10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended March 31, 2008

or

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

for the transition period from                     to                    

Commission file number 0-20488

Psychiatric Solutions, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

6640 Carothers Parkway, Suite 500
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYesoNo

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

Large accelerated filer þ  Accelerated filer o  Non-accelerated filer   o
(Do not check if a smaller reporting company) Smaller reporting company o 

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes þNo

As of April 30, 2008, 55,420,049 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 (Unaudited)		1
Condensed Consolidated Statements of Income for the three month periods ended March 31, 2008 and 2007 (Unaudited)		2
Condensed Consolidated Statement of Stockholders’ Equity for the three month period ended March 31, 2008 (Unaudited)		3
Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2008 and 2007 (Unaudited)		4
Notes to Condensed Consolidated Financial Statements (Unaudited)		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		21
Item 1A. Risk Factors		22
Item 6. Exhibits		22
EX-10.3 ISDA Master Agreement
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO & CFO

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

	March 31,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	14,743		$	39,975
Accounts receivable, less allowance for doubtful accounts of $38,635 and $35,587 for 2008 and 2007, respectively		254,935			233,945
Prepaids and other		71,237			66,159
Total current assets		340,915			340,079
Property and equipment, net of accumulated depreciation		742,200			694,018
Cost in excess of net assets acquired		1,183,970			1,073,583
Other assets		64,601			71,843
Total assets	$	2,331,686		$	2,179,523
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	30,899		$	31,394
Salaries and benefits payable		79,159			82,899
Other accrued liabilities		58,496			61,939
Current portion of long-term debt		5,071			6,016
Total current liabilities		173,625			182,248
Long-term debt, less current portion		1,299,898			1,166,008
Deferred tax liability		47,807			49,131
Other liabilities		22,771			23,235
Total liabilities		1,544,101			1,420,622
Minority Interest		4,273			4,159
Stockholders’ equity:
Common stock, $0.01 par value, 125,000 shares authorized; 55,419 and 55,107 issued and outstanding for 2008 and 2007, respectively		554			551
Additional paid-in capital		581,210			574,943
Accumulated other comprehensive loss		(3,675	)		(479	)
Retained earnings		205,223			179,727
Total stockholders’ equity		783,312			754,742
Total liabilities and stockholders’ equity	$	2,331,686		$	2,179,523

See accompanying notes.

1

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except for per share amounts)

	Three Months Ended March 31,
	2008			2007
Revenue	$	429,691		$	322,438
Salaries, wages and employee benefits (including share- based compensation of $5,560 and $3,673 for 2008 and 2007, respectively)		238,651			180,135
Professional fees		43,504			30,900
Supplies		23,779			18,344
Rentals and leases		6,230			4,629
Other operating expenses		39,115			31,547
Provision for doubtful accounts		7,159			6,664
Depreciation and amortization		9,435			6,256
Interest expense		20,376			14,386
		388,249			292,861
Income from continuing operations before income taxes		41,442			29,577
Provision for income taxes		15,789			11,328
Income from continuing operations		25,653			18,249
Loss from discontinued operations, net of income tax benefit of $83 and $77 for 2008 and 2007, respectively		(157	)		(124	)
Net income	$	25,496		$	18,125
Basic earnings per share:
Income from continuing operations	$	0.46		$	0.34
Loss from discontinued operations, net of taxes		—			—
Net income	$	0.46		$	0.34
Diluted earnings per share:
Income from continuing operations	$	0.46		$	0.33
Loss from discontinued operations, net of taxes		—			—
Net income	$	0.46		$	0.33
Shares used in computing per share amounts:
Basic		55,143			53,804
Diluted		55,799			55,237

See accompanying notes.

2

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)

							Accumulated
					Additional		Other
	Common Stock				Paid-In		Comprehensive			Retained
	Shares		Amount		Capital		Loss			Earnings		Total
Balance at December 31, 2007		55,107	$	551	$	574,943	$	(479	)	$	179,727	$	754,742
Comprehensive income:
Net income		—		—		—		—			25,496		25,496
Change in fair value of interest rate swap, net of tax benefit of $1,967		—		—		—		(3,196	)		—		(3,196	)
Total comprehensive income												$	22,300
Share-based compensation		—		—		5,560		—			—		5,560
Exercise of stock options and grants of restricted stock, net of issuance costs		312		3		707		—			—		710
Income tax benefit of stock option exercises		—		—		—		—			—		—
Balance at March 31, 2008		55,419	$	554	$	581,210	$	(3,675	)	$	205,223	$	783,312

See accompanying notes.

3

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Three Months Ended March 31,
	2008			2007
Operating activities:
Net income	$	25,496		$	18,125
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Depreciation and amortization		9,435			6,256
Amortization of loan costs and bond premium		553			517
Share-based compensation		5,560			3,673
Change in income tax assets and liabilities		10,003			(1,798	)
Loss from discontinued operations, net of taxes		157			124
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(19,888	)		(9,484	)
Prepaids and other current assets		(64	)		(894	)
Accounts payable		(523	)		(838	)
Salaries and benefits payable		(4,511	)		(9,387	)
Accrued liabilities and other liabilities		(14,802	)		(1,101	)
Net cash provided by continuing operating activities		11,416			5,193
Net cash provided by (used in) discontinued operating activities		136			(62	)
Net cash provided by operating activities		11,552			5,131
Investing activities:
Cash paid for acquisitions, net of cash acquired		(141,248	)		(25,241	)
Capital purchases of property and equipment		(22,932	)		(9,872	)
Other assets		(1,205	)		233
Net cash used in continuing investing activities		(165,385	)		(34,880	)
Financing activities:
Net increase in revolving credit facility		130,000			19,000
Principal payments on long-term debt		(2,057	)		(315	)
Payment of loan and issuance costs		(12	)		(85	)
Excess tax benefit from share based payment arrangements		—			2,569
Proceeds from exercises of common stock options		670			5,706
Net cash provided by financing activities		128,601			26,875
Net decrease in cash		(25,232	)		(2,874	)
Cash and cash equivalents at beginning of the period		39,975			18,572
Cash and cash equivalents at end of the period	$	14,743		$	15,698
Effect of Acquisitions:
Assets acquired, net of cash acquired	$	144,289		$	35,928
Cash paid for prior year acquisitions		—			2,081
Liabilities assumed		(3,041	)		(2,064	)
Common stock issued		—			(9,000	)
Long-term debt assumed		—			(1,704	)
Cash paid for acquisitions, net of cash acquired	$	141,248		$	25,241

See accompanying notes.

4

PSYCHIATRIC SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2008

1. Recent Developments

Effective March 1, 2008, we completed the acquisition of five inpatient behavioral health care facilities from United Medical Corporation (“UMC”), which are located in Florida and Kentucky and include more than 400 beds.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for audited financial statements. The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Certain reclassifications have been made to the prior year to conform to current year presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position have been included. The majority of our expenses are “cost of revenue” items. General and administrative expenses, excluding share-based compensation expense, were approximately 2.8% of net revenue for the three months ended March 31, 2008. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

3. Earnings Per Share

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

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

	Three Months Ended
	March 31,
	2008			2007
Numerator:
Basic and diluted earnings per share:
Income from continuing operations	$	25,653		$	18,249
Loss from discontinued operations, net of taxes		(157	)		(124	)
Net income	$	25,496		$	18,125
Denominator:
Weighted average shares outstanding for basic earnings per share		55,143			53,804
Effects of dilutive stock options and restriced stock outstanding		656			1,433
Shares used in computing diluted earnings per common share		55,799			55,237
Basic earnings per share:
Income from continuing operations	$	0.46		$	0.34
Loss from discontinued operations, net of taxes		—			—
	$	0.46		$	0.34
Diluted earnings per share:
Income from continuing operations	$	0.46		$	0.33
Loss from discontinued operations, net of taxes		—			—
	$	0.46		$	0.33

5

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

4. Share-Based Compensation

We recognized $5.6 million and $3.7 million in share-based compensation expense and approximately $2.1 million and $1.4 million of related income tax benefit for the three months ended March 31, 2008 and 2007, respectively. The fair value of our stock options was estimated using the Black-Scholes option pricing model. The impact of share-based compensation expense, net of tax, on our basic and diluted earnings per share was approximately $0.06 and $0.04 per share for the three months ended March 31, 2008 and 2007, respectively. We classified $2.6 million in income tax benefits in excess of share-based compensation expense on stock options exercised in 2007 as cash flows from financing activities in our Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2007. Income tax benefits in excess of share-based compensation expense on stock options exercised and restricted stock vested during the three months ended March 31, 2008 were negligible.

Based on our stock option and restricted stock grants outstanding at March 31, 2008, we estimate remaining unrecognized share-based compensation expense to be approximately $49.7 million with a weighted average remaining life of 3.0 years.

The total intrinsic value, which represents the difference between the underlying stock’s market price and the option’s exercise price, of options exercised and restricted stock vested during the three months ended March 31, 2008 and 2007 was $2.3 million and $8.7 million, respectively.

We granted 695,225 stock options to employees during the three months ended March 31, 2008. These options vest over four years in annual increments of 25% on each anniversary of the grant date and each had a grant-date fair value of $9.45.

We granted 283,000 shares of restricted stock to certain senior management during the three months ended March 31, 2008. These shares of restricted stock vest 25% on each anniversary of the grant date and had a weighted-average grant-date fair value of $29.00 per share.

5. Acquisitions

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

Effective March 1, 2008, we completed the acquisition of five inpatient behavioral health care facilities from UMC for $120 million. These facilities, located in Florida and Kentucky, include more than 400 beds.

The balance of cost in excess of net assets acquired (goodwill) increased to $1.2 billion as of March 31, 2008 from $1.1 billion as of December 31, 2007. This increase in goodwill is primarily the result of the five facilities acquired from UMC and certain other employee assistance program (“EAP”) businesses acquired during the first quarter of 2008. The purchase price allocation for these 2008 acquisitions is preliminary as of March 31, 2008, pending final measurement of certain assets and liabilities.

During 2007, we acquired 16 inpatient behavioral health care facilities with an aggregate of approximately 1,600 beds, including the May 31, 2007 acquisition of Horizon Health Corporation (“Horizon Health”), which operated 15 inpatient facilities.

6. Long-term debt

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

6

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

	March 31,		December 31,
	2008		2007
Senior credit facility:
Revolving line of credit facility, expiring on December 21, 2009 and bearing interest of 4.5% and 6.4% at March 31, 2008 and December 31, 2007, respectively	$	210,000	$	80,000
Senior secured term loan facility, expiring on July 1, 2012 and bearing interest of 5.0% and 6.8% at March 31, 2008 and December 31, 2007, respectively		571,438		573,312
7 3/4% Notes		476,346		476,508
Mortgage loans on facilities, maturing in 2036, 2037 and 2038 bearing fixed interest rates of 5.7% to 7.6%		33,574		33,671
Other		13,611		8,533
		1,304,969		1,172,024
Less current portion		5,071		6,016
Long-term debt	$	1,299,898	$	1,166,008

Senior Credit Facility

Our Second Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) includes a $300 million revolving credit facility and $575 million senior secured term loan facility. Quarterly principal payments of $0.9 million are due on our senior secured term loan facility with the balance payable in full 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 $5.0 million and the stock of substantially all 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. As of March 31, 2008, we had $210.0 million in borrowings outstanding and $82.7 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 $300 million on our revolving credit facility. All repayments made under the senior secured term loan facility are permanent. We pay a quarterly commitment fee on the unused portion of our revolving credit facility that fluctuates, based upon certain leverage ratios, between 0.25% and 0.5% per annum. Commitment fees were approximately $0.1 million for the three months ended March 31, 2008.

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) a financial leverage covenant; and (3) cross-default covenants triggered by a default of any other indebtedness of at least $5.0 million. As of March 31, 2008, 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

The 7³/₄% Senior Subordinated Notes due 2015 (the “7³/₄% Notes”) are fully and unconditionally guaranteed on a senior subordinated basis by substantially all of our existing operating subsidiaries. We received a premium of 2.75% from the sale of $250 million of 7³/₄% Notes on May 31, 2007. This premium is being amortized over the remaining life of the 7³/₄% Notes using the effective interest method, which results in an effective interest rate of 7.3% on the $250 million issuance. 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. The 7³/₄% Notes mature on July 15, 2015.

Mortgage Loans

Our mortgage loans are insured by the U.S. Department of Housing and Urban Development (“HUD”) and are secured by real estate

7

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

located at Holly Hill Hospital in Raleigh, North Carolina; West Oaks Hospital in Houston, Texas; Riveredge Hospital near Chicago, Illinois; Canyon Ridge Hospital in Chino, California and MeadowWood Behavioral Health in New Castle, Delaware. The carrying amount of assets held as collateral approximated $37.5 million at March 31, 2008.

Interest Rate Swap Agreements

We periodically enter into interest rate swap agreements to manage our exposure to fluctuations in interest rates. During the fourth quarter of 2007, we entered into an agreement with Merrill Lynch Capital Securities, Inc. to exchange the interest payments associated with a notional amount of $225 million of LIBOR indexed variable rate debt related to our senior secured term loan facility for a fixed interest rate. The agreement matures on November 30, 2009. The interest payments associated with this agreement are settled on a net basis. The fair value of our interest rate swap at March 31, 2008 reflected a liability of $6.0 million, which represents the estimated amount we would have paid if the agreement was canceled.

7. Income Taxes

The provision for income taxes for the three months ended March 31, 2008 and 2007 reflects an effective tax rate of approximately 38.1% and 38.3%, respectively. The decrease in the effective tax rate is primarily due to a decrease in our overall effective foreign income tax rate.

8. Discontinued Operations

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that all components of an entity that have been disposed of (by sale, by abandonment or in a distribution to owners) or are held for sale and whose cash flows can be clearly distinguished from the rest of the entity be presented as discontinued operations. During the second quarter of 2007, we elected to dispose of one facility. Accordingly, these operations, net of applicable income taxes, have been presented as discontinued operations and prior period consolidated financial statements have been reclassified.

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

	Three Months Ended
	March 31,
	2008			2007
Revenue	$	—		$	1,280
Operating expenses		240			1,481
Loss from discontinued operations before income taxes		(240	)		(201	)
Benefit for income taxes		(83	)		(77	)
Loss from discontinued operations, net of income taxes	$	(157	)	$	(124	)

9. Disclosures About Reportable Segments

In accordance with the criteria of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (“SFAS 131”), owned and leased facilities is our only reportable segment. Each of our inpatient facilities qualifies as an operating segment under SFAS 131; however, none is individually material. We have aggregated our inpatient facilities into one reportable segment based on the characteristics of the services provided. As of March 31, 2008, the owned and leased facilities segment provides mental health and behavioral heath services to patients in its 86 owned and 9 leased inpatient facilities in 31 states, Puerto Rico and the U.S. Virgin Islands. The column entitled “Other” in the schedules below includes management contracts to provide inpatient psychiatric management and development services to inpatient behavioral health units in hospitals and clinics, employee assistance programs and a managed care plan in Puerto Rico. The operations included in the “Other” column do not qualify as reportable segments under SFAS 131. Activities classified as “Corporate” in the following schedule relate primarily to unallocated home office items and discontinued operations.

Adjusted EBITDA is a non-GAAP financial measure and is defined as net income (loss) before discontinued operations, interest expense (net of interest income), income taxes, depreciation, amortization, share-based compensation and other items included in the

8

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

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

Three Months Ended March 31, 2008

	Owned and
	Leased
	Facilities		Other		Corporate			Consolidated
Revenue	$	388,308	$	41,383	$	—		$	429,691
Adjusted EBITDA	$	80,769	$	7,959	$	(11,915	)	$	76,813
Interest expense		7,114		214		13,048			20,376
Provision for income taxes		—		—		15,789			15,789
Depreciation and amortization		7,890		1,184		361			9,435
Inter-segment expenses		15,951		1,952		(17,903	)		—
Other expenses:
Share-based compensation		—		—		5,560			5,560
Total other expenses		—		—		5,560			5,560
Income (loss) from continuing operations	$	49,814	$	4,609	$	(28,770	)	$	25,653
Total assets	$	2,030,544	$	224,812	$	76,330		$	2,331,686

Three Months Ended March 31, 2007

	Owned and
	Leased
	Facilities		Other			Corporate			Consolidated
Revenue	$	306,862	$	15,576		$	—		$	322,438
Adjusted EBITDA	$	61,237	$	2,181		$	(9,526	)	$	53,892
Interest expense		9,028		(5	)		5,363			14,386
Provision for income taxes		—		—			11,328			11,328
Depreciation and amortization		5,730		182			344			6,256
Inter-segment expenses		11,369		721			(12,090	)		—
Other expenses:
Share-based compensation		—		—			3,673			3,673
Total other expenses		—		—			3,673			3,673
Income (loss) from continuing operations	$	35,110	$	1,283		$	(18,144	)	$	18,249
Total assets	$	1,499,188	$	47,577		$	76,459		$	1,623,224

10. Financial Information for the Company and Its Subsidiaries

We conduct substantially all of our business through our subsidiaries. Presented below is consolidated financial information for us and our subsidiaries as of March 31, 2008 and December 31, 2007, and for the three months ended March 31, 2008 and 2007. 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.

9

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

Condensed Consolidating Balance Sheet
As of March 31, 2008
(Dollars in thousands)

				Combined							Total
				Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent			Guarantors		Guarantors		Adjustments			Amounts
Current Assets:
Cash and cash equivalents	$	—		$	7,808	$	6,935	$	—		$	14,743
Accounts receivable, net		—			246,986		7,949		—			254,935
Prepaids and other		—			55,785		15,452		—			71,237
Total current assets		—			310,579		30,336		—			340,915
Property and equipment, net of accumulated depreciation		—			692,316		57,170		(7,286	)		742,200
Cost in excess of net assets acquired		—			1,183,970		—		—			1,183,970
Investment in subsidiaries		1,167,606			—		—		(1,167,606	)		—
Other assets		14,743			45,698		22,415		(18,255	)		64,601
Total assets	$	1,182,349		$	2,232,563	$	109,921	$	(1,193,147	)	$	2,331,686
Current Liabilities:
Accounts payable	$	—		$	29,715	$	1,184	$	—		$	30,899
Salaries and benefits payable		—			77,859		1,300		—			79,159
Other accrued liabilities		13,550			44,310		636		—			58,496
Current portion of long-term debt		4,667			—		404		—			5,071
Total current liabilities		18,217			151,884		3,524		—			173,625
Long-term debt, less current portion		1,266,728			—		33,170		—			1,299,898
Deferred tax liability		—			47,807		—		—			47,807
Other liabilities		2,204			10,900		31,332		(21,665	)		22,771
Total liabilities		1,287,149			210,591		68,026		(21,665	)		1,544,101
Minority Interest		—			—		—		4,273			4,273
Total stockholders’ (deficit) equity		(104,800	)		2,021,972		41,895		(1,175,755	)		783,312
Total liabilities and stockholders’ (deficit) equity	$	1,182,349		$	2,232,563	$	109,921	$	(1,193,147	)	$	2,331,686

Condensed Consolidating Balance Sheet
As of December 31, 2007
(Dollars in thousands)

				Combined							Total
				Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent			Guarantors		Guarantors		Adjustments			Amounts
Current Assets:
Cash and cash equivalents	$	—		$	19,159	$	20,816	$	—		$	39,975
Accounts receivable, net		—			226,501		7,444		—			233,945
Prepaids and other		—			64,604		1,555		—			66,159
Total current assets		—			310,264		29,815		—			340,079
Property and equipment, net of accumulated depreciation		—			643,838		57,526		(7,346	)		694,018
Cost in excess of net assets acquired		—			1,073,583		—		—			1,073,583
Investment in subsidiaries		1,058,235			—		—		(1,058,235	)		—
Other assets		15,441			52,298		22,359		(18,255	)		71,843
Total assets	$	1,073,676		$	2,079,983	$	109,700	$	(1,083,836	)	$	2,179,523
Current Liabilities:
Accounts payable	$	—		$	30,335	$	1,059	$	—		$	31,394
Salaries and benefits payable		—			81,242		1,657		—			82,899
Other accrued liabilities		25,171			36,526		242		—			61,939
Current portion of long-term debt		5,619			—		397		—			6,016
Total current liabilities		30,790			148,103		3,355		—			182,248
Long-term debt, less current portion		1,132,735			—		33,273		—			1,166,008
Deferred tax liability		—			49,131		—		—			49,131
Other liabilities		2,659			10,912		31,096		(21,432	)		23,235
Total liabilities		1,166,184			208,146		67,724		(21,432	)		1,420,622
Minority Interest		—			—		—		4,159			4,159
Total stockholders’ (deficit) equity		(92,508	)		1,871,837		41,976		(1,066,563	)		754,742
Total liabilities and stockholders’ (deficit) equity	$	1,073,676		$	2,079,983	$	109,700	$	(1,083,836	)	$	2,179,523

10

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2008
(Dollars in thousands)

				Combined								Total
				Subsidiary			Combined Non-		Consolidating			Consolidated
	Parent			Guarantors			Guarantors		Adjustments			Amounts
Revenue	$	—		$	418,526		$	13,596	$	(2,431	)	$	429,691
Salaries, wages and employee benefits		—			231,451			7,200		—			238,651
Professional fees		—			41,654			1,850		—			43,504
Supplies		—			23,209			570		—			23,779
Rentals and leases		—			6,138			92		—			6,230
Other operating expenses		—			37,438			1,707		(30	)		39,115
Provision for doubtful accounts		—			6,890			269		—			7,159
Depreciation and amortization		—			8,881			615		(61	)		9,435
Interest expense		19,858			—			518		—			20,376
		19,858			355,661			12,821		(91	)		388,249
(Loss) income from continuing operations before income taxes		(19,858	)		62,865			775		(2,340	)		41,442
(Benefit from) provision for income taxes		(7,566	)		23,323			32		—			15,789
(Loss) income from continuing operations		(12,292	)		39,542			743		(2,340	)		25,653
Loss from discontinued operations, net of tax		—			(157	)		—		—			(157	)
Net (loss) income	$	(12,292	)	$	39,385		$	743	$	(2,340	)	$	25,496

Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2007
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Revenue	$	—		$	322,438		$	4,534		$	(4,534	)	$	322,438
Salaries, wages and employee benefits		—			180,135			—			—			180,135
Professional fees		—			30,902			(2	)		—			30,900
Supplies		—			18,344			—			—			18,344
Rentals and leases		—			4,629			—			—			4,629
Other operating expenses		—			31,153			3,749			(3,355	)		31,547
Provision for doubtful accounts		—			6,664			—			—			6,664
Depreciation and amortization		—			6,042			275			(61	)		6,256
Interest expense		14,158			—			228			—			14,386
		14,158			277,869			4,250			(3,416	)		292,861
(Loss) income from continuing operations before income taxes		(14,158	)		44,569			284			(1,118	)		29,577
(Benefit from) provision for income taxes		(5,423	)		16,751			—			—			11,328
(Loss) income from continuing operations		(8,735	)		27,818			284			(1,118	)		18,249
Loss from discontinued operations, net of taxes		—			(124	)		—			—			(124	)
Net (loss) income	$	(8,735	)	$	27,694		$	284		$	(1,118	)	$	18,125

11

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2008
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating activities:
Net (loss) income	$	(12,292	)	$	39,385		$	743		$	(2,340	)	$	25,496
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			8,881			615			(61	)		9,435
Amortization of loan costs and bond premium		542			—			11			—			553
Share-based compensation		—			5,560			—			—			5,560
Change in income tax assets and liabilities		—			10,003			—			—			10,003
Loss from discontinued operations, net of taxes		—			157			—			—			157
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(19,383	)		(505	)		—			(19,888	)
Prepaids and other current assets		—			13,833			(13,897	)		—			(64	)
Accounts payable		—			(648	)		125			—			(523	)
Salaries and benefits payable		—			(4,154	)		(357	)		—			(4,511	)
Accrued liabilities and other liabilities		(304	)		(15,128	)		630			—			(14,802	)
Net cash (used in) provided by continuing operating activities		(12,054	)		38,506			(12,635	)		(2,401	)		11,416
Net cash provided by discontinued operating activities		—			136			—			—			136
Net cash (used in) provided by operating activities		(12,054	)		38,642			(12,635	)		(2,401	)		11,552
Investing activities:
Cash paid for acquisitions, net of cash acquired		(141,248	)		—			—			—			(141,248	)
Capital purchases of property and equipment		—			(22,673	)		(259	)		—			(22,932	)
Other assets		—			(1,138	)		(67	)		—			(1,205	)
Net cash used in investing activities		(141,248	)		(23,811	)		(326	)		—			(165,385	)
Financing activities:
Net increase in revolving credit facility		130,000			—			—			—			130,000
Principal payments on long-term debt		(1,961	)		—			(96	)		—			(2,057	)
Payment of loan and issuance costs		(12	)		—			—			—			(12	)
Net transfers to and from members		24,605			(26,182	)		(824	)		2,401			—
Proceeds from exercises of common stock options		670			—			—			—			670
Net cash provided by (used in) financing activities		153,302			(26,182	)		(920	)		2,401			128,601
Net decrease in cash		—			(11,351	)		(13,881	)		—			(25,232	)
Cash and cash equivalents at beginning of period		—			19,159			20,816			—			39,975
Cash and cash equivalents at end of period	$	—		$	7,808		$	6,935		$	—		$	14,743

12

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2007
(Dollars in thousands)

				Combined									Total
				Subsidiary			Combined Non-			Consolidating			Consolidated
	Parent			Guarantors			Guarantors			Adjustments			Amounts
Operating activities:
Net (loss) income	$	(8,735	)	$	27,694		$	284		$	(1,118	)	$	18,125
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			6,042			275			(61	)		6,256
Amortization of loan costs and bond premium		506			—			11			—			517
Share-based compensation		—			3,673			—			—			3,673
Loss on refinancing long-term debt		—			—			—			—			—
Change in income tax assets and liabilities		—			(1,798	)		—			—			(1,798	)
Loss from discontinued operations, net of taxes		—			124			—			—			124
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(9,484	)		—			—			(9,484	)
Prepaids and other current assets		—			(15,538	)		14,644			—			(894	)
Accounts payable		—			(838	)		—			—			(838	)
Salaries and benefits payable		—			(9,387	)		—			—			(9,387	)
Accrued liabilities and other liabilities		10,424			(25,664	)		14,139			—			(1,101	)
Net cash provided by (used in) continuing operating activities		2,195			(25,176	)		29,353			(1,179	)		5,193
Net cash used in discontinued operating activities		—			(62	)		—			—			(62	)
Net cash provided by (used in) operating activities		2,195			(25,238	)		29,353			(1,179	)		5,131
Investing activities:
Cash paid for acquisitions, net of cash acquired		(25,241	)		—			—			—			(25,241	)
Capital purchases of property and equipment		—			(9,872	)		—			—			(9,872	)
Other assets		—			361			(128	)		—			233
Net cash used in investing activities		(25,241	)		(9,511	)		(128	)		—			(34,880	)
Financing activities:
Net increase in revolving credit facility		19,000			—			—			—			19,000
Principal payments on long-term debt		(241	)		—			(74	)		—			(315	)
Payment of loan and issuance costs		(85	)		—			—			—			(85	)
Excess tax benefits from share-based payment arrangements		2,569			—			—			—			2,569
Net transfers to and from members		(3,903	)		31,809			(29,085	)		1,179			—
Proceeds from exercises of common stock options		5,706			—			—			—			5,706
Net cash provided by (used in) financing activities		23,046			31,809			(29,159	)		1,179			26,875
Net (decrease) increase in cash		—			(2,940	)		66			—			(2,874	)
Cash and cash equivalents at beginning of period		—			1,149			17,423			—			18,572
Cash and cash equivalents at end of period	$	—		$	(1,791	)	$	17,489		$	—		$	15,698

11. Fair Value Measurements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. We have adopted the provisions of SFAS 157 as of January 1, 2008, for financial instruments. The adoption of SFAS 157 did not materially impact our financial statements, but does require us to provide additional disclosures.

SFAS 157 prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 is quoted prices in active markets for identical assets and liabilities. Level 2 is significant inputs other than quoted prices in active markets that are either directly or indirectly observable. Level 3 is unobservable inputs for which little or no market data exists.

Our interest rate swap is required to be measured at fair value on a recurring basis. Our interest rate swap agreement is with a private-party and is not traded on a public exchange. The fair value of our swap agreement is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, we have categorized the inputs to value our swap agreement as Level 2, which are consistently applied.

13

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008

12. Recently Issued Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of SFAS 115 (“SFAS 159”), which permits, but does not require, the measurement of financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. Upon the effective date of SFAS 159, January 1, 2008, we did not elect the fair value option for any of our financial instruments.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), to replace SFAS No. 141, Business Combinations. SFAS 141(R) requires use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date, requires acquisition-related costs to be expensed as incurred and broadens the scope of a business combination to include transactions and other events in which one entity obtains control over one or more other businesses. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. We are currently evaluating the impact of SFAS 141(R) on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. We are currently evaluating the impact of SFAS 160 on our consolidated financial statements.

14

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

FORWARD LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission (the “SEC”), as well as information included in oral statements or other written statements made, or to be made, by our senior management, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including those set forth below, which could significantly affect our current plans and expectations and future financial condition and results.

     We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports.

     While it is not possible to identify all these factors, we continue to face many risks and uncertainties that could cause actual results to differ from those forward-looking statements, including:

• our ability to successfully integrate and improve the operations of acquired inpatient facilities;

• potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional inpatient facilities on favorable terms;

• our ability to maintain favorable and continuing relationships with physicians who use our inpatient facilities;

• our substantial indebtedness and our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs;

• risks inherent to the health care industry, including the impact of unforeseen changes in regulation and exposure to claims and legal actions by patients and others;

• efforts by federal and state health care programs and managed care companies to reduce reimbursement rates for our services;

• our ability to comply with applicable licensure and accreditation requirements;

• our ability to comply with extensive laws and government regulations related to billing, physician relationships, adequacy of medical care and licensure;

• our ability to retain key employees who are instrumental to our successful operations;

• our ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act;

• our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards;

• our ability to comply with federal and state governmental regulation covering health care-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology;

• our ability to obtain adequate levels of general and professional liability insurance;

• those risks and uncertainties described from time to time in our filings with the SEC; and

• future trends for pricing, margins, revenue and profitability remain difficult to predict in the industries that we serve.

     We caution you that the factors listed above, as well as the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2007, may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statements.

Overview

     Our business strategy is to acquire inpatient behavioral health care facilities and improve the operating results of our inpatient facilities and managed inpatient behavioral health care operations.

15

     Effective March 1, 2008, we completed the acquisition of five inpatient behavioral health care facilities from United Medical Corporation (“UMC”) for $120 million. These facilities, located in Florida and Kentucky, include more than 400 beds.

     During 2007, we acquired 16 inpatient behavioral health care facilities with an aggregate of approximately 1,600 beds, including the May 31, 2007 acquisition of Horizon Health Corporation (“Horizon Health”), which operated 15 inpatient facilities.

     We strive to improve the operating results of our inpatient behavioral health care operations by providing the highest quality service, expanding referral networks and marketing initiatives and meeting increased demand for our services by expanding our services and developing new services. We also attempt to improve operating results by optimizing staffing ratios, controlling contract labor costs and reducing supply costs through group purchasing. During the quarter ended March 31, 2008, our same-facility revenue from owned and leased inpatient facilities increased by 7.7% compared to the same period in 2007. Same-facility revenue growth was driven by increases in patient days and revenue per patient day. Patient days increased 2.4% during the quarter ended March 31, 2008 compared to the same period in 2007. Revenue per patient day increased 5.1% for the quarter ended March 31, 2008 compared to the same period in 2007. Same-facility growth refers to the comparison of each inpatient facility owned and leased during 2007 with the results for the comparable period in 2008, adjusted for closures and combinations for comparability purposes.

Sources of Revenue

Patient Service Revenue

     Patient service revenue is generated by our inpatient facilities as a result of services provided to patients on an inpatient and outpatient basis within the inpatient behavioral health care facility setting. Patient service revenue is recorded at our established billing rates less contractual adjustments. Generally, collection in full is not expected at our established billing rates. Contractual adjustments are recorded to state our patient service revenue at the amount we expect to collect for the services provided based on amounts reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement formulas or amounts due from other third-party payors at contractually determined rates. Patient service revenue comprised approximately 90.4% and 95.2% of our total revenue for the three months ended March 31, 2008 and 2007, respectively.

Other Revenue

     Other revenue accounted for approximately 9.6% and 4.8% of our total revenue for the three months ended March 31, 2008 and 2007, respectively. This portion of our business primarily consists of our contract management and employee assistance program (“EAP”) businesses. Our contract management business involves the development, organization and management of behavioral health care programs within medical/surgical hospitals. Our EAP business contracts with employers to assist employees and their dependents with resolution of behavioral conditions or other personal concerns. Services provided are recorded as revenue at contractually determined rates in the period the services are rendered, provided that collectability of such amounts is reasonably assured.

Results of Operations

     The following table illustrates our consolidated results of operations for the three months ended March 31, 2008 and 2007 (dollars in thousands):

16

	For the Three Months Ended March 31,
	2008					2007
	Amount		%			Amount		%
Revenue	$	429,691		100.0	%	$	322,438		100.0	%
Salaries, wages, and employee benefits (including share-based compensation of $5,560 and $3,673 for 2008 and 2007, respectively)		238,651		55.6	%		180,135		55.9	%
Professional fees		43,504		10.1	%		30,900		9.6	%
Supplies		23,779		5.5	%		18,344		5.7	%
Provision for doubtful accounts		7,159		1.7	%		6,664		2.0	%
Other operating expenses		45,345		10.6	%		36,176		11.2	%
Depreciation and amortization		9,435		2.2	%		6,256		1.9	%
Interest expense, net		20,376		4.7	%		14,386		4.5	%
Income from continuing operations before income taxes		41,442		9.6	%		29,577		9.2	%
Provision for income taxes		15,789		3.6	%		11,328		3.5	%
Income from continuing operations	$	25,653		6.0	%	$	18,249		5.7	%

Three Months Ended March 31, 2008 Compared To Three Months Ended March 31, 2007

     The following table compares key total facility and same-facility statistics for the quarters ended March 31, 2008 and 2007 (revenue in thousands).

	Three Months Ended March 31,				%
	2008		2007		Change
Same-facility results:
Revenue (in thousands)	$	326,579	$	303,288		7.7	%
Admissions		33,181		32,371		2.5	%
Patient days		568,439		554,941		2.4	%
Average length of stay (in days)		17.1		17.1		0.0	%
Revenue per patient day	$	575	$	547		5.1	%
Total facility results:
Revenue (in thousands)	$	388,308	$	306,862		26.5	%
Admissions		40,860		32,748		24.8	%
Patient days		686,350		562,026		22.1	%
Average length of stay (in days)		16.8		17.2		-2.3	%
Revenue per patient day	$	566	$	546		3.7	%

     Revenue. Revenue from continuing operations was $429.7 million for the quarter ended March 31, 2008 compared to $322.4 million for the quarter ended March 31, 2007, an increase of $107.3 million, or 33.3%. Revenue from owned and leased inpatient facilities accounted for $388.3 million in 2008 compared to $306.9 million in 2007, an increase of $81.4 million, or 26.5%. The increase in revenue from owned and leased inpatient facilities relates primarily to acquisitions of behavioral health care facilities. The remainder of the increase in revenue from owned and leased inpatient facilities is attributable to same-facility growth in patient days and revenue per patient day of 2.4% and 5.1%, respectively. Other revenue was $41.4 million in 2008 compared to $15.6 million in 2007. The increase in other revenue is primarily the result of other operations acquired in the Horizon Health acquisition, including an EAP business and numerous management contracts.

     Salaries, wages and employee benefits. Salaries, wages and employee benefits (“SWB”) expense was $238.7 million for the quarter ended March 31, 2008 compared to $180.1 million for the quarter ended March 31, 2007. SWB expense includes $5.6 million and $3.7 million of share-based compensation expense for the quarters ended March 31, 2008 and 2007, respectively. Excluding share-based compensation expense, SWB expense was $233.1 million, or 54.2% of total revenue, in the quarter ended March 31, 2008 compared to $176.5 million, or 54.7% of total revenue, for the quarter ended March 31, 2007. SWB expense for owned and leased inpatient facilities was $209.6 million, or 54.0% of revenue, in 2008. Same-facility SWB expense for owned and leased inpatient facilities was $174.0 million, or 53.3% of revenue, in 2008 compared to $163.6 million, or 53.9% of revenue, in 2007. SWB expense

17

for other operations increased to $15.5 million in 2008 from $4.5 million in 2007 primarily due to the other operations acquired in the Horizon Health acquisition. SWB expense for our corporate office was $13.6 million, including $5.6 million in share-based compensation, for 2008 compared to $10.0 million, including $3.7 million in share-based compensation, for 2007. Excluding share-based compensation, SWB expense for our corporate office increased approximately $1.7 million primarily as a result of hiring additional staff necessary to manage the inpatient facilities acquired during 2007.

     Professional fees. Professional fees were $43.5 million for the quarter ended March 31, 2008, or 10.1% of total revenue, compared to $30.9 million for the quarter ended March 31, 2007, or 9.6% of total revenue. Professional fees for owned and leased inpatient facilities were $36.3 million in 2008, or 9.4% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $30.5 million in 2008, or 9.3% of revenue, compared to $28.2 million in 2007, or 9.3% of revenue. Professional fees for other operations as well as our corporate office increased to $7.2 million in 2008 from $2.2 million in 2007 due to the other operations acquired in the Horizon Health acquisition.

     Supplies. Supplies expense was $23.8 million for the quarter ended March 31, 2008, or 5.5% of total revenue, compared to $18.3 million for the quarter ended March 31, 2007, or 5.7% of total revenue. Supplies expense for owned and leased inpatient facilities was $23.4 million in 2008, or 6.0% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $19.2 million in 2008, or 5.9% of revenue, compared to $17.8 million in 2007, or 5.9% of revenue. Supplies expense for other operations as well as our corporate office consisted primarily of office supplies and is negligible to our supplies expense overall.

     Provision for doubtful accounts. The provision for doubtful accounts was $7.2 million for the quarter ended March 31, 2008, or 1.7% of total revenue, compared to $6.7 million for the quarter ended March 31, 2007, or 2.0% of total revenue. The provision for doubtful accounts at our owned and leased inpatient facilities comprised substantially all of our provision for doubtful accounts.

     Other operating expenses. Other operating expenses consist primarily of rent, utilities, insurance, travel, and repairs and maintenance expenses. Other operating expenses were approximately $45.3 million for the quarter ended March 31, 2008, or 10.6% of total revenue, compared to $36.2 million for the quarter ended March 31, 2007, or 11.2% of total revenue. Other operating expenses for owned and leased inpatient facilities were $31.2 million in 2008, or 8.0% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $25.6 million in 2008, or 7.8% of revenue, compared to $26.1 million in 2007, or 8.6% of revenue. The decrease in same-facility other operating expenses for owned and leased inpatient facilities as a percentage of revenue is primarily the result of reductions in risk management costs as a percent of revenue. Other operating expenses for other operations were $12.2 million in 2008 compared to $7.9 million in 2007. The increase in other operating expenses for other operations was primarily due to new operations acquired in the Horizon Health acquisition. Other operating expenses at our corporate office were $2.0 million in 2008 compared to $1.8 million in 2007.

     Depreciation and amortization. Depreciation and amortization expense was $9.4 million for the quarter ended March 31, 2008 compared to $6.3 million for the quarter ended March 31, 2007. This increase in depreciation and amortization expense was primarily the result of the acquisitions of inpatient facilities during 2007 and 2008.

     Interest expense, net. Interest expense, net of interest income, was $20.4 million for the quarter ended March 31, 2008 compared to $14.4 million for the quarter ended March 31, 2007, an increase of $6.0 million. This increase in interest expense is primarily the result of a $541.3 million increase in our long-term debt during the past twelve months offset by a reduction in our overall effective interest rate. We borrowed $443.2 million in May 2007 to finance the Horizon Health acquisition and borrowed $130.0 million in the first quarter of 2008 principally to finance the acquisition of five inpatient behavioral health care facilities from UMC, other acquisitions, capital expenditures and other general corporate purposes.

     Loss from discontinued operations, net of taxes. The loss from discontinued operations (net of income tax effect) was $0.2 million for the quarter ended March 31, 2008 compared to $0.1 million for the quarter ended March 31, 2007. We did not have any operations that were discontinued during the quarter ended March 31, 2008.

Liquidity and Capital Resources

     Working capital at March 31, 2008 was $167.3 million, including cash and cash equivalents of $14.7 million, compared to working capital of $157.8 million, including cash and cash equivalents of $40.0 million, at December 31, 2007. The increase in working capital is primarily the result of a $21.0 million increase in accounts receivable, a $5.1 million increase in prepaids and other current assets and a $3.7 million decrease in salaries and benefits payable at March 31, 2008 compared to December 31, 2007. The increase in accounts receivable was primarily the result of increases in same-facility revenue and receivables generated from businesses acquired in 2008. Our consolidated day’s sales outstanding were 52 and 53 for March 31, 2008 and December 31, 2007, respectively. The increase in prepaids and other current assets is primarily the result of the reclassification of an asset held for sale that is now expected to be sold within the next twelve months. The decrease in salaries and benefits payable was primarily the result of payments of incentive compensation for the year ended December 31, 2007 that were accrued at the end of 2007 and paid during the quarter ended March 31, 2008.

18

     Cash provided by continuing operating activities was $11.4 million for the three months ended March 31, 2008 compared to $5.2 million for the three months ended March 31, 2007. This $6.2 million increase in cash flows from continuing operating activities was primarily attributable to the results of operations of Horizon Health acquired on May 31, 2007 and improved operating margins on a same-facility basis, offset by increased interest payments and incentive compensation payments made during the first quarter of 2008.

     Cash used in continuing investing activities was $165.4 million for the three months ended March 31, 2008 compared to $34.9 million for the three months ended March 31, 2007. Cash used in continuing investing activities for 2008 consisted primarily of $141.2 million paid for acquisitions and $22.9 million for purchases of fixed assets. Cash used for routine and expansion capital expenditures was approximately $9.1 million and $13.8 million, respectively, for the three months ended March 31, 2008. Our expansion expenditures will continue to increase in 2008 as a result of planned capital expansion projects and the construction of new facilities, which are expected to add approximately 600 new beds to our operations. We define expansion capital expenditures as those that increase the capacity of our facilities or otherwise enhance revenue. Routine or maintenance capital expenditures were 2.1% of our revenue for the three months ended March 31, 2008. Cash used in investing activities for the three months ended March 31, 2007 consisted primarily of cash paid for acquisitions of $25.2 million and capital expenditures of $9.9 million.

     Cash provided by financing activities was $128.6 million for the three months ended March 31, 2008 compared to $26.9 million for the three months ended March 31, 2007. Cash provided by financing activities for 2008 consisted primarily of $130.0 million in net borrowings under our revolving credit facility, which were used to finance the acquisition of five inpatient behavioral health care facilities from UMC and certain EAP acquisitions, capital expenditures and other general corporate purposes. Cash provided by financing activities for the three months ended March 31, 2007 consisted primarily of $19.0 million in net borrowings under our revolving credit facility and $5.7 million in proceeds from the exercise of stock options.

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

     During the fourth quarter of 2007, we entered into an interest rate swap agreement with Merrill Lynch Capital Services, Inc. to manage our exposure to fluctuations in interest rates. With this interest rate swap agreement we exchange the interest payments associated with a notional amount of $225 million of LIBOR indexed variable rate debt related to our senior secured term loan facility for a fixed interest rate. This interest rate swap agreement matures on November 30, 2009.

     We are actively seeking acquisitions that fit our corporate growth strategy and may acquire additional inpatient psychiatric facilities and other operations, including EAP businesses. 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.

Contractual Obligations

	Payments Due by Period (in thousands)
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
Long-term debt (1):
Senior Credit Facility:
Revolving line of credit facility, expiring on December 21, 2009 and bearing interest of 4.5% and 6.4% at March 31, 2008 and December 31, 2007, respectively	$	210,000	$	—	$	210,000	$	—	$	—
Senior secured term loan facility, expiring on July 1, 2012 and bearing interest of 5.0% and 6.8% at March 31, 2008 and December 31, 2007, respectively		571,438		3,750		7,500		560,188		—
7 3/4% Notes		476,346		—		—		—		476,346
Mortgage loans on facilities, maturing in 2036, 2037 and 2038 bearing fixed interest rates of 5.7% to 7.6%		33,574		404		886		1,003		31,281
		1,291,358		4,154		218,386		561,191		507,627
Lease and other obligations		96,431		16,413		29,459		12,904		37,655
Total contractual obligations	$	1,387,789	$	20,567	$	247,845	$	574,095	$	545,282

(1) Excludes capital lease obligations, fair value of interest rate swap, and other obligations totaling $13.6 million, which are included in lease and other obligations.

19

     The fair value of our $470.0 million 7³/₄% Notes was approximately $468.2 million as of March 31, 2008. The fair value of our $470.0 million 7³/₄% Notes was approximately $467.1 million as of December 31, 2007. The carrying value of our other long-term debt, including current maturities, of $828.6 million and $695.5 million at March 31, 2008 and December 31, 2007, respectively, approximated fair value. We had $571.4 million and $210.0 million of variable rate debt outstanding under our senior secured term loan facility and revolving credit facility, respectively, as of March 31, 2008. As a result of our interest rate swap arrangement to exchange interest rate payments associated with a notional amount of $225 million of LIBOR indexed variable rate debt for a fixed rate, the variable rate debt outstanding under our senior secured term loan facility was effectively $346.4 million as of March 31, 2008. At our March 31, 2008 borrowing level, a hypothetical 10% increase in interest rates would decrease our annual net income and cash flows by approximately $1.7 million.

Critical Accounting Policies

     Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, 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 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 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 by comparing our established billing rates with the amount we determine to be reimbursable given our interpretation of the applicable regulations or contract terms. Most payments are determined based on negotiated per-diem rates. While the services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from our estimates, these differences are deemed immaterial. Additionally, updated regulations and contract renegotiations frequently occur necessitating continual review and assessment of the estimation process by our management. We periodically compare the contractual rates on our patient accounting systems with the Medicare and Medicaid reimbursement rates or the third-party payor contracts for accuracy. We also monitor the adequacy of our contractual adjustments using financial measures such as comparing cash receipts to net patient revenue adjusted for bad debt expense.

     Professional and General Liability

     We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. At March 31, 2008, all of our operations have professional and general liability insurance in umbrella form for claims in excess of $3.0 million with an insured limit of $50.0 million. The self-insured reserves for professional and general liability risks are calculated based on historical claims, demographic factors, industry trends, severity factors and other actuarial assumptions calculated by an independent third-party actuary. This self-insurance reserve is discounted to its present value using a 5.0% discount rate. This estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations. We have utilized our captive insurance company to manage the self-insured retention. While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often hamper timely adjustments to the assumptions used in these estimates.

20

     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.

     We adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes- An Interpretation of FASB Statement No. 109, on January 1, 2007. Applying the provisions of FIN 48 requires significant judgments regarding the recognition and measurement of each tax position. Changes in these judgments may materially affect the estimate of our effective tax rate and our operating results.

     Share-Based Compensation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

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Item 1A. Risk Factors.

     There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

Item 6. Exhibits.

Exhibit
Number	Description
3.1	Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on March 9, 1998 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 1998).
3.2	Certificate of Amendment to Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on August 5, 2002 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2002).
3.3	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on March 21, 2003 (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement, filed on January 22, 2003).
3.4	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on December 15, 2005.
3.5	By-laws (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed on November 6, 2007).
10.1	Psychiatric Solutions, Inc. 2008 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on February 27, 2008).
10.2	Psychiatric Solutions, Inc. 2008 Cash Bonus Plans (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February 27, 2008).
10.3*	ISDA Master Agreement, dated as of November 29, 2007, between Merrill Lynch Capital Services, Inc. and Psychiatric Solutions, Inc.
31.1*	Certification of the Chief Executive Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certifications of the Chief Executive Officer and Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

22

SIGNATURES

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

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

Dated: May 5, 2008

EX-10.3

Exhibit 10.3

(Multicurrency — Cross Border)

International Swap Dealers Association, Inc.

MASTER AGREEMENT

dated as of November 29, 2007

MERRILL LYNCH CAPITAL
SERVICES, INC.
(“Party A”) PSYCHIATRIC SOLUTIONS, INC.
(“Party B”)

have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be governed by this Master Agreement, which includes the schedule (the “Schedule”), and the documents and other confirming evidence (each a “Confirmation”) exchanged between the parties confirming those Transactions.

Accordingly, the parties agree as follows:-

1. Interpretation

(a) Definitions. The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement.

(b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction.

(c) Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions.

2. Obligations

(a) General Conditions.

(i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.

(ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement.

(iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement.

2046268.1by International Swap Dealers Association, Inc.

(b) Change of Account. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change.

(c) Netting. If on any date amounts would otherwise be payable:—

     (i) in the same currency; and

     (ii) in respect of the same Transaction,

by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount.

The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries.

(d) Deduction or Withholding for Tax.

(i) Gross-Up. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so required to deduct or withhold, then that party (“X”) will:—

(1) promptly notify the other party (“Y”) of such requirement;

(2) pay to the relevant authorities the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by X to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Y;

(3) promptly forward to Y an official receipt (or a certified copy), or other documentation reasonably acceptable to Y, evidencing such payment to such authorities; and

(4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for:—

(A) the failure by Y to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d); or

(B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (II) a Change in Tax Law.

2 ISDA® 1992

(ii) Liability. If:—

(1) X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4);

(2) X does not so deduct or withhold; and

(3) a liability resulting from such Tax is assessed directly against X,

then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)).

(e) Default Interest; Other Amounts. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement.

3. Representations

Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(f), at all times until the termination of this Agreement) that:—

(a) Basic Representations.

(i) Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing;

(ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance;

(iii) No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets;

(iv) Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and

(v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors’ rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)).

3 ISDA® 1992

(b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party.

(c) Absence of Litigation. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document.

(d) Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect.

(e) Payer Tax Representation. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(e) is accurate and true.

(f) Payee Tax Representations. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(f) is accurate and true.

4. Agreements

Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party:—

(a) Furnish Specified Information. It will deliver to the other party or, in certain cases under subparagraph (iii) below, to such government or taxing authority as the other party reasonably directs:—

(i) any forms, documents or certificates relating to taxation specified in the Schedule or any Confirmation;

(ii) any other documents specified in the Schedule or any Confirmation; and

(iii) upon reasonable demand by such other party, any form or document that may be required or reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a payment under this Agreement or any applicable Credit Support Document without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as the completion, execution or submission of such form or document would not materially prejudice the legal or commercial position of the party in receipt of such demand), with any such form or document to be accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be delivered with any reasonably required certification,

in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable.

(b) Maintain Authorisations. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future.

(c) Comply with Laws. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party.

(d) Tax Agreement. It will give notice of any failure of a representation made by it under Section 3(f) to be accurate and true promptly upon learning of such failure.

(e) Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated,

4 ISDA® 1992

organised, managed and controlled, or considered to have its seat, or in which a branch or office through which it is acting for the purpose of this Agreement is located (“Stamp Tax Jurisdiction”) and will indemnify the other party against any Stamp Tax levied or imposed upon the other party or in respect of the other party’s execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with respect to the other party.

5. Events of Default and Termination Events

(a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an “Event of Default”) with respect to such party:—

(i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party;

(ii) Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party;

(iii) Credit Support Default.

(1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed;

(2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or

(3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document;

(iv) Misrepresentation. A representation (other than a representation under Section 3(e) or (f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated;

(v) Default under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf);

(vi) Cross Default. If “Cross Default” is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however

5 ISDA® 1992

described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period);

(vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:—

(1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or

(viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer:—

(1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or

(2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement.

(b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, a Tax Event if the event is specified in (ii) below or a Tax Event Upon Merger if the event is specified in (iii) below, and, if specified to be applicable, a Credit Event

6 ISDA® 1992

Upon Merger if the event is specified pursuant to (iv) below or an Additional Termination Event if the event is specified pursuant to (v) below:—

(i) Illegality. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party):—

(1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or

(2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction;

(ii) Tax Event. Due to (x) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (y) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date (1) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B));

(iii) Tax Event Upon Merger. The party (the “Burdened Party”) on the next succeeding Scheduled Payment Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Indemnifiable Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets to, another entity (which will be the Affected Party) where such action does not constitute an event described in Section 5(a)(viii);

(iv) Credit Event Upon Merger. If “Credit Event Upon Merger” is specified in the Schedule as applying to the party, such party (“X”), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or

(v) Additional Termination Event. If any “Additional Termination Event” is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation).

(c) Event of Default and Illegality. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default.

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6. Early Termination

(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(l), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).

(b) Right to Terminate Following Termination Event.

(i) Notice. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require.

(ii) Transfer to Avoid Termination Event. If either an Illegality under Section 5(b)(i)(l) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist.

If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i).

Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party’s policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed.

(iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(l) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event.

(iv) Right to Terminate. If:—

(1) a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or

(2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party,

either party in the case of an Illegality, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then

8 ISDA® 1992

continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions.

(c) Effect of Designation.

(i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing.

(ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e).

(d) Calculations.

(i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation.

(ii) Payment Date. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed.

(e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties’ election in the Schedule of a payment measure, either “Market Quotation” or “Loss”, and a payment method, either the “First Method” or the “Second Method”. If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that “Market Quotation” or the “Second Method”, as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off.

(i) Events of Default. If the Early Termination Date results from an Event of Default:—

(1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party.

(2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party’s Loss in respect of this Agreement.

(3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the

9 ISDA® 1992

Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.

(4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party’s Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.

(ii) Termination Events. If the Early Termination Date results from a Termination Event:—

(1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions.

(2) Two Affected Parties. If there are two Affected Parties:—

(A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount (“X”) and the Settlement Amount of the party with the lower Settlement Amount (“Y”) and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (II) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and

(B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss (“X”) and the Loss of the party with the lower Loss (“Y”).

If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y.

(iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because “Automatic Early Termination” applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii).

(iv) Pre-Estimate. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses.

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7. Transfer

Subject to Section 6(b)(ii), neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that:—

(a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and

(b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e).

Any purported transfer that is not in compliance with this Section will be void.

8. Contractual Currency

(a) Payment in the Contractual Currency. Each payment under this Agreement will be made in the relevant currency specified in this Agreement for that payment (the “Contractual Currency”). To the extent permitted by applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such tender results in the actual receipt by the party to which payment is owed, acting in a reasonable manner and in good faith in converting the currency so tendered into the Contractual Currency, of the full amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in respect of this Agreement, the party required to make the payment will, to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. If for any reason the amount in the Contractual Currency so received exceeds the amount in the Contractual Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of such excess.

(b) Judgments. To the extent permitted by applicable law, if any judgment or order expressed in a currency other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in respect of a judgment or order of another court for the payment of any amount described in (i) or (ii) above, the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund promptly to the other party any excess of the Contractual Currency received by such party as a consequence of sums paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purposes of such judgment or order and the rate of exchange at which such party is able, acting in a reasonable manner and in good faith in converting the currency received into the Contractual Currency, to purchase the Contractual Currency with the amount of the currency of the judgment or order actually received by such party. The term “rate of exchange” includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the Contractual Currency.

(c) Separate Indemnities. To the extent permitted by applicable law, these indemnities constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which any payment is owed and will not be affected by judgment being obtained or claim or proof being made for any other sums payable in respect of this Agreement.

(d) Evidence of Loss. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made.

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9. Miscellaneous

(a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto.

(b) Amendments. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system.

(c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction.

(d) Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law.

(e) Counterparts and Confirmations.

(i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original.

(ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation.

(f) No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege.

(g) Headings. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement.

10. Offices; Multibranch Parties

(a) If Section 10(a) is specified in the Schedule as applying, each party that enters into a Transaction through an Office other than its head or home office represents to the other party that, notwithstanding the place of booking office or jurisdiction of incorporation or organisation of such party, the obligations of such party are the same as if it had entered into the Transaction through its head or home office. This representation will be deemed to be repeated by such party on each date on which a Transaction is entered into.

(b) Neither party may change the Office through which it makes and receives payments or deliveries for the purpose of a Transaction without the prior written consent of the other party.

(c) If a party is specified as a Multibranch Party in the Schedule, such Multibranch Party may make and receive payments or deliveries under any Transaction through any Office listed in the Schedule, and the Office through which it makes and receives payments or deliveries with respect to a Transaction will be specified in the relevant Confirmation.

11. Expenses

A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees and Stamp Tax, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document

12 ISDA® 1992

to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection.

12. Notices

(a) Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated:—

(i) if in writing and delivered in person or by courier, on the date it is delivered;

(ii) if sent by telex, on the date the recipient’s answerback is received;

(iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender’s facsimile machine);

(iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or

(v) if sent by electronic messaging system, on the date that electronic message is received,

unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day.

(b) Change of Addresses. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it.

13. Governing Law and Jurisdiction

(a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule.

(b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement (“Proceedings”), each party irrevocably:—

(i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and

(ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party.

Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction.

(c) Service of Process. Each party irrevocably appoints the Process Agent (if any) specified opposite its name in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any

13 ISDA® 1992

reason any party’s Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days appoint a substitute process agent acceptable to the other party. The parties irrevocably consent to service of process given in the manner provided for notices in Section 12. Nothing in this Agreement will affect the right of either party to serve process in any other manner permitted by law.

(d) Waiver of Immunities. Each party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings.

14. Definitions

As used in this Agreement:—

“Additional Termination Event” has the meaning specified in Section 5(b).

“Affected Party” has the meaning specified in Section 5(b).

“Affected Transactions” means (a) with respect to any Termination Event consisting of an Illegality, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions.

“Affiliate” means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, “control” of any entity or person means ownership of a majority of the voting power of the entity or person.

“Applicable Rate” means:—

(a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;

(b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate;

(c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and

(d) in all other cases, the Termination Rate.

“Burdened Party” has the meaning specified in Section 5(b).

“Change in Tax Law” means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into.

“consent” includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent.

“Credit Event Upon Merger” has the meaning specified in Section 5(b).

“Credit Support Document” means any agreement or instrument that is specified as such in this Agreement.

“Credit Support provider” has the meaning specified in the Schedule.

“Default Rate” means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1 % per annum.

14 ISDA® 1992

“Defaulting Party” has the meaning specified in Section 6(a).

“Early Termination Date” means the date determined in accordance with Section 6(a) or 6(b)(iv).

“Event of Default” has the meaning specified in Section 5(a) and, if applicable, in the Schedule.

“Illegality” has the meaning specified in Section 5(b).

“Indemnifiable Tax” means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document).

“law” includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any relevant governmental revenue authority) and “lawful” and “unlawful” will be construed accordingly.

“Local Business Day” means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located and, if different, in the principal financial centre, if any, of the currency of such payment, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction.

“Loss” means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(l) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party’s legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets.

“Market Quotation” means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the “Replacement Transaction”) that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have

15 ISDA® 1992

been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined.

“Non-default Rate” means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount.

“Non-defaulting Party” has the meaning specified in Section 6(a).

“Office” means a branch or office of a party, which may be such party’s head or home office.

“Potential Event of Default” means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default.

“Reference Market-makers” means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city.

“Relevant Jurisdiction” means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organised, managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment, from or through which such payment is made.

“Scheduled Payment Date” means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction.

“Set-off” means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer.

“Settlement Amount” means, with respect to a party and any Early Termination Date, the sum of:—

(a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and

(b) such party’s Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result.

“Specified Entity” has the meaning specified in the Schedule.

16 ISDA® 1992

“Specified Indebtedness” means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money.

“Specified Transaction” means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation.

“Stamp Tax” means any stamp, registration, documentation or similar tax.

“Tax” means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax.

“Tax Event” has the meaning specified in Section 5(b).

“Tax Event Upon Merger” has the meaning specified in Section 5(b).

“Terminated Transactions” means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if “Automatic Early Termination” applies, immediately before that Early Termination Date).

“Termination Currency” has the meaning specified in the Schedule.

“Termination Currency Equivalent” means, in respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the “Other Currency”), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Market Quotation or Loss (as the case may be), is determined as of a later date, that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in the city in which such foreign exchange agent is located) on such date as would be customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties.

“Termination Event” means an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event.

“Termination Rate” means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts.

“Unpaid Amounts” owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market

17 ISDA® 1992

value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties.

IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document.

MERRILL LYNCH CAPITAL SERVICES, INC.			PSYCHIATRIC SOLUTIONS, INC.
By:	/s/ Angelina Lopes		By:	/s/ Brent Turner
	Name:			Name:	Brent Turner
	Title: Date:	Authorized Signatory		Title:	Executive Vice President, Finance and Administration

18

EXECUTION DOCUMENT

SCHEDULE

to the

Master Agreement

dated as of November 29, 2007

between

MERRILL LYNCH CAPITAL SERVICES, INC.,
a corporation organized under the laws of the State of Delaware
(“Party A”)

and

PSYCHIATRIC SOLUTIONS, INC.,
a corporation organized under the laws of the State of Delaware
(“Party B”)

Part 1

Termination Provisions

In this Agreement:-

(a) “Specified Entity” means in relation to Party A for the purpose of:-

Section 5(a)(v),	Not Applicable
Section 5(a)(vi),	Not Applicable
Section 5(a)(vii),	Not Applicable
Section 5(b)(iv),	Not Applicable

     in relation to Party B for the purpose of:-

Section 5(a)(v),	Not Applicable
Section 5(a)(vi),	Not Applicable
Section 5(a)(vii),	Not Applicable
Section 5(b)(iv),	Not Applicable

(b) “Specified Transaction” will have the meaning specified in Section 14 of this Agreement.

(c) The “Cross Default” provisions of Section 5(a)(vi) will apply to Party A and to Party B; provided that (1) the phrase “or becoming capable at such time of being declared” shall be deleted from clause (1) of such Section 5(a)(vi); and (2) the following language shall be added to the end thereof: “Notwithstanding the foregoing, a default under subsection (2) hereof shall not constitute an Event of Default if (i) the default was caused solely by an error or omission of an administrative or operational

19

nature; (ii) funds were available to such party, any Credit Support Provider of such party or any applicable Specified Entity of such party, as the case may be, to enable it to make the relevant payment when due; and (iii) the payment is made within three Local Business Days.

If such provisions apply:-

“Specified Indebtedness” will have the meaning specified in Section 14 of this Agreement, and, in addition, “Specified Indebtedness” as applied to Party B shall also include any obligation of Party B under or relating to that certain Credit Agreement dated as of July 1, 2005 among Party B as borrower, the subsidiaries of the borrower identified as guarantors thereunder, the lenders and the L/C issuer party thereto, Citicorp North America, Inc., as term loan facility administrative agent, co-syndication agent and documentation agent, and Bank of America, N.A. as Revolving Credit Facility Administrative Agent, Collateral Agent, Co-syndication Agent and Swing Line Lender (and as such credit agreement has been amended, supplemented or otherwise modified from time to time, the “Credit Agreement”).

“Threshold Amount” means, in respect of Party A, USD 100,000,000 or its equivalent in other currencies, and in respect of Party B, USD 5,000,000 or its equivalent in other currencies; provided that, in respect of Party B, the Threshold Amount applicable to a default or event of default under the Credit Agreement shall mean zero (0).

(d) The “Credit Event Upon Merger” provisions of Section 5(b)(iv) will apply to Party A and Party B. Section 5(b)(iv) of this Agreement shall be amended to read as follows: “Credit Event Upon Merger” means that a Designated Event (as defined below) occurs with respect to a party, any Credit Support Provider of such party, or any Specified Entity of such party and such action does not constitute an event described in Section 5(a)(viii) but, the creditworthiness of the successor, surviving or transferee entity, taking into account any applicable Credit Support Document (except any applicable Credit Support Annex or other agreement providing for the pledge of collateral or any similar agreement) (in which case the party or its successor or transferee, as appropriate, will be the Affected Party) is materially weaker than that of its predecessor, immediately prior to the occurrence of the Designated Event. For purposes hereof, a Designated Event means that, after the Trade Date of any Transaction:

(i)

the party, any Credit Support Provider of the party or any Specified Entity of the party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets (or any substantial part of the assets comprising the business of that party) to, or reorganizes, incorporates, reincorporates, or reconstitutes into or as, another entity, or another entity consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, or reorganizes, incorporates, reincorporates, reconstitutes into or as, such party; or

(ii)

any person or entity acquires directly or indirectly the beneficial ownership of equity securities having the power to elect a majority of the board of directors of the party, any Credit Support Provider of the party or any applicable Specified Entity of the party; or

(e) The “Automatic Early Termination” provision of Section 6(a) will not apply to either Party A or to Party B.

(f) Payments on Early Termination. For the purpose of Section 6(e) of this Agreement:-

(i)	Market Quotation will apply.
(ii)	The Second Method will apply.

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(g) “Termination Currency” means United States Dollars.

(h) Additional Termination Event will apply.

The occurrence of any of the events set out in clauses (i) and (ii) immediately below shall constitute the occurrence of an Additional Termination Event pursuant to Section 5(b)(v), and Party B shall be the sole Affected Party.

(i) (A) (x) the lending and other credit extension commitment of each lender and other credit extension provider under the Credit Agreement have been terminated in full and each loan and other extension of credit made pursuant to the Credit Agreement have been repaid in full or refinanced; provided that a refinancing of all or any portion of the Credit Agreement shall not constitute an Additional Termination Event if such refinancing indebtedness (i) is secured by substantially the same Collateral as the Collateral immediately prior to such refinancing, (ii) does not contain materially weaker financial covenants and (iii) Party B’s swap obligations to Party A continue to be secured equally and ratably with Party B’s obligations to the lenders under such credit facility; or

(y) all or substantially all of the collateral (if any) securing the obligations of Party B under the Credit Agreement is released prior to the date on which no Transaction is outstanding under this Agreement and no amount is owing to Party A under this Agreement.

(ii) If at any time any of the priorities of payment accorded to Party A under the Credit Agreement (as defined herein) and the Security Agreement (as defined herein) with respect to proceeds from the Collateral (as defined herein) is lowered from that accorded to Party A under Section 2.13 of the Credit Agreement (as defined herein, but solely for the purposes of this clause (ii), without giving effect to any amendment to such Credit Agreement after the date of this Agreement) as at the date of this Agreement. As used herein, the terms “Collateral” and “Security Agreement” shall have the meanings assigned respectively thereto under the Credit Agreement (as such term is defined herein).

21

Part 2

Tax Representations

(a) Payer Representations. For the purpose of Section 3(e) of this Agreement, Party A will make the following representation and Party B will make the following representation:-

It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii) or 6(e) of this Agreement) to be made by it to the other party under this Agreement. In making this representation, it may rely on (i) the accuracy of any representations made by the other party pursuant to Section 3(f) of this Agreement, (ii) the satisfaction of the agreement contained in Section 4(a)(i) or 4(a)(iii) of this Agreement and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of this Agreement and (iii) the satisfaction of the agreement of the other party contained in Section 4(d) of this Agreement, provided that it shall not be a breach of this representation where reliance is placed on clause (ii) and the other party does not deliver a form or document under Section 4(a)(iii) by reason of material prejudice to its legal or commercial position.

(b) Payee Representations. For the purpose of Section 3(f) of this Agreement, Party A and Party B make the representations specified below:-

(i)	The following representation applies to Party A:-
	Party A is a corporation organized under the laws of the State of Delaware.
(ii)	The following representation applies to Party B:-
	Party B is a corporation organized under the laws of the State of Delaware.

22

Part 3

Agreement to Deliver Documents

For the purpose of Section 4(a)(i) and (ii) of this Agreement, each party agrees to deliver the following documents as applicable:-

(a) Tax forms, documents or certificates to be delivered are:-

Party Required to
Deliver Document	Form/Document/Certificate	Date by Which to be Delivered
Party A/Party B	A correct, complete and executed U.S. Internal Revenue Service Form W-9 (or any successor thereto), including appropriate attachments, that eliminates U.S. federal backup withholding tax on payments under this Agreement.	(i) Before the first Payment Date under this Agreement, (ii) promptly upon reasonable demand by the other party, and (iii) promptly upon learning that any such form previously provided by such party has become obsolete or incorrect.

(b) Other Documents to be delivered are:-

Party Required			Covered by
to Deliver	Form/Document/	Date by which	Section 3(d)
Document	Certificate	to be Delivered	Representation
Party A/Party B.	Annual audited financial statements (or, in the case of Party A, of its Credit Support Provider) prepared in accordance with generally accepted accounting principles in the country in which the party (or, in the case of Party A, its Credit Support Provider) is organized.	Promptly after request.	Yes.
Party A/Party B.	Quarterly unaudited financial statements (or, in the case of Party A, of its Credit Support Provider) prepared in accordance with generally accepted accounting principles in the country in which the party (or, in the case of Party A, its Credit Support Provider) is organized.	Promptly after request.	Yes.
Party A/Party B.	Credit Support Document, if any, specified in Part 4 of the Schedule, such Credit Support Document being duly executed if required.	Concurrently with the execution of this Agreement.	No.
Party A/Party B.	Certified copies of the resolution(s) of its board of directors or other documents authorizing the execution and delivery of this Agreement.	Concurrently with the execution of this Agreement.	Yes.

23

Party Required			Covered by
to Deliver	Form/Document/	Date by which	Section 3(d)
Document	Certificate	to be Delivered	Representation
Party A/Party B.	Incumbency certificate or other documents evidencing the authority of the party entering into this Agreement or any other document executed in connection with this Agreement.	Concurrently with the execution of this Agreement or of any other documents executed in connection with this Agreement.	Yes.

24

Part 4

Miscellaneous

(a) Addresses for Notices: For the purpose of Section 12(a) of this Agreement:-

Address for notices or communications to Party A:-

Address:	Merrill Lynch World Headquarters
	2 World Financial Center, 6thFloor
	New York, New York 10281
Attention:	Swap Group
Facsimile No.:	646-805-0218                     Telephone No.:  212 236-8709

(For all purposes)

Additionally, a copy of all notices pursuant to Sections 5, 6, and 7 as well as any changes to counterparty’s address, telephone number or facsimile number should be sent to:

GMI Counsel
Merrill Lynch World Headquarters
4 World Financial Center, 12^th Floor
New York, New York 10080
Attention: Swaps Legal
Facsimile No.: 212 449-6993

Address for notices or communications to Party B:-

Address:	Psychiatric Solutions, Inc.
	6640 Carothers Parkway, Suite 500
	Franklin, Tennessee 37067
Attention:	Brent Turner
Facsimile No.:	615-312-5711                    Telephone No.:  615-312-5746

(For all purposes)

(b) Process Agent. For the purpose of Section 13(c):-

Party A appoints as its Process Agent:     Not Applicable.

Party B appoints as its Process Agent:     Not Applicable.

(c) Offices. The provisions of Section 10(a) will apply to this Agreement.

(d) Multibranch Party. For the purpose of Section 10(c) of this Agreement:

Party A is not a Multibranch Party.

Party B is not a Multibranch Party.

(e) Calculation Agent. The Calculation Agent is Party A, unless otherwise specified in a Confirmation in relation to the relevant Transaction.

25

(f) Credit Support Document. Details of any Credit Support Document:-

Party A: Guarantee of Merrill Lynch & Co., Inc. (“ML&Co.”) in the form attached hereto as Exhibit A.

Party B: (i) The Credit Agreement (including all agreements, instruments and other documents relating to the Credit Agreement (as such agreements, instruments and other documents may be amended, supplemented or otherwise modified from time to time) and, for the avoidance of doubt, including, but without limitation, any security agreements, pledge agreements and intercreditor agreements executed and delivered pursuant to or in connection with the Credit Agreement and any other agreements relating to the Credit Agreement providing for the granting and/or administration of any security interest or other lien) and (ii) any Confirmation which provides for credit support or enhancement of a Transaction.

(g) Credit Support Provider.

Credit Support Provider means in relation to Party A, ML & Co.

Credit Support Provider means in relation to Party B, Not Applicable

(h) Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine.

(i) Netting of Payments. Subparagraph (ii) of Section 2(c) of this Agreement will not apply.

(j) “Affiliate” will have the meaning specified in Section 14 of this Agreement.

26

Part 5

Other Provisions

(1) Financial Statements. Section 3(d) is hereby amended by adding in the third line thereof after the word “respect” and before the period: “or, in the case of financial statements, a fair presentation of the financial condition of the relevant party”.

(2) Additional Representations. For purposes of Section 3, the following shall be added, immediately following paragraph (f) thereto:

(g) It is an “eligible contract participant” within the meaning of the United States Commodity Exchange Act.

(h) It has entered into this Agreement (including each Transaction evidenced hereby) in conjunction with its line of business (including financial intermediation services) or the financing of its business.

(i) It is entering into this Agreement, any Credit Support Document to which it is a party, each Transaction and any other documentation relating to this Agreement or any Transaction as principal (and not as agent or in any other capacity, fiduciary or otherwise).

(j) Non-Reliance. Each party represents to the other party (which representation will be deemed to be repeated by each party on each date on which a Transaction is entered into or amended, extended or otherwise modified) that it is acting for its own account, and has made its own independent decisions to enter into this Agreement and any Transaction hereunder and as to whether this Agreement and any Transaction hereunder is appropriate or proper for it based on its own judgment and upon advice from such advisors as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into this Agreement or any Transaction hereunder, it being understood that information and explanations related to the terms and conditions of this Agreement and any Transaction hereunder shall not be considered investment advice or a recommendation to enter into this Agreement or any Transaction hereunder. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of any Transaction hereunder.

(3) Transfer. Notwithstanding the provisions of Section 7, Party A may assign and delegate its rights and obligations under (i) any one or more Transactions or (ii) this Agreement and all Transactions hereunder (the “Transferred Obligations”) to any subsidiary of ML & Co. (the “Assignee”) by notice specifying the effective date of such transfer (“Effective Date”) and including an executed acceptance and assumption by the Assignee of the Transferred Obligations; provided that with respect to (i) and (ii) above, (i) Party B is not, as a result of such transfer, required to pay to the Assignee an amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii), or 6(e)) greater than the amount in respect of which Party B would have been required to pay to Party A in the absence of such transfer; and (ii) the Assignee is not, as a result of such transfer, required to withhold or deduct on account of a Tax under Section 2(d)(i) (except in respect of interest under Section 2(e), 6(d)(ii), or 6(e)) an amount in excess of that which Party A would have been required to withhold or deduct in the absence of such transfer, unless the Assignee would be required to make additional payments pursuant to Section 2(d)(i)(4) corresponding to such excess.

27

On the Effective Date, (a) Party A shall be released from all obligations and liabilities arising under the Transferred Obligations; and (b) if Party A has not assigned and delegated its rights and obligations under this Agreement and all Transactions hereunder, the Transferred Obligations shall cease to be Transaction(s) under this Agreement and shall be deemed to be Transaction(s) under the master agreement, if any, between Assignee and Party B, provided that, if at such time Assignee and Party B have not entered into a master agreement, Assignee and Party B shall be deemed to have entered into an ISDA form of Master Agreement (Multicurrency-Cross Border) with a Schedule substantially in the form hereof but amended to reflect the name of the Assignee and the address for notices and any amended representations under Part 2 hereof as may be specified in the notice of transfer.

(4)	Method of Notice. Section 12(a)(ii) of the Master Agreement is deleted in its entirety.
(5)	Jurisdiction.

(a) Section 13(b)(i) of the Agreement is amended to read in its entirety as follows:

“(i) submits to the jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, which submission shall be exclusive unless none of such courts has lawful jurisdiction over such Proceedings;” and

(b) the final paragraph of Section 13(b) of the Agreement is hereby deleted.

(6) Set-off.

(a) Without affecting the provisions of this Agreement requiring the calculation of certain net payment amounts, all payments under this Agreement will be made without setoff or counterclaim; provided, however, that in addition to any rights of setoff a party may have as a matter of law or otherwise, upon the designation or deemed designation of an Early Termination Date, the non-Defaulting Party or non-Affected party (in either case, “X”) may without prior notice set off any sum or obligation (whether or not arising under this Agreement, whether or not matured, whether or not contingent and regardless of the currency, place of payment or booking office of the obligation) owed or due by the Defaulting Party or Affected Party (in either case, “Y”) to X against any sum or obligation (whether or not arising under this Agreement, whether or not matured, whether or not contingent and regardless of the currency, place of payment or booking office of the obligation) owed or due by X or any Affiliate of X to Y.

(b) For the purposes of cross-currency set-off, X may convert any obligation to another currency at a market rate determined by X.

(c) If an obligation is unascertained, X may in good faith estimate that obligation and set off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained.

(7) Escrow. If by reason of the time difference between the cities in which payments are to be made, it is not possible for simultaneous payments to be made on any date on which both parties are required to make payments hereunder, either party may, at its option and in its sole discretion, notify the other party that payments on that date are to be made in escrow. In this case, deposit of the payment due earlier on that date shall be made by 2:00 p.m. (local time at the place for the earlier payment) on that date with an escrow agent selected by the notifying party, accompanied by irrevocable payment instruction (i) to release the deposited payment to the intended recipient upon receipt by the escrow agent of the required deposit of the corresponding payment from the other party on the same date accompanied by irrevocable payment instructions to the same effect or (ii) if the required deposit of the corresponding payment is not

28

made on that same date, to return the payment deposited to the party that paid it in escrow. The party that elects to have payments made in escrow shall pay the costs of the escrow arrangements and shall cause those arrangements to provide that the intended recipient of the payment due to be deposited first shall be entitled to interest on that deposited payment for each day in the period of its deposit at the rate offered by the escrow agent for that day for overnight deposits in the relevant currency in the office where it holds that deposited payment (at 11:00 a.m. local time on that day) if that payment is not released by 5:00 p.m. local time on the date it is deposited for any reason, other than the intended recipient’s failure to make the escrow deposit it is required to make hereunder in a timely fashion.

(8) Consent to Recording. The parties agree that each may electronically record all telephonic conversations between marketing and trading personnel in connection with this Agreement.

(9) Waiver of Jury Trial. Each party hereby irrevocably waives any and all right to trial by jury with respect to any legal proceeding arising out of or relating to this Agreement or any Transaction contemplated hereunder.

(10) Secured Party. Party A is a “Secured Party” as such term is defined in the Credit Agreement and the obligations hereunder are “Obligations” as defined in the Credit Agreement and “Secured Obligations” as defined in the Amended and Restated Security Agreement dated as of December 21, 2004.

(11) Swap Contract & Loan Document. This Agreement is a “Swap Contract” and a “Loan Document” as such terms are defined in the Credit Agreement.

29

EXHIBIT A

GUARANTEE OF MERRILL LYNCH & CO., INC.

     FOR VALUE RECEIVED, receipt of which is hereby acknowledged, MERRILL LYNCH & CO., INC., a corporation duly organized and existing under the laws of the State of Delaware (“ML & CO.”), hereby unconditionally guarantees (the “Guarantee”) to Psychiatric Solutions, Inc. (the “Company”), the due and punctual payment of any and all amounts payable by Merrill Lynch Capital Services, Inc., a corporation organized under the laws of the State of Delaware (the “Obligor”), its successors and permitted assigns, to the extent such successors or permitted assigns are direct or indirect subsidiaries of ML & Co., under the terms of the ISDA Master Agreement between the Company and the Obligor, dated as of November 29, 2007 (the “Agreement”), including, in case of default, interest on any amount due, when and as the same shall become due and payable, whether on the scheduled payment dates, at maturity, upon declaration of termination or otherwise, according to the terms thereof. In case of the failure of the Obligor punctually to make any such payment, ML & Co. hereby agrees to make such payment, or cause such payment to be made, promptly upon demand made by the Company to ML & Co.; provided, however that delay by the Company in giving such demand shall in no event affect ML & Co.’s obligations under this Guarantee. This Guarantee shall remain in full force and effect or shall be reinstated (as the case may be) if at any time any payment guaranteed hereunder, in whole or in part, is rescinded or must otherwise be returned by the Company upon the insolvency, bankruptcy or reorganization of the Obligor or otherwise, all as though such payment had not been made.

This Guarantee shall be one of payment and not collection and shall be irrevocable in respect of any payment obligations incurred by the Obligor prior to its termination as further provided below. ML & Co. hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Agreement; the absence of any action to enforce the same; any waiver or consent by the Company concerning any provisions thereof; the rendering of any judgment against the Obligor or any action to enforce the same; or any other circumstances that might otherwise constitute a legal or equitable discharge of a guarantor or a defense of a guarantor other than defense of payment. ML & Co. covenants that this Guarantee will not be discharged except by complete payment of the amounts payable under the Agreement. This Guarantee shall continue to be effective if the Obligor merges or consolidates with or into another entity, loses its separate legal identity or ceases to exist.

ML & Co. hereby waives diligence; presentment; protest; notice of protest, acceleration, and dishonor; filing of claims with a court in the event of insolvency or bankruptcy of the Obligor; all demands whatsoever, except as noted in the first paragraph hereof; and any right to require a proceeding first against the Obligor.

ML & Co. hereby certifies and warrants that this Guarantee constitutes the valid obligation of ML & Co. and complies with all applicable laws.

This Guarantee shall be governed by, and construed in accordance with, the laws of the State of New York.

This Guarantee may be terminated at any time by notice by ML & Co. to the Company given in accordance with the notice provisions of the Agreement, effective upon receipt of such notice by the Company or such later date as may be specified in such notice; provided, however, that this Guarantee shall continue in full force and effect with respect to any payment obligation of the Obligor under the Agreement entered into prior to the effectiveness of such notice of termination.

1

     This Guarantee becomes effective concurrent with the effectiveness of the Agreement, according to its terms.

     IN WITNESS WHEREOF, ML & Co. has caused this Guarantee to be executed in its corporate name by its duly authorized representative.

MERRILL LYNCH & CO., INC.
By:
	Name:
	Title:
Date:

2

COVER STATEMENT
CLIENT/COUNTERPARTY RELATIONSHIP

Dear Client/Counterparty:

     Merrill Lynch is pleased to provide the attached statement of Generic Risks Associated with Over-the-Counter FX and Derivative Transactions (“OTC Transactions”) under this Cover Statement that concerns, among other things, the nature of our relationship with you in the context of such transactions. This statement was developed for our new and our ongoing client/counterparties in response to suggestions that over-the-counter FX and derivative dealers consider taking steps to ensure that market participants utilizing OTC Transactions understand their risk exposures and the nature of their relationships with dealers before they enter into OTC Transactions.

     Merrill Lynch (“we”) are providing to you and your organization (“you”) the attached statement of Generic Risks Associated with OTC Transactions in order to identify, in general terms, certain of the principal risks associated with individually negotiated OTC Transactions. The attached statement does not purport to identify the nature of the specific market or other risks associated with a particular transaction.

     Before entering into an OTC Transaction, you should ensure that you fully understand the terms of the transaction, relevant risk factors, the nature and extent of your risk of loss and the nature of the contractual relationship into which you are entering. You should also carefully evaluate whether the transaction is appropriate for you in light of your experience, objectives, financial resources, and other relevant circumstances and whether you have the operational resources in place to monitor the associated risks and contractual obligations over the term of the transaction. If you are acting as a financial adviser or agent, you should evaluate these considerations in light of the circumstances applicable to your principal and the scope of your authority.

     If you believe you need assistance in evaluating and understanding the terms or risks of a particular OTC Transaction, you should consult appropriate advisers before entering into the transaction.

     Unless we have expressly agreed in writing to act as your adviser with respect to a particular OTC Transaction pursuant to terms and conditions specifying the nature and scope of our advisory relationship, we are acting in the capacity of an arm’s length contractual counterparty to you in connection with the transaction and not as your financial adviser or fiduciary. Accordingly, unless we have so agreed to act as your adviser, you should not regard transaction proposals, suggestions or other written or oral communications from us as recommendations or advice or as expressing our view as to whether a particular transaction is appropriate for you or meets your financial objectives.

     Finally, we and/or our affiliates may from time to time take proprietary positions and/or make a market in instruments identical or economically related to OTC Transactions entered into with you, or may have an investment banking or other commercial relationship with and access to information from the issuer(s) of securities, financial instruments, or other interests underlying OTC Transactions entered into with you. We may also undertake proprietary activities, including hedging transactions related to the initiation or termination of an OTC Transaction with you, that may adversely affect the market price, rate index or other market factor(s) underlying an OTC Transaction entered into with you and consequently the value of the transaction.

GENERIC RISKS ASSOCIATED WITH
OVER-THE-COUNTER FX AND DERIVATIVE TRANSACTIONS

Over-the-counter FX and derivative transactions (“OTC Transactions), like other financial transactions, involve a variety of significant risks. The specific risks presented by a particular OTC Transaction necessarily depend upon the terms of the transaction and your circumstances. In general, however, all OTC Transactions involve some combination of market risk, credit risk, funding risk and operational risk.

Market risk is the risk that the value of a transaction will be adversely affected by fluctuations in the level or volatility of or correlation or relationship between one or more market prices, rates or indices or other market factors or by illiquidity in the market for the relevant transaction or in a related market.

Credit risk is the risk that a counterparty will fail to perform its obligations to you when due.

Funding risk is the risk that, as a result of mismatches or delays in the timing of cash flows due from or to your counterparties in OTC Transactions or related hedging, trading, collateral or other transactions, you or your counterparty will not have adequate cash available to fund current obligations.

Operational risk is the risk of loss to you arising from inadequacies in or failures of your internal systems and controls for monitoring and quantifying the risks and contractual obligations associated with OTC Transactions, for recording and valuing OTC and related Transactions, or for detecting human error, systems failure or management failure.

There may be other significant risks that you should consider based on the terms of a specific transaction. Highly customized OTC Transactions in particular may increase liquidity risk and introduce other significant risk factors of a complex character. Highly leveraged transactions may experience substantial gains or losses in value as a result of relatively small changes in the value or level of an underlying or related market factor.

Because the price and other terms on which you may enter into or terminate an OTC Transaction are individually negotiated, these may not represent the best price or terms available to you from other sources.

In evaluating the risks and contractual obligations associated with a particular OTC Transaction, you should also consider that an OTC Transaction may be modified or terminated only by mutual consent of the original parties and subject to agreement on individually negotiated terms. Accordingly, it may not be possible for you to modify, terminate or offset your obligations or your exposure to the risks associated with a transaction prior to its scheduled termination date.

Similarly, while market makers and dealers generally quote prices or terms for entering into or terminating OTC Transactions and provide indicative or mid-market quotations with respect to outstanding OTC Transactions, they are generally not contractually obligated to do so. In addition, it may not be possible to obtain indicative or mid-market quotations for an OTC Transaction from a market maker or dealer that is not a counterparty to the transaction. Consequently, it may also be difficult for you to establish an independent value for an outstanding OTC Transaction. You should not regard your counterparty’s provision of a valuation or indicative price at your request as an offer to enter into or terminate the relevant transaction at that value or price, unless the value or price is identified by the counterparty as firm or binding.

This brief statement does not purport to disclose all of the risks and other material considerations associated with OTC Transactions. You should not construe this generic disclosure statement as business, legal, tax or accounting advice or as modifying applicable law. You should consult your own business, legal, tax and accounting advisers with respect to proposed OTC Transactions and you should refrain from entering into any OTC Transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss.

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Joey A. Jacobs, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: May 5, 2008	/s/ Joey A. Jacobs
	Joey A. Jacobs
	Chairman, Chief Executive Officer and President

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Jack E. Polson, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: May 5, 2008	/s/ Jack E. Polson
	Jack E. Polson
	Executive Vice President, Chief Accounting Officer

EX-32.1

EXHIBIT 32.1

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

          In connection with the Quarterly Report of Psychiatric Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joey A. Jacobs, Chairman, Chief Executive Officer and President of the Company, and I, Jack E. Polson, Chief Accounting Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

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

Date: May 5, 2008

/s/ Joey A. Jacobs  

Joey A. Jacobs 

Chairman, Chief Executive Officer and President 

/s/ Jack E. Polson  

Jack E. Polson 

Executive Vice President, Chief Accounting Officer