 could share in the earnings of the entity. We have calculated earnings per share in accordance with SFAS 128 for all periods presented.

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

F-14

	Year ended December 31,
	2005		2004		2003
Numerator:
Basic earnings per share:
Income from continuing operations	$	26,867	$	16,454	$	4,713
Accrued dividends on series A convertible preferred stock		—		663		811
Income from continuing operations used in computing basic earnings per share		26,867		15,791		3,902
Income from discontinued operations, net of taxes		287		347		503
Net income available to common stockholders	$	27,154	$	16,138	$	4,405
Diluted earnings per share:
Income from continuing operations	$	26,867	$	16,454	$	4,713
Income from discontinued operations, net of taxes		287		347		503
Net income used in computing diluted earnings per share	$	27,154	$	16,801	$	5,216
Denominator:
Weighted average shares outstanding for basic earnings per share		44,792		29,140		16,740
Effects of dilutive stock options and warrants outstanding		1,504		1,139		862
Effect of dilutive series A convertible preferred stock outstanding		—		4,867		5,896
Shares used in computing diluted earnings per common share		46,296		35,146		23,498
Basic earnings per share:
Income from continuing operations	$	0.60	$	0.54	$	0.23
Income from discontinued operations, net of taxes		0.01		0.01		0.03
	$	0.61	$	0.55	$	0.26
Diluted earnings per share:
Income from continuing operations	$	0.58	$	0.47	$	0.20
Income from discontinued operations, net of taxes		0.01		0.01		0.02
	$	0.59	$	0.48	$	0.22

Diluted earnings per share for the year ended December 31, 2003 does not include the potential dilutive effect of debt outstanding which was convertible into 212,000 shares of our common stock, respectively, as the effect would be anti-dilutive. Interest expense related to this convertible debt was approximately $124,000 for the year ended December 31, 2003.

4. Discontinued Operations

Statement of Financial Accounting Standards 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 during 2006, two of our contracts during 2005 and three of our contracts during 2004 to manage state-owned facilities in Florida. The operations of these contracts were previously reported within our management contract segment. In 2006, we sold a therapeutic boarding school, previously reported within our owned and leased facilities segment. 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 income from discontinued operations, net of taxes, are as follows (in thousands):

F-15

	Year Ended December 31,
	2005		2004		2003
Revenue	$	14,911	$	26,904	$	16,090
Salaries, wages and employee benefits		10,331		18,646		11,207
Professional fees		836		2,039		1,207
Supplies		1,319		2,329		1,309
Rentals and leases		256		295		120
Other operating expenses		1,477		2,877		1,387
Provision for bad debts		68		80		2
Depreciation and amortization		109		78		47
Interest expense		48		—		—
		14,444		26,344		15,279
Income from discontinued operations before income taxes		467		560		811
Provision for income taxes		180		213		308
Income from discontinued operations, net of income taxes	$	287	$	347	$	503

5. Acquisitions

     2005 ACQUISITIONS

On July 1, 2005, we acquired Ardent Health Services, Inc. (“Ardent Behavioral”) an owner and operator of 20 inpatient psychiatric facilities. This acquisition was accounted for by the purchase method. The aggregate purchase price of this transaction was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The consolidated financial statements include the accounts and operations of the acquired entities for the period subsequent to the acquisition date. As the acquisition of Ardent Behavioral involved the acquisition of stock, the goodwill associated with this acquisition is not deductible for federal income tax purposes.

The following table summarizes the allocation of the aggregate purchase price of the aforementioned acquisition (in thousands):

	Ardent
	Behavioral
Assets acquired:
Accounts receivable	$	47,670
Other current assets		23,436
Fixed assets		152,355
Costs in excess of net assets acquired		393,017
Other assets		4,601
		621,079
Liabilities assumed		50,114
Common stock issued		64,765
Cash paid, net of cash acquired	$	506,200

The purchase price allocation for Ardent Behavioral is preliminary pending final measurement of certain assets and liabilities related to the acquisition.

     2004 ACQUISITIONS

During 2004, we acquired two inpatient psychiatric facilities from Brentwood Behavioral Health (“Brentwood”), all of the membership interests of Palmetto Behavioral Health System, L.L.C. (“Palmetto”), an operator of two inpatient behavioral health care facilities, four inpatient behavioral health care facilities from Heartland Healthcare (“Heartland”), an inpatient behavioral health care facility from Piedmont Behavioral Health Center LLC (“Piedmont”) and a system of inpatient behavioral health care facilities from Alliance Behavioral Health Group (“Alliance Behavioral”). These acquisitions were accounted for by the purchase method. The aggregate purchase price of these transactions was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The consolidated financial statements include the accounts and operations of the acquired entities for periods subsequent to the respective acquisition dates. As the acquisition of Palmetto involved the acquisition of membership interests, the goodwill

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associated with this acquisition is not deductible for federal income tax purposes. The goodwill associated with the other acquisitions during 2004 is deductible for federal income tax purposes.

The following table summarizes the allocation of the aggregate purchase price of the aforementioned acquisitions (in thousands):

									Alliance
	Brentwood		Palmetto		Heartland		Piedmont		Behavioral		Total
Assets acquired:
Accounts receivable	$	4,086	$	1,703	$	8,637	$	748	$	2,548	$	17,722
Other current assets		214		593		166		65		34		1,072
Fixed assets		27,868		4,877		17,563		4,970		4,328		59,606
Costs in excess of net assets acquired		3,956		5,349		44,714		5,703		7,552		67,274
Other assets		1,899		4		30		—		111		2,044
		38,023		12,526		71,110		11,486		14,573		147,718
Liabilities assumed		7,087		1,774		4,481		505		1,353		15,200
Cash paid, net of cash acquired	$	30,936	$	10,752	$	66,629	$	10,981	$	13,220	$	132,518

     2003 ACQUISITIONS

During 2003, we acquired Ramsay, an operator of 11 owned or leased inpatient behavioral health care facilities and 10 contracts to manage inpatient behavioral health care facilities for state government agencies. Also during 2003, we acquired six inpatient behavioral health care facilities from The Brown Schools, Inc. (“The Brown Schools”). In addition, we purchased Alliance Health Center (“Alliance”) and the Calvary Center (“Cavalry”) during 2003. These acquisitions were accounted for by the purchase method. The aggregate purchase price of these transactions was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The consolidated financial statements include the accounts and operations of the acquired entities for periods subsequent to the respective acquisition dates. Our liabilities assumed included approximately $3.3 million payable to the seller of Calvary upon the completion of certain licensing issues. This amount was paid to the seller in January 2004. As the acquisitions of Ramsay and Alliance involved the acquisition of stock, the goodwill associated with these acquisitions is not deductible for federal income tax purposes. The goodwill associated with the acquisitions of The Brown Schools and Calvary is deductible for federal income tax purposes.

The following table summarizes the allocation of the aggregate purchase price of the aforementioned acquisitions (in thousands):

			The Brown
	Ramsay		Schools		Alliance		Calvary		Total
Assets acquired:
Accounts receivable	$	18,396	$	11,367	$	1,901	$	70	$	31,734
Other current assets		7,228		1,046		139		20		8,433
Fixed assets		53,050		43,756		14,460		36		111,302
Costs in excess of net assets acquired		19,161		17,377		1,755		4,114		42,407
Other assets		1,496		591		—		9		2,096
		99,331		74,137		18,255		4,249		195,972
Liabilities assumed		18,536		9,601		4,229		3,591		35,957
Long-term debt issued		—		51,171		12,594		—		63,765
Cash paid, net of cash acquired	$	80,795	$	13,365	$	1,432	$	658	$	96,250

     Other Information

The following represents the unaudited pro forma results of consolidated operations as if the aforementioned acquisitions had occurred at the beginning of the immediate preceding period, after giving effect to certain adjustments, including the depreciation and amortization of the assets acquired based upon their fair values and changes in interest expense resulting from changes in consolidated debt:

	2005		2004		2003
Revenues	$	877,275	$	810,875	$	495,136
Net income available to common stockholders		34,515		25,430		11,688
Earnings per common share, basic	$	0.75	$	0.80	$	0.70

The pro forma information for the years ended December 31, 2005, 2004 and 2003 includes losses from refinancing long-term debt of approximately $21.9 million, $6.4 million and $4.9 million, respectively. The pro forma information given does not purport to be indicative of what our results of operations would have been if the acquisitions had in fact occurred at the beginning of the periods

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presented, and is not intended to be a projection of the impact on future results or trends.

6. Long-term debt

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

	December 31,
	2005		2004
Senior credit facility:
Senior Secured Term Loan Facility, expiring on July 1, 2012 and bearing interest of 6.2% at December 31, 2005	$	200,000	$	—
7 3/4% Notes		220,000		—
10 5/8% Notes		38,681		150,000
Mortgage loans on facilities, maturing in 2037 and 2038 bearing fixed interest rates of 5.65% to 5.95%		23,377		23,611
Other		331		725
		482,389		174,336
Less current portion		325		20,764
Long-term debt	$	482,064	$	153,572

Senior Credit Facility

As a result of entering into a new credit agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”) and terminating our former senior credit facility we recorded a loss on refinancing long-term debt of $6.4 million during 2004. On December 21, 2004, our Credit Agreement with Bank of America was amended and restated to provide for a revolving credit facility of up to $150 million. On July 1, 2005, we amended and restated our Credit Agreement 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 for the Ardent Behavioral acquisition. 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 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 December 31, 2005, 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 $600,000 for the year ended December 31, 2005.

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 December 31, 2005, 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 the $150 million bridge loan, which financed a portion of the purchase price for the acquisition 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.

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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. We classified $20 million of the 10⁵/₈% Notes as current portion of long-term debt on December 31, 2004. 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”). 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 and Riveredge Hospital near Chicago, Illinois. Interest accrues on the Holly Hill, West Oaks and Riveredge HUD loans at 5.95%, 5.85% and 5.65% and principal and interest are payable in 420 monthly installments through December 2037, September 2038 and December 2038, respectively. We used the proceeds from the mortgage loans to repay approximately $4.4 million in 2002 and $17.0 million in 2003 of our term debt under our former senior credit facility, pay certain financing costs, and fund required escrow amounts for future improvements to the property. The carrying amount of assets held as collateral approximated $22 million at December 31, 2005.

Other

At December 31, 2005, we had approximately $10.6 million of accrued interest expense in other accrued liabilities.

The aggregate maturities of long-term debt, including capital lease obligations, are as follows (in thousands):

2006	$	325
2007		367
2008		378
2009		338
2010		322
Thereafter		480,659
Total	$	482,389

7. Series A Convertible Preferred Stock

In conjunction with our acquisitions of The Brown Schools and Ramsay, we issued 4,545,454 shares of our series A convertible preferred stock for $25.0 million in equal installments in April and June of 2003. Each share of series A convertible preferred stock was convertible into one share of our common stock. Holders of our series A convertible preferred stock were entitled to receive pay-in-kind dividends, compounded quarterly, equal to 5% per share of the original share price through March 31, 2005 and 7% per share of the original share price thereafter. Because we may have been required to redeem the series A convertible preferred stock upon certain change of control events that may not have been within our control, the series A convertible preferred stock were classified outside of our permanent stockholders’ equity. During the year ended December 31, 2004, the holders of our series A convertible preferred stock converted all shares of series A convertible preferred stock and related accrued dividends into 9,626,940 shares of our common stock.

8. Leases

At December 31, 2005, future minimum lease payments under operating leases having an initial or remaining non-cancelable lease term in excess of one year are as follows (in thousands):

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2006	$	7,594
2007		5,321
2008		3,972
2009		3,469
2010		2,063
Thereafter		16,503
Total	$	38,922

9. Income Taxes

Total provision for income taxes for the years ended December 31, 2005, 2004 and 2003 was allocated as follows (in thousands):

	2005		2004		2003
Provision for income taxes attributable to income from continuing operations	$	16,836	$	10,085	$	3,477
Provision for income taxes attributable to income from discontinued operations		180		213		308
Total provision for income taxes	$	17,016	$	10,298	$	3,785

The provision for (benefit from) income taxes attributable to income from continuing operations consists of the following (in thousands):

	2005			2004			2003
Current:
Federal	$	(1,754	)	$	9,823		$	—
State		2,712			1,606			371
		958			11,429			371
Deferred:
Federal		16,556			(1,279	)		3,099
State		(912	)		(244	)		7
Foreign		234			179			—
		15,878			(1,344	)		3,106
Provision for income taxes	$	16,836		$	10,085		$	3,477

The tax benefits associated with nonqualified stock options decreased the current tax liability by $4.3 million, $2.2 million, and zero in 2005, 2004 and 2003, respectively, and increased noncurrent deferred tax assets by $0.5 million $ 0.3 million, and zero in 2005, 2004 and 2003, respectively. Such benefits were recorded as increases to stockholders’ equity.

The reconciliation of income tax computed by applying the U.S. federal statutory rate to the actual income tax (benefit) expense attributable to income from continuing operations is as follows (in thousands):

	2005		2004			2003
Federal tax	$	15,296	$	9,288		$	2,784
State income taxes (net of federal)		1,169		885			246
Other		371		(88	)		447
Provision for income taxes	$	16,836	$	10,085		$	3,477

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising temporary differences at December 31, 2005 and 2004 are as follows (in thousands):

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	2005			2004
Deferred tax assets:
Net operating loss carryforwards	$	34,370		$	15,491
Allowance for doubtful accounts		5,067			2,550
Alternative minimum tax credit carryovers		1,601			1,244
Accrued liabilities		12,603			8,270
Other		—			18
Total gross deferred tax assets		53,641			27,573
Less: Valuation allowance		(4,053	)		(3,435	)
Total deferred tax assets		49,588			24,138
Deferred tax liabilities:
Intangible assets		(11,092	)		(8,048	)
Property and equipment		(40,252	)		(15,002	)
Other		—			(453	)
Net deferred tax asset (liability)	$	(1,756	)	$	635

Deferred income taxes of $30.4 million and $8.7 million at December 31, 2005 and 2004, respectively, are included in other current assets. Noncurrent deferred income tax liabilities totaled $32.2 million and $8.0 million at December 31, 2005 and 2004, respectively. In connection with the Ardent Behavioral acquisition, we recorded net deferred tax assets of approximately $12.1 million, with a corresponding reduction in goodwill. Ardent Behavioral’s final income tax returns for the period ending on the acquisition date had not been completed at the time of this filing. The final determination of deferred tax assets and liabilities resulting from the Ardent Behavioral acquisition cannot be completed until such tax returns are filed. Any resulting adjustments to deferred tax assets and liabilities will be allocated to goodwill.

Current accounting standards generally accepted in the United States (“GAAP”) require that deferred income taxes reflect the tax consequences of differences between the tax bases of assets and liabilities and their carrying values for GAAP. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is established for those benefits that do not meet the more likely than not criteria. We have evaluated the need for a valuation allowance against deferred tax assets and have recorded valuation allowances of $4.1 million, $3.4 million and $11.3 million at December 31, 2005, 2004 and 2003, respectively. The net change in valuation allowance was an increase of $0.6 million for the year ended December 31, 2005 and a decrease of $7.8 million for the year ended December 31, 2004. Of the valuation allowance reported as of December 31, 2005, $3.0 million relates to amounts recorded in various acquisitions and any subsequent reductions to this portion of the valuation allowance would reduce goodwill. Reductions in valuation allowances of $0.2 million and $6.7 million during the years ended December 31, 2005 and December 31, 2004, respectively, were allocated to reduce goodwill.

As of December 31, 2005, we had federal net operating loss carryforwards of $79.7 million expiring in the years 2012 through 2025, state net operating loss carryforwards of $79.7 million expiring in various years through 2025, foreign net operating loss carryforwards of $4.3 million expiring through 2023 and an alternative minimum tax credit carryover of approximately $1.6 million available to reduce future federal income taxes.

10. Stock Option Plans

The Psychiatric Solutions, Inc. Equity Incentive Plan (the “Equity Incentive Plan”) was amended at our 2005 Annual Meeting of Stockholders to increase the number of shares of our common stock subject to grant under the Equity Incentive Plan to 9,866,666 from 5,866,666. Under the Equity Incentive Plan, options may be granted for terms of up to ten years and initial grants are generally exercisable in cumulative annual increments of 25% each year, commencing one year after the date of grant. Options granted subsequent to an employee’s initial grant are generally exercisable in cumulative increments of 25% each year, commencing on the date of grant. The exercise prices of incentive stock options and nonqualified options shall not be less than 100% and 85%, respectively, of the fair market value of the common shares on the trading day immediately preceding the date of grant.

The Psychiatric Solutions, Inc. Outside Directors’ Stock Option 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 was amended at our 2005 Annual Meeting of Stockholders to provide 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. Options for a maximum of 683,334 shares may be granted under the Directors’ Plan.

No options with exercise prices below fair market value were granted during 2005, 2004 or 2003.

Stock option activity, including options granted for acquisitions, is as follows (number of options in thousands):

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						Weighted
	Number			Option		Average
	of			Exercise		Exercise
	Options			Price		Price
Balance at December 31, 2002		2,146		$	0.44 to $15.00	$	4.61
Granted		1,426		$	2.53 to $6.88	$	5.39
Canceled		(166	)	$	0.44 to $15.00	$	5.69
Exercised		(128	)	$	0.44 to $4.78	$	2.46
Balance at December 31, 2003		3,278		$	0.44 to $15.00	$	4.97
Granted		1,420		$	9.98 to $13.10	$	10.65
Canceled		(248	)	$	1.52 to $15.00	$	6.81
Exercised		(918	)	$	0.44 to $15.00	$	5.86
Balance at December 31, 2004		3,532		$	0.44 to $15.00	$	6.89
Granted		2,154		$	19.31 to $27.35	$	21.75
Canceled		(495	)	$	1.52 to $23.28	$	13.36
Exercised		(719	)	$	0.44 to $20.69	$	8.88
Balance at December 31, 2005		4,472		$	0.44 to $27.35	$	13.01

     The following table summarizes information concerning outstanding and exercisable options at December 31, 2005 (number of options in thousands).

	Options Outstanding				Options Exercisable
			Weighted Avg.		Weighted
			Remaining		Average
	Number		Contractual		Exercise		Number
Exercise Prices	Outstanding		Life (in years)		Price		Exercisable
$0.44 to $4.99		1,059		6.3	$	2.60		743
$5.00 to $9.99		776		7.8	$	7.07		275
$10.00 to $14.99		742		8.1	$	10.52		255
$15.00 to $19.99		201		9.2	$	18.96		41
$20.00 to $24.99		1,580		9.4	$	21.08		234
$25.00 to $27.35		114		9.8	$	27.35	—
		4,472		8.2	$	7.92		1,548

11. Employee Benefit Plan

We sponsor the Psychiatric Solutions, Inc. Retirement Savings Plan (the “Plan”). The Plan is a tax-qualified profit sharing plan with a cash or deferred arrangement whereby employees who have completed three months of service and are age 21 or older are eligible to participate. The Plan allows eligible employees to make contributions of 1% to 85% of their annual compensation, subject to annual limitations. The Plan enables us to make discretionary contributions into each participants’ account that fully vest over a four year period based upon years of service.

12. Contingencies and Health Care Regulation

  Contingencies

We are subject to various claims and legal actions which arise in the ordinary course of business. We have professional liability insurance to protect against such claims or legal actions. We believe the ultimate resolution of such matters will be adequately covered by insurance and will not have a material adverse effect on our financial position or results of operations.

  Employment Agreements

Effective August 6, 2002, we entered into an Amended and Restated Employment Agreement with Joey A. Jacobs, our Chairman, Chief Executive Officer and President. Mr. Jacobs’ Amended and Restated Employment Agreement was amended on November 26, 2003. Mr. Jacobs’ agreement provides for an annual base salary and an annual cash incentive compensation award tied to objective criteria as established by the board of directors. The employment agreement has an initial term of one year and is subject to automatic annual renewals absent prior notice from either party.

Mr. Jacobs’ employment agreement provides for various payments to Mr. Jacobs upon cessation of employment, depending on the circumstances. If we terminate Mr. Jacobs’s employment “without cause” or if he resigns pursuant to a constructive discharge, then

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(i) all options scheduled to vest during the succeeding 24 month period will immediately vest and will remain exercisable for 12 months from the date of termination, (ii) certain restricted stock will immediately vest, (iii) Mr. Jacobs will receive a cash payment equal to 200% of his base salary and bonus earned during the twelve months prior to termination, and (iv) all benefits and perquisites will continue for 18 months. In the event of a change in control, his employment agreement requires that we pay him 200% of his base salary and bonus earned in the twelve months prior to termination, paid out over a period of 24 months, and to continue all benefits and perquisites for 18 months.

  Current Operations

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

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

We have acquired and may continue to acquire professional corporations with prior operating histories. Acquired corporations may have unknown or contingent liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although we attempt to assure ourselves that no such liabilities exist and obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.

13. Related Party Transactions

Joey Jacobs, our Chief Executive Officer, served as a member of the board of directors of Stones River Hospital until the first quarter of 2003, a hospital in which we manage a psychiatric unit pursuant to a management agreement. The term of the third amendment to the management agreement is two years, and automatically renews for one year terms unless terminated by either party. Total revenue from this management agreement was $783,000 for the year ended December 31, 2003. We believe the terms of the management agreement are consistent with management agreements negotiated at arms-length.

Edward Wissing, one of our outside directors, occasionally provided advisory and consulting services during 2002 to Brentwood Capital Advisors, our financial advisor. Mr. Wissing also was a party to a consulting arrangement with Brentwood Capital pursuant to which he provided certain consulting services. According to the terms of this consulting arrangement, Mr. Wissing received a fixed consulting fee of $5,000 per month beginning in August 2002 and ending in May 2003.

In January 2000, PMR loaned Mark. P. Clein, PMR’s chief executive officer at the time and currently one of our directors, $467,500 pursuant to promissory notes for the purchase of stock in connection with the exercise of stock options (the “Stock Notes”). The Stock Notes, due December 31, 2004, bear interest at the rate of 6.21% per annum and are with recourse in addition to being secured by stock under pledge agreements. PMR also received promissory notes from Mr. Clein for up to $257,208 for tax liabilities related to the purchase of such stock (the “Tax Notes”). The Tax Notes, due December 31, 2004, bore interest at the rate of 6.21% and were secured by stock pledges, but were otherwise without recourse. During the third quarter of 2004, Mr. Clien repaid the remaining principal balance of $338,000 on the Stock Notes and Tax Notes.

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

William M. Petrie, M.D., a member of the Company’s Board of Directors, serves as President of Psychiatric Consultants, P.C. (“PCPC”), a practice group managed by us, and owns a 14% interest in PCPC. The initial term of the management agreement was for three years. It was renewed for additional three year terms on April 11, 2000 and April 11, 2003. The management agreement will continue to automatically renew for three year terms unless terminated by either party. Our management fee was for the years ended December 31, 2005, 2004 and 2003 was $125,000, $137,000 and $112,000, respectively. At December 31, 2005 and 2004 PCPC owed us $89,000 and $21,000, respectively.

On February 4, 2003, our stockholders approved the private placement of $25 million of series A convertible preferred stock with

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affiliates of Oak Investment Partners and Salix Ventures and The 1818 Mezzanine Fund II, L.P. (“the 1818 Fund”). The 1818 Fund invested an aggregate of $1 million and received an aggregate of 181,818 shares of series A convertible preferred stock. Oak Investment Partners invested an aggregate of $20 million and received an aggregate of 3,636,364 shares of series A convertible preferred stock. Salix Ventures invested an aggregate of $4 million and received an aggregate of 727,272 shares of series A convertible preferred stock. One half of the series A convertible preferred stock was issued on April 1, 2003. The other half was issued on June 19, 2003. The 1818 Fund, Oak Investment Partners and Salix Ventures each had a representative who was a member of our board of directors when we sold the series A convertible preferred stock. The proceeds of the sale of the series A convertible preferred stock were used to acquire Ramsay, six facilities from The Brown Schools, and to pay down a portion of our long-term debt. During 2004, the holders of series A convertible preferred stock converted all outstanding shares of series A convertible preferred stock and related pay-in-kind dividends into 9,626,940 shares of our common stock.

14. Disclosures About Reportable Segments

In accordance with the criteria of Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information, (“SFAS 131”) 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 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 December 31, 2005, the owned and leased facilities segment provides mental health and behavioral heath services to patients in its 47 owned and 8 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, stock compensation and other items included in the caption labeled “Other expenses.” These other expenses may occur in future periods, but the amounts recognized can vary significantly from period to period and do not directly relate to 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 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):

Year ended December 31, 2005

	Owned and
	Leased		Management		Corporate
	Facilities		Contracts		and Other			Consolidated
Revenue	$	663,236	$	52,088	$	—		$	715,324
Adjusted EBITDA	$	121,010	$	10,074	$	(23,716	)	$	107,368
Interest expense, net		16,406		—		10,650			27,056
Provision for income taxes		2,142		—		14,694			16,836
Depreciation and amortization		13,308		680		750			14,738
Inter-segment expenses		25,716		2,919		(28,635	)		—
Other expenses:
Loss on refinancing long-term debt		—		—		21,871			21,871
Total other expenses		—		—		21,871			21,871
Income (loss) from continuing operations	$	63,438	$	6,475	$	(43,046	)	$	26,867
Total assets	$	1,018,276	$	29,285	$	127,470		$	1,175,031
Capital expenditures	$	17,592	$	52	$	4,106		$	21,750
Cost in excess of net assets acquired	$	506,160	$	20,376	$	—		$	526,536

F-24

Year ended December 31, 2004

	Owned and
	Leased		Management			Corporate
	Facilities		Contracts			and Other			Consolidated
Revenue	$	419,701	$	51,268		$	—		$	470,969
Adjusted EBITDA	$	66,351	$	10,007		$	(14,640	)	$	61,718
Interest expense, net		19,645		(15	)		(666	)		18,964
Provision for income taxes		2,737		—			7,348			10,085
Depreciation and amortization		8,366		1,082			360			9,808
Inter-segment expenses		11,471		2,968			(14,439	)		—
Other expenses:
Loss on refinancing long-term debt		—		—			6,407			6,407
Total other expenses		—		—			6,407			6,407
Income (loss) from continuing operations	$	24,132	$	5,972		$	(13,650	)	$	16,454
Total assets	$	401,633	$	31,217		$	63,834		$	496,684
Capital expenditures	$	15,632	$	—		$	1,569		$	17,201
Cost in excess of net assets acquired	$	105,121	$	23,841		$	—		$	128,962

Year ended December 31, 2003

	Owned and
	Leased		Management			Corporate
	Facilities		Contracts			and Other			Consolidated
Revenue	$	223,340	$	54,235		$	—		$	277,575
Adjusted EBITDA	$	32,407	$	10,489		$	(8,950	)	$	33,946
Interest expense, net		6,996		92			7,690			14,778
Provision for income taxes		2,165		73			1,239			3,477
Depreciation and amortization		4,409		1,108			190			5,707
Inter-segment expenses		5,640		1,292			(6,932	)		—
Other expenses:
Loss on refinancing long-term debt		—		—			4,856			4,856
Change in valuation of put warrants		—		—			960			960
Change in reserve of stockholder notes		—		(545	)		—			(545	)
Total other expenses		—		(545	)		5,816			5,271
Income (loss) from continuing operations	$	13,197	$	8,469		$	(16,953	)	$	4,713
Total assets	$	252,001	$	33,557		$	60,644		$	346,202
Capital expenditures	$	5,516	$	—		$	231		$	5,747
Cost in excess of net assets acquired	$	44,523	$	23,305		$	—		$	67,828

15. Other Information

A summary of activity in allowance for doubtful accounts follows (in thousands)

	Balances		Additions		Additions		Accounts written		Balances
	at beginning		charged to costs		charged to		off, net of		at end
	of period		and expenses		other accounts (1)		recoveries		of period
Allowance for doubtful accounts:
Year ended December 31, 2003		5,284		6,312		4,321		8,834		7,083
Year ended December 31, 2004		7,083		10,794		3,253		10,468		10,662
Year ended December 31, 2005		10,662		13,498		5,844		14,649		15,355

(1) Allowances as a result of acquisition.

16. Quarterly Information (Unaudited)

Summarized results for each quarter in the years ended December 31, 2005 and 2004 are as follows (in thousands, except per share data):

F-25

	1st Quarter			2nd Quarter		3rd Quarter		4th Quarter
2005
Revenue	$	134,268		$	139,490	$	220,458	$	221,108
Income from continuing operations	$	3,195		$	8,769	$	1,127	$	13,776
Net income	$	3,328		$	8,707	$	1,179	$	13,940
Earnings per share:
Basic	$	0.08		$	0.21	$	0.03	$	0.26
Diluted	$	0.08		$	0.21	$	0.02	$	0.26
2004
Revenue	$	99,392		$	112,958	$	127,430	$	131,189
(Loss) income from continuing operations	$	(160	)	$	5,090	$	5,194	$	6,330
Net (loss) income available to common stockholders	$	(360	)	$	4,923	$	5,215	$	6,360
Earnings per share:
Basic	$	(0.01	)	$	0.17	$	0.18	$	0.18
Diluted	$	(0.01	)	$	0.15	$	0.15	$	0.17

As discussed in Note 4, we terminated three of our contracts during 2006, two of our contracts during 2005 and three of our contracts during 2004 to manage state-owned facilities in Florida. In addition, we sold a therapeutic boarding school in 2006. These operations have been accounted for as discontinued operations in accordance with SFAS 144 and accordingly, have been presented as discontinued operations, net of income tax, and all prior quarterly data has been reclassified.

We incurred losses on refinancing long-term debt of approximately $7.0 million and $14.9 million during the first and third quarters of 2005, respectively. In the first quarter of 2004, we incurred a loss on refinancing long-term debt of approximately $6.4 million in conjunction with the termination of our former credit agreement.

17. 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 December 31, 2005 and 2004, and for the years ended December 31, 2005, 2004 and 2003. The information segregates the parent company (Psychiatric Solutions, Inc.), the combined wholly-owned subsidiary guarantors, the combined non-guarantors, and eliminations. All of the subsidiary guarantees are both full and unconditional and joint and several.

F-26

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	$	—		$	44,115	$	10,585	$	—		$	54,700
Accounts receivable, net		—			132,288		—		—			132,288
Prepaids and other		—			52,142		—		—			52,142
Total current assets		—			228,545		10,585		—			239,130
Property and equipment, net of accumulated depreciation		—			356,816		29,179		(7,833	)		378,162
Cost in excess of net assets acquired		—			526,536		—		—			526,536
Investment in subsidiaries		444,888			—		—		(444,888	)		—
Other assets		12,441			15,347		3,415		—			31,203
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:
Total 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

Condensed Consolidating Balance Sheet
As of December 31, 2004
(Dollars in thousands)

			Combined								Total
			Subsidiary			Combined Non-		Consolidating			Consolidated
	Parent		Guarantors			Guarantors		Adjustments			Amounts
Current Assets:
Cash and cash equivalents	$	—	$	30,988		$	2,463	$	—		$	33,451
Accounts receivable, net		—		75,329			—		—			75,329
Prepaids and other		—		16,242			975		—			17,217
Total current assets		—		122,559			3,438		—			125,997
Property and equipment, net of accumulated depreciation		—		195,848			30,155		(8,076	)		217,927
Cost in excess of net assets acquired		—		128,962			—		—			128,962
Investment in subsidiaries		160,065		—			—		(160,065	)		—
Other assets		6,791		13,442			3,565		—			23,798
Total assets	$	166,856	$	460,811		$	37,158	$	(168,141	)	$	496,684
Current Liabilities:
Accounts payable	$	—	$	10,058		$	—	$	—		$	10,058
Salaries and benefits payable		—		26,751			—		—			26,751
Other accrued liabilities		1,162		27,296			1,682		(1,559	)		28,581
Current portion of long-term debt		20,529		—			235		—			20,764
Total current liabilities		21,691		64,105			1,917		(1,559	)		86,154
Long-term debt, less current portion		130,195		—			23,377		—			153,572
Deferred tax liability		—		8,020			—		—			8,020
Other liabilities		3,325		(461	)		—		1,559			4,423
Total liabilities		155,211		71,664			25,294		—			252,169
Stockholders’ equity:
Total stockholders’ equity		11,645		389,147			11,864		(168,141	)		244,515
Total liabilities and stockholders’ equity	$	166,856	$	460,811		$	37,158	$	(168,141	)	$	496,684

F-27

Condensed Consolidating Statement of Income
For the Year Ended December 31, 2005
(Unaudited, dollars in thousands)

				Combined							Total
				Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent			Guarantors		Guarantors		Adjustments			Amounts
Revenue	$	—		$	715,324	$	11,073	$	(11,073	)	$	715,324
Salaries, wages and employee benefits		—			392,309		—		—			392,309
Professional fees		—			72,703		474		—			73,177
Supplies		—			42,993		—		—			42,993
Rentals and leases		—			11,450		—		—			11,450
Other operating expenses		—			73,728		8,313		(7,512	)		74,529
Provision for doubtful accounts		—			13,498		—		—			13,498
Depreciation and amortization		—			14,005		976		(243	)		14,738
Interest expense		25,823			—		1,233		—			27,056
Loss on refinancing long-term debt		21,871			—		—		—			21,871
		47,694			620,686		10,996		(7,755	)		671,621
(Loss) income from continuing operations before income taxes		(47,694	)		94,638		77		(3,318	)		43,703
(Benefit from) provision for income taxes		(18,376	)		35,212		—		—			16,836
(Loss) income from continuing operations		(29,318	)		59,426		77		(3,318	)		26,867
Income from discontinued operations, net of taxes		—			287		—		—			287
Net (loss) income	$	(29,318	)	$	59,713	$	77	$	(3,318	)	$	27,154

Condensed Consolidating Statement of Income
For the Year Ended December 31, 2004
(Unaudited, dollars in thousands)

				Combined							Total
				Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent			Guarantors		Guarantors		Adjustments			Amounts
Revenue	$	—		$	470,969	$	3,702	$	(3,702	)	$	470,969
Salaries, wages and employee benefits		—			254,897		—		—			254,897
Professional fees		—			52,142		58		—			52,200
Supplies		—			29,717		—		—			29,717
Rentals and leases		—			8,876		—		—			8,876
Other operating expenses		—			52,757		618		(608	)		52,767
Provision for doubtful accounts		—			10,794		—		—			10,794
Depreciation and amortization		—			9,076		975		(243	)		9,808
Interest expense		17,469			—		1,495		—			18,964
Loss on refinancing long-term debt		6,407			—		—		—			6,407
		23,876			418,259		3,146		(851	)		444,430
(Loss) income from continuing operations before income taxes		(23,876	)		52,710		556		(2,851	)		26,539
(Benefit from) provision for income taxes		(9,073	)		19,158		—		—			10,085
(Loss) income from continuing operations		(14,803	)		33,552		556		(2,851	)		16,454
Income from discontinued operations, net of taxes		—			347		—		—			347
Net (loss) income		(14,803	)		33,899		556		(2,851	)		16,801
Accrued preferred stock dividends		663			—		—		—			663
Net (loss) income available to common shareholders	$	(15,466	)	$	33,899	$	556	$	(2,851	)	$	16,138

F-28

Condensed Consolidating Statement of Income
For the Year Ended December 31, 2003
(Unaudited, dollars in thousands)

				Combined								Total
				Subsidiary		Combined Non-			Consolidating			Consolidated
	Parent			Guarantors		Guarantors			Adjustments			Amounts
Revenue	$	—		$	277,575	$	1,802		$	(1,802	)		277,575
Salaries, wages and employee benefits		—			142,292		—			—			142,292
Professional fees		—			31,992		94			—			32,086
Supplies		—			15,765		—			—			15,765
Rentals and leases		—			3,989		—			—			3,989
Other operating expenses		545			44,439		903			(2,702	)		43,185
Provision for doubtful accounts		—			6,312		—			—			6,312
Depreciation and amortization		—			5,260		447			—			5,707
Interest expense		14,086			124		568			—			14,778
Loss on refinancing long-term debt		4,856			—		—			—			4,856
Change in valuation of put warrants		960			—		—			—			960
Change in reserve of stockholder notes		(545	)		—		—			—			(545	)
		19,902			250,173		2,012			(2,702	)		269,385
(Loss) income from continuing operations before income taxes		(19,902	)		27,402		(210	)		900			8,190
(Benefit from) provision for income taxes		(7,357	)		10,833		1			—			3,477
(Loss) income from continuing operations		(12,545	)		16,569		(211	)		900			4,713
Income from discontinued operations, net of taxes		—			503		—			—			503
Net (loss) income		(12,545	)		17,072		(211	)		900			5,216
Accrued preferred stock dividends		811			—		—			—			811
Net (loss) income available to common shareholders	$	(13,356	)	$	17,072	$	(211	)	$	900		$	4,405

F-29

Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2005
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating activities:
Net (loss) income	$	(29,318	)	$	59,713		$	77		$	(3,318	)	$	27,154
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			14,005			976			(243	)		14,738
Amortization of loan costs		1,140			—			47			—			1,187
Loss on refinancing long-term debt		21,871			—			—			—			21,871
Change in income tax assets and liabilities		—			9,494			—			—			9,494
Income from discontinued operations		—			(287	)		—			—			(287	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(9,399	)		—			—			(9,399	)
Prepaids and other current assets		—			(4,647	)		974			—			(3,673	)
Accounts payable		—			2,116			—			—			2,116
Salaries and benefits payable		—			2,598			—			—			2,598
Accrued liabilities and other liabilities		10,965			(4,519	)		6,894			—			13,340
Other		—			463			—			—			463
Net cash provided by (used in) continuing operating activities		4,658			69,537			8,968			(3,561	)		79,602
Net cash provided by discontinued operating activities		—			173			—			—			173
Net cash provided by (used in) operating activities		4,658			69,710			8,968			(3,561	)		79,775
Investing activities:
Cash paid for acquisitions, net of cash acquired		(514,525	)		—			—			—			(514,525	)
Capital purchases of property and equipment		—			(21,750	)		—			—			(21,750	)
Purchases of short-term investments		(29,400	)		—			—			—			(29,400	)
Sales of short-term investments		29,400			—			—			—			29,400
Cash paid for investments in equity method investees		—			(1,340	)		—			—			(1,340	)
Other assets		—			1,115			104			—			1,219
Net cash (used in) provided by investing activities		(514,525	)		(21,975	)		104			—			(536,396	)
Financing activities:
Borrowings on long-term debt		545,000			—			—			—			545,000
Principal payments on long-term debt		(236,587	)		—			(235	)		—			(236,822	)
Net transfers to and from members		31,762			(34,608	)		(715	)		3,561			—
Payment of loan and issuance costs		(13,932	)		—			—			—			(13,932	)
Refinancing of long-term debt		(15,398	)		—			—			—			(15,398	)
Proceeds from secondary offering of common stock, net of issuance costs		192,637			—			—			—			192,637
Proceeds from exercises of common stock options		6,385			—			—			—			6,385
Net cash provided by (used in) financing activities		509,867			(34,608	)		(950	)		3,561			477,870
Net increase in cash		—			13,127			8,122			—			21,249
Cash and cash equivalents at beginning of year		—			30,988			2,463			—			33,451
Cash and cash equivalents at end of year	$	—		$	44,115		$	10,585		$	—		$	54,700

F-30

Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2004
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating Activities:
Net (loss) income	$	(14,803	)	$	33,899		$	556		$	(2,851	)	$	16,801
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		—			9,076			975			(243	)		9,808
Amortization of loan costs		691			—			—			—			691
Loss on refinancing long-term debt		6,407			—			—			—			6,407
Change in income tax assets and liabilities		—			6,920			—			—			6,920
Income from discontinued operations		—			(347	)		—			—			(347	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(2,110	)		(956	)		—			(3,066	)
Prepaids and other current assets		—			2,388			—			—			2,388
Accounts payable		—			(5,327	)		—			—			(5,327	)
Salaries and benefits payable		—			5,199			—			—			5,199
Accrued liabilities and other liabilities		(363	)		149			605			—			391
Net cash (used in) provided by continuing operating activities		(8,068	)		49,847			1,180			(3,094	)		39,865
Net cash provided by discontinued operating activities		—			295			—			—			295
Net cash (used in) provided by operating activities		(8,068	)		50,142			1,180			(3,094	)		40,160
Investing Activities:
Cash paid for acquisitions, net of cash acquired		(136,495	)		—			—			—			(136,495	)
Capital purchases of property and equipment		—			(17,100	)		(101	)		—			(17,201	)
Sale of long-term securities		—			—			953			—			953
Other assets		—			(2,758	)		1,341			—			(1,417	)
Net cash (used in) provided by investing activities		(136,495	)		(19,858	)		2,193			—			(154,160	)
Financing Activities:
Principal payments on long-term debt		(810	)		—									(810	)
Net transfers to and from members		42,060			(42,746	)		(2,408	)		3,094			—
Payment of loan and issuance costs		(2,300	)		—			—			—			(2,300	)
Refinancing of long-term debt		(3,844	)		—			—			—			(3,844	)
Proceeds from secondary offering of common stock, net of issuance costs		104,691			—			—			—			104,691
Proceeds from issuance of common stock		4,428			—			—			—			4,428
Proceeds from repayment of stockholder notes		338			—			—			—			338
Net cash provided by (used in) financing activities		144,563			(42,746	)		(2,408	)		3,094			102,503
Net (decrease) increase in cash		—			(12,462	)		965			—			(11,497	)
Cash and cash equivalents at beginning of year		—			43,450			1,498			—			44,948
Cash and cash equivalents at end of year	$	—		$	30,988		$	2,463		$	—		$	33,451

F-31

Condensed Consolidating Statement of Cash Flows
For the Twelve Months Ended December 31, 2003
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating Activities:
Net (loss) income	$	(12,545	)	$	17,072		$	(211	)	$	900		$	5,216
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		—			5,260			447			—			5,707
Amortization of loan costs		1,454			—			24			—			1,478
Loss on refinancing long-term debt		4,856			—			—			—			4,856
Change in valuation of put warrants		960			—			—			—			960
Change in income tax assets and liabilities		—			2,809			—			—			2,809
Release of reserve on stockholder notes		(545	)		—			—			—			(545	)
Income from discontinued operations, net of taxes		—			(503	)		—			—			(503	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(3,318	)		—			—			(3,318	)
Prepaids and other current assets		(7,731	)		11,940			(4	)		—			4,205
Accounts payable		—			(2,299	)		—			—			(2,299	)
Salaries and benefits payable		—			1,318			—			—			1,318
Accrued liabilities and other liabilities		(58	)		(741	)		997			—			198
Net cash (used in) provided by continuing operating activities		(13,609	)		31,538			1,253			900			20,082
Net cash used in discontinued operating activities		—			(1,528	)		—			—			(1,528	)
Net cash (used in) provided by operating activities		(13,609	)		30,010			1,253			900			18,554
Investing Activities:
Cash paid for acquisitions, net of cash acquired		(99,856	)		—			—			—			(99,856	)
Capital purchases of property and equipment		—			(5,747	)		(25,487	)		25,487			(5,747	)
Purchase of long-term securities		—			—			(971	)		—			(971	)
Other assets		—			(1,144	)		(4	)		—			(1,148	)
Net cash (used in) provided by continuing investing activities		(99,856	)		(6,891	)		(26,462	)		25,487			(107,722	)
Net cash used in discontinued investing activities		(568	)		—			—			—			(568	)
Net cash (used in) provided by investing activities		(100,424	)		(6,891	)		(26,462	)		25,487			(108,290	)
Financing Activities:
Net decrease in revolving credit facility, less acquisitions		(34,148	)		—			—			—			(34,148	)
Borrowings on long-term deft		159,981			—			—			—			159,981
Principal payments on long-term debt		(63,853	)		—			18,962			(18,962	)		(63,853	)
Net transfers to and from members		(18,259	)		19,156			6,528			(7,425	)		—
Payment of loan and issuance costs		(1,998	)		—			—			—			(1,998	)
Refinancing of long-term debt		(1,410	)		—			—			—			(1,410	)
Proceeds from issuance of series A convertible preferred stock, net of issuance costs		24,505			—			—			—			24,505
Proceeds from secondary offering of common stock, net of issuance costs		48,897			—			—			—			48,897
Proceeds from issuance of common stock		318			—			—			—			318
Net cash provided by (used in) financing activities		114,033			19,156			25,490			(26,387	)		132,292
Net increase in cash		—			42,275			281			—			42,556
Cash and cash equivalents at beginning of year		—			1,175			1,217			—			2,392
Cash and cash equivalents at end of year	$	—		$	43,450		$	1,498		$	—		$	44,948

18. Subsequent Events (Unaudited)

     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.

     During 2006, we completed the acquisitions of three inpatient facilities in January, one inpatient facility in May, two inpatient facilities in July and three inpatient facilities in September with an aggregate of 730 beds. These facilities are located in Jeffersonville, Indiana; Fort Lauderdale, Florida; Midland, Texas; Louisville, Mississippi; Mt. Dora, Florida; Desoto, Texas; Orlando, Florida; Tequesta, Florida; and Clearwater, Florida.

     On October 30, 2006, we announced that we entered into an amended and restated Stock Purchase Agreement to purchase the capital stock of Alternative Behavioral Services, Inc. (“ABS”) for a cash purchase price of $210 million. ABS owns and operates nine inpatient facilities with approximately 1,050 beds. Consummation of the transaction is expected to occur on December 1, 2006, subject to customary closing conditions.

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